IN THIS ISSUE

	Tax Exemptions for Scholarships and Fellowships
	Register Now for this April's Nonresident Alien Tax Training
	Spring into Compliance with Windstar Publishing Tax Guides
	Upcoming Trade Show Appearances

Tax Exemptions for Scholarships and Fellowships

by Paula N. Singer, Esq. and Terri Crowl 

Section 117 of the Internal Revenue Code taxes scholarship and fellowship grants for items that are not qualified (nontaxable). Although scholarship and fellowship grants for which no services are required are not reportable to US citizens and resident aliens, the recipient may nevertheless be subject to income taxes on the grant. Taxable scholarship and fellowship grants paid to or on behalf of nonresident alien recipients, however, are subject to withholding and reporting unless a tax law or treaty exception applies.
 
Qualified vs. Nonqualified Grants

Qualified (nontaxable) grants are for tuition and required fees for enrollment, along with books, fees, supplies, and equipment required of all participants in a course of study provided the recipient is a “candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii). ”  

IRS Publication 970, Tax Benefits for Education, provides a liberal definition of the term “candidate for a degree.”  Post-doctoral students are never considered candidates for a degree, and are, therefore, not eligible to claim qualified expenses – their total fellowships are always nonqualified even if they are enrolled in classes.

Publication 970 also provides a helpful chart, “Tax Treatment of Scholarship and Fellowship Payments,” which identifies taxable and nontaxable payments.  Payments which would be nontaxable if the recipient were a candidate for a degree are taxable if the recipient is not a candidate for a degree.  Other types of taxable payments listed include room and board, research, and travel.  The list is not all-inclusive.

Taxation of Grants

Although taxable grants of U.S. citizens and resident aliens are not subject to reporting, they are, nevertheless, taxable and includable in gross income.  The recipients must record them on their Form 1040 under wages with “SCH” on the dotted line unless their total worldwide income is under the filing threshold and they are therefore not required to file.

The taxation of scholarship and fellowship grants of nonresident aliens depends on the immigration status of the recipient.  Taxable grants of recipients in F, J, M, or Q status, who are deemed by the Code to be engaged in a U.S. trade or business, are taxed at graduated rates after deductions.  Nonresident recipients in any other immigration category are subject to 30 percent withholding on the gross amount.  All taxable grants of nonresidents must be reported on Form 1042-S under Income Code 15.  There is no de minimis rule.  (Qualified grants are not required to be reported on Form 1042-S.)
 
Withholding on Grants

Generally, payments to nonresidents are subject to 30 percent withholding.  A reduced rate of 14 percent applies to F, J, M, or Q candidates for a degree at an educational organization described in section 170(b)(1)(A)(ii).  A nonqualified scholarship grantee who does not meet these requirements is subject to 30 percent withholding unless the grantor is one of the organizations described in Section 1441(b)(2), such as 501(c)(3) organizations, foreign governments, certain international organizations, and the U.S. government or political subdivision or agency thereof.

Withholding applies only to a grant from a U.S. grantor for study, training, or research in the United States.  Grants for such activities performed outside the United States are foreign-source income, not subject to tax when received by a nonresident. If the grantor is not a U.S. entity, the grant is foreign-source, and therefore not subject to U.S. tax for nonresidents, regardless of the location of the activity.  Also, U.S.-source USAID per diems for subsistence are not subject to withholding under the tax law but are nevertheless subject to tax.
 
Payers may apply wage withholding to taxable grants of recipients in F, J, M, or Q status.  (Amounts remain reportable on Form 1042-S, not Form W-2, the income of which also determines benefits such as pensions not available to grant recipients.)  Few payers make this election because of concern that tax rates computed are not considered valid Form 1042-S rates.

Withholding Reductions

The withholding on taxable grants can be reduced or eliminated through withholding allowances.  Withholding allowances only apply to nonresidents in F, J, M, or Q status. No U.S. TIN is required for the withholding allowance reductions (unless multiple allowances are claimed), but one will be required for tax return purposes.

