IRS Pub 519: USA Tax Guide for Aliens
This page contains an excerpt of the text of IRS Publication 519 USA Tax Guide for Aliens (1995 Revision). This document has been prepared as a public service, and may be missing sections from the original. It is not intended to act as a substitute for the official version available from the IRS, but rather to provide a convenient online reference. The information on this page is not guaranteed to be correct. It has not been reviewed or approved by the IRS, so we strongly suggest that you refer to the original publication for official information. To order IRS publications and forms, call 1-800-TAX-FORM (1-800-829-3676) or visit the IRS web site.
We’ve excerpted only the sections that directly speak to the topic of scholarships and fellowships. Other sections of the document that discuss issues relevant to students are not included. Please order the full publication from the IRS.
Exclusions from Gross Income
Scholarships and Fellowship Grants
If you are a candidate for a degree, you may be able to exclude from your income part or all of the amounts you receive as a scholarship or fellowship grant. The rules discussed here apply to both resident and nonresident aliens.
Source of grant.
Nonresident aliens must first determine the source of the grant. If a nonresident alien receives a grant that is not from USA sources, it is not subject to USA tax.
Generally, the source of a scholarship or fellowship grant is the residence of the payer regardless of who actually disburses the funds. However, see Services to be performed outside the USA, later.
For example, scholarship or fellowship payments for research or study in the USA made by the USA, a noncorporate USA resident, or a domestic corporation, are from USA sources. Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a USA agent. Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources.
Services to be performed outside the USA.
Scholarship or fellowship grants received by nonresident aliens for services to be performed outside the USA are not USA source income.
If you are a nonresident alien and you must include all or part of your grant in your income, see Students and trainees in Chapter 4 for information on how this income is taxed.
How to report.
If you file Form 1040NR, report the total amount of your grant on line 12, and the nontaxable portion, if any, on line 29. If you file Form 1040NR-EZ, report the total amount of your grant on line 5, and the nontaxable portion on line 8.
Qualified scholarship.
A qualified scholarship is any amount you receive as a scholarship or fellowship grant that you use according to the conditions of the grant for:
- Tuition and fees required to enroll in, or to attend, an educational institution, or
- Fees, books, supplies, and equipment that the educational institution requires for the courses of instruction.
Amounts you receive from a scholarship or fellowship that you use for other expenses, such as room and board or travel, are not excludable from income.
Terms of grant.
Your scholarship or fellowship can still qualify as tax-free even if the terms do not provide that it only be used for tuition and and course-related expenses. It will qualify if you use the grant proceeds for tuition and course-related expenses. However, if the terms of the grant require its use for other purposes, such as room and board, or specify that the grant cannot be used for tuition or course-related expenses, the amounts received under the grant cannot be excluded from income.
Candidate for a degree.
The term candidate for a degree means a student (whether full or part-time) who:
- Attends a primary or secondary school or is pursuing a degree at a college or university, or
- Attends an educational institution that is authorized and accredited to provide a program that is acceptable for full credit toward a bachelor’s or higher degree, or to provide a program of training to prepare students for gainful employment in a recognized occupation.
Payment for services.
You cannot exclude from income the portion of any scholarship or fellowship, including any tuition reduction, that represents payment for teaching, research, or other services which the grantor requires as a condition for receiving the scholarship or fellowship. This is true even if all candidates for a degree are required to perform the services as a condition for receiving the degree.
Example.On January 7, 1995, Maria Gomez is notified of a scholarship of $2,500 for the spring 1995 semester. As a condition for receiving the scholarship, Maria must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for her services. Assuming that Maria meets all other conditions, she can exclude no more than $1,500 from income as a qualified scholarship.
Paying Tax Through
Withholding or Estimated Tax
Reduced Withholding on Scholarships and Fellowship Grants
There is no withholding on a qualified scholarship as described in Chapter 3.
If you are a nonresident alien student or grantee with an F, J, M, or Qvisa, and you receive a USA source grant or scholarship that is not fully exempt, the withholding agent (usually the payer of the scholarship) can reduce the withholding tax to 14% of the taxable part of the grant or scholarship.
