Scholarship and Fellowship Tax Reporting
The Tax Reform Act of 1986 contained provisions regarding the federal income tax treatment of scholarships and fellowships. If you receive a scholarship or fellowship grant from the University or from any other source, you should be aware of the following:
- Under federal tax law, only qualified scholarships or fellowships may be excluded from the recipient’s gross income.
- Qualified scholarships or fellowships are amounts awarded to degree candidates and used for educational expenses such as tuition, required fees, books, supplies and equipment required for courses of instruction. If the award specifies that any portion of the scholarship or fellowship may not be used for these described expenses or if it designates any portion of the award for purposes other than those expenses just described, those designated amounts are not qualified scholarships or fellowships. Awards in excess of the described expenses are includable in the recipient’s gross income.
- An individual who is not a candidate for a degree must include in gross income any amount received as a scholarship or fellowship grant.
- A scholarship or fellowship which is conditioned upon past, present or future services by the recipient is not a qualified scholarship or fellowship and may not be excluded from the recipient’s gross income.
Included within the definition of scholarships and fellowships and thus possibly subject to taxation, are scholarship and fellowship grants awarded on the basis of academic merit, talent, financial need or any other factors; state and federal grants, including Pell Grants; athletic grants-in-aid; graduate fellowships or other non-service awards; and tuition remissions or reductions. Awards may come from the University, from state or federal agencies or from private organizations.
For U.S. citizens and resident aliens, the University is not required to report scholarships or fellowships to the Internal Revenue Service; reporting such income for tax purposes is the sole responsibility of the recipient.
For nonresident aliens, scholarships and fellowships may be subject to federal income tax withholding based on the student’s visa type, the degree path of the student, and the existence of a U.S. tax treaty with the student’s country of residence. The federal income tax withholding rate may be 0%, 14% or 30% depending on the circumstances, and the tax rate may apply to a portion of the scholarship or fellowship.
The withholding rate for a nonresident alien using tax treaty provisions would be 0% or another rate based on the treaty. If a tax treaty is not used, the withholding rate would be 14% of taxable portion for individuals with F, J, or M visas and 30% of taxable portion for others. The taxable portion for students not seeking a degree is the total amount of the financial aid award. The taxable portion for students seeking a degree is the total amount of the financial aid award less qualified educational expenses.
IRS tax regulations require that scholarship and fellowship awards for nonresident aliens be reported to the IRS and to the recipient after each calendar year on Form 1042S – Foreign Person’s U.S. Source Income Subject to Withholding. Form 1042S is used to report taxable scholarship/ fellowship payments made, income tax withheld, and other information relating to the grant payments.
It is important that you keep copies of documents which will establish the amounts of scholarship and fellowship awards and the amounts paid for tuition, required fees, books, supplies and course-related equipment. Your records should include award notices from the University or awarding agency, check stubs from scholarship or fellowship payments, receipts from the Office of the University Cashier and receipts from the purchase of books, supplies and equipment.