Tax Treaty Benefits For Scholarships And Fellowships
Scholarship and fellowship payments that are not for qualified items are taxable to the recipient. Qualified items include tuition and fees required for enrollment, and fees, books, supplies, and equipment required for a course of study received by a candidate for a degree at a qualifying educational institution.
Scholarships and fellowships for nonqualified items such as room and board or research are taxable and, in the case of nonresident alien recipients, subject to NRA withholding at a 30 percent rate or a lower 14 percent rate for certain recipients in F, J, M, or Q status. For more details on these rules, see the articles about scholarships, fellowships, and stipends in the September/October, 2008, November/December, 2008, and March/April 2009 editions of the Crow’s Nest.
US Tax Treaty
As a result of this policy, the majority of tax treaties in effect provide a benefit only for foreign-source scholarship and fellowship grants. New treaties that have come into effect since 2006 replacing existing tax treaties (e.g., the treaties with Belgium and Iceland) have eliminated benefits for U.S.-source taxable scholarships and fellowships that were in the prior treaties. Treaties with new treaty partners such as Bulgaria also include the U.S. Model Treaty provision.
Since nonresident alien recipients of foreign-source scholarships and fellowships are not subject to tax on foreign-source income, this treaty benefit is of no utility for the majority of grant recipients who are nonresident aliens. It is important for the minority of recipients of foreign-source scholarships and fellowships who become resident aliens subject to U.S. income tax on their worldwide income, including their grants from foreign organizations and governments. However, these grant recipients may not understand that their foreign grants are subject to U.S. tax, either because such grants may not be taxable by the treaty country or because there is no specific line for reporting taxable grants on Form 1040 (grants are recorded on the wages line with “SCH” on the dotted line), or both.
Article 21 of the treaty with South Korea is typical. It provides benefits for an individual from South Korea who is temporarily present in the United States for the primary purpose of:
Under treaties that follow this model, benefits are available for researchers as well as for students and trainees. (For more details, see “Tax Treaty Benefits for Research,” in the July/August 2008 edition of the Crow’s Nest.)
Benefits are typically available for five taxable years from the date of arrival for the purpose of the treaty. A few treaties allow benefits for a slightly longer period by providing benefits for five years from date of arrival instead of limiting the benefit period to tax years.
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Paula N. Singer, Esq. chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA, has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. She is also the editor of "US Tax Compliance For Immigrants And Employers: The Lawyer's Complete Guide". To learn more, see: http://www.ilw.com/books/tax.shtm. For more information, visit www.windstar.com. For additional information, call 1-800-259-6398 or email: firstname.lastname@example.org.
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