To reduce the withholding tax on your scholarship or grant, you must complete a Form W-4, Employee’s Withholding Allowance Certificate,every year and give it to the withholding agent.
You are allowed a prorated part of allowable personal exemptions when you complete Form W-4. Figure the prorated part by multiplying the number of days you expect to be in the USA in 1996, times the daily exemption amount ($6.97) for each allowable exemption. The prorated exemption amount should be shown on the line specified for entering an allowance for yourself on the Personal Allowances Worksheet that comes with Form W-4.
If you are a student who qualifies under Article 21(2) of the USA-India Income Tax Treaty, and you are not claiming deductions for away-from-home expenses or other itemized deductions (discussed next), enter the standard deduction on the line specified for entering an allowance based on your marital status and/or job situation on the worksheet. The standard deduction amount for 1996 is $4,000 if you are single or $3,350 if you are married. All other nonresident aliens must enter 0. Enter a zero (-0-) on the lines specified for entering allowances for your spouse and dependents on the worksheet unless you are a resident of Canada, Mexico, Japan, the Republic of Korea, a USA national, or an Indian student. If you are a resident of Canada, Mexico, Japan, the Republic of Korea, or a USA national, an additional daily exemption amount may be allowed for your spouse and each of your dependents. If you are a student who is eligible for the benefits of Article 21(2) of the USA-India Income Tax Treaty, you can claim an additional daily exemption amount for your spouse. You can also claim an additional amount for each of your dependents not admitted to the USA on F-2, J-2, or M-2 visas.
You also can claim other expenses that will be deductible on your Form 1040NR. These include away-from-home expenses (meals, lodging, and transportation), certain state and local income taxes, charitable contributions, and casualty losses, discussed earlier under Itemized Deductions in Chapter 5. They also include business expenses, moving expenses, and the IRA deduction discussed under Deductions in Chapter 5.
You can also enter the part of your grant or scholarship that is not taxable under USA tax law or under a tax treaty. Use the Deductions and Adjustments Worksheet in Form W-4 to claim these other expenses.
If you file a Form W-4 to reduce or eliminate the withholding on your scholarship or grant, you must file an annual USA income tax return to be allowed the exemptions and deductions you claimed on that form. If you are in the USA during more than one tax year, you must attach a statement to your yearly Form W-4 indicating that you have filed a USA income tax return for the previous year. If you have not been in the USA long enough to be required to file a return, you must attach a statement to your Form W-4 saying you will file a USA income tax return when required.
After the withholding agent has accepted your Form W-4, tax will be withheld on your scholarship or grant as if it were wages. The gross amount of the income is reduced by the exemptions and deductions allowed from Form W-4 and the withholding tax is figured on the remainder.
You will receive a Form 1042-S from the withholding agent (usually the payer of your grant) showing the gross amount of your scholarship or fellowship grant less the withholding allowance amount, the tax rate, and the amount of tax withheld. Use this form to file your annual USA income tax return.
Social Security and Medicare Taxes
Students and Exchange Visitors
Services performed by you as a nonresident alien temporarily in the USA as a nonimmigrant under subparagraph F, J, M, or Q of section 101(a)(15) of the Immigration and Nationality Act are not covered under the social security program if the services are performed to carry out the purpose for which you were admitted to the USA. This means that there will be no withholding of social security or Medicare taxes from the pay you receive for these services. However, these types of services are very limited, and generally include only on-campus work, practical training, and economic hardship employment.
Nonresident Alien Students
If you are a nonresident alien admitted to the USA as a student, you generally are not permitted to work for a wage or salary or to engage in business while you are in the USA. In some cases, a student is granted permission to work and it is so noted on the student’s copy of Immigration Form I-20, Certificate of Eligibility for Nonimmigrant Student Status, or Form I-688B, Employment Authorization Document. Social security and Medicare taxes are not withheld from pay for the work.
The Immigration and Naturalization Service (INS) permits on-campus work for students in F-1 status if it does not displace a USA resident. On-campus work means work performed on the school’s premises. On-campus employment includes work performed at an off-campus location that is educationally-affiliated with the school. On-campus work under the terms of a scholarship, fellowship, or assistantship is considered part of the academic program of a student taking a full course of study and is permitted by the INS. In this case, there will be no notation on Form I-20 concerning the work, no Form I-688B will be issued, and social security and Medicare taxes are not withheld from pay received for it.
Employment due to severe economic necessity is sometimes permitted for students in F-1 status. This requires approval by a Designated School Official. Students granted permission to work due to severe economic necessity will be issued Form I-688B by INS. Social security and Medicare taxes are not withheld from pay for this work.
Students who have been in F-1 status (except students in English language programs) for at least one academic year (or nine consecutive months) can accept employment for practical training related to the course of study upon approval of the designated school official and after authorization by the INS. If the training is required or for credit or is part of a work-study or cooperative education program, it can be authorized by the school with a notation on Form I-20. Otherwise, such training is considered optional and requires approval by the school and the issuance of Form I-688B by INS and is limited to 12 months. Students in M-1 status who have completed a course of study can accept employment or practical training for up to six months and must have a Form I-688B issued by INS. Social security and Medicare taxes are not withheld from F-1 or M-1 students’ pay for these services.
In all other cases, any services performed by a nonresident alien student are not considered as performed to carry out the purpose for which the student was admitted to the USA. Social security and Medicare taxes will be withheld from pay for the services unless the pay is exempt under the Internal Revenue Code.
Exchange Visitors
Nonresident aliens are admitted to the USA as nonimmigrant exchange visitors under section 101(a)(15)(J) of the Immigration and Nationality Act through the sponsorship of approved organizations and institutions that are responsible for establishing a program for the exchange visitor and for any later modification of that program. Generally, an exchange visitor who has the permission of the sponsor can work for the same reasons as the students discussed above. In these cases, permission is granted by a letter from the exchange visitor’s sponsor or by endorsement from the program sponsor on Form IAP-66, Certificate of Eligibility.
Social security and Medicare taxes are not withheld on pay for services of an exchange visitor who has been given permission to work and who possesses or obtains a letter of authorization from the sponsor. In all other cases, services performed by an exchange visitor are not considered as performed to carry out the purpose for which the visitor was admitted to the USA. Social security and Medicare taxes are withheld from pay for the services unless the pay is exempt under the Internal Revenue Code.
Your spouse or child may be permitted to work in the USA with the prior approval of the INS and issuance of Form I-688B.
Nonresident aliens admitted to the USA as participants in cultural exchange programs under section 101(a)(15)(Q) of the Immigration and Nationality Act may be exempt from social security and Medicare taxes. Aliens with Q visas are aliens whose employment or training affords the opportunity for culture-sharing with the American public. They are allowed to work in the USA for a specific employer in an approved cultural exchange program. The employer must be the petitioner through whom the alien obtained the Q visa. Social security and Medicare taxes are not withheld from pay for this work. Aliens with Q visas are not permitted to engage in employment outside of the exchange program activities.
Refunds of Taxes Withheld in Error
If social security or Medicare taxes were withheld in error from pay you receive that is not subject to these taxes, contact the employer who withheld the taxes for reimbursement. If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement, and attach a copy of your Form W-2, Wage and Tax Statement, to prove the amount of social security and Medicare taxes withheld. Also attach a copy of your visa (if not stamped on Form I-94), INS Form I-94, Arrival/Departure Record, and INS Form I-538,Application by Nonimmigrant Student (FI) for Extension to Stay, School Transfer or Permission to Accept or Continue Employment. You must also attach a statement from your employer indicating the amount of the reimbursement your employer provided and the amount of the credit or refund your employer claimed or you authorized your employer to claim. If you cannot obtain this statement from your employer, you must provide this information on your own statement and explain why you are not attaching a statement from your employer.
File the claim for refund (with attachments) with the IRS office where your employer’s returns were filed. If you do not know where your employer’s returns were filed, file your claim with the Internal Revenue Service Center, Philadelphia, PA 19255.
Tax Treaty Benefits
Provision D – For Trainees, Students, and Apprentices
Students, apprentices, and trainees generally are exempt from tax on remittances (including scholarship and fellowship grants) received from abroad for study and maintenance. Also, under certain circumstances, a limited amount of compensation received by students, trainees, and apprentices may be exempt from tax.
Each treaty’s provisions are discussed in Publication 901.