1. Personal Exemption Amount

Grant recipients not claiming the personal exemption on an employment W-4 may use the personal exemption amount ($3,650 for 2009) as a withholding allowance to offset their taxable grant.  They are not required to prorate the amount although that would be advisable if they could have employment income later in the year.  No paperwork is required (other than proof that the recipient is in F, J, M, or Q status) except for recipients allowed to claim additional personal exemption amounts, such as residents of Canada and Mexico, among others.

The withholding allowance cannot exceed the taxable grant being reported.  If it is less, the tax is applied to the grant after deducting the withholding allowance.  The amounts must all be reported on Form 1042-S.    

2. Rev. Proc. 88-24

If the taxable grant consists of travel expenses totaling more than the personal exemption amount, and the recipient will be in the United States for 12 months or less, Rev. Proc. 88-24 provides steps which also appear in IRS Publication 515, page 21 (tax year 2008 version), under “Alternate Withholding Procedure,” which can be used to further reduce the withholdable amount down to zero in most cases. 

These procedures provide a means of exempting temporarily away-from-home business expenses from tax, similar to the accountable plan rules.  (Accountable plan exclusions only apply to travel reimbursements attributable to personal services.)  For tax return purposes, taxpayers have historically claimed these travel expenses on Form 2106-EZ or 2106 (since there is no other form available) and brought them forward to Schedule A of Form 1040NR as itemized deductions.

Although the grantor will most likely not require receipts for disbursement purposes, the grantee must be able to defend any deductions to the IRS by keeping adequate records to establish the amounts claimed, the time and place of the expenditure, and the business purpose of the expense as it relates to the conduct of the taxpayer’s trade or business in the U.S. 

Payers need to provide recipients with a breakdown of expenses so that recipients can prepare their tax returns correctly.

Summary

Taxable scholarship and fellowship grants must be recorded on the recipient’s tax return – Form 1040 for US citizens and resident aliens or Form 1040NR and Form 1040NR-EZ for nonresident aliens. The withholding tax on nonqualified (taxable) scholarship and fellowship grants may be reduced or eliminated if a taxable grant may be offset by a withholding allowance (deduction). Recipients of taxable grants should consider making estimated federal and state tax payments on taxable grants to the extent that the grant is not subject to withholding.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 6, Number 3, for a discussion on Tax Treaty Benefits for Scholarships and Fellowships.

Q:  We are paying a non-qualified scholarship to the child of a G-4 individual for the spring 2009 semester. The child, in G-4 status as well, has been in the U.S. in that status since 2006 and is only 18. She does not have work authorization. Since she is a nonresident alien (NRA), we plan to reduce the withholdable portion of the scholarship by the $3,650 personal exemption, withhold 14 percent on the rest, and report on a 1042-S. Is this correct?

A:  Unfortunately, no. Although it is true that the payee is an NRA because she is in G-4 status and under 21, the ability to apply the personal exemption to non-qualified scholarships and the reduced 14 percent withholding rate on those payments, are both restricted to NRA individuals in F, J, M, or Q status. The 14 percent rate is further restricted to F, J, M, or Q individuals who are candidates for a degree at a qualifying educational institution or, failing that, to F, J, M, or Q individuals whose scholarship is from a specific type of grantor as described in Code Section 1441(b)(2). In this case, you must withhold at 30 percent on the entire amount of the non-qualified scholarship.

Register Now for this April’s Nonresident Alien Tax Training

Registration is still open for Windstar’s next comprehensive Nonresident Alien Tax Training occurring April 29^th to May 1^st at the Doubletree Guest Suites in Boston, MA. A half-day pre-conference is also available on April 28^th.

In addition to receiving high quality, useful instruction, all attendees receive:

• Comprehensive binder filled with hundreds of pages of helpful resources and presentation slides
• Laptop for all hands-on software sessions
• Breakfasts and lunches, along with morning and afternoon breaks
• Two Windstar Publishing® tax guides
• Continuing education credits (for individuals who apply)
• Certificate of completion

The Doubletree Guest Suites Boston is hosting all three 2009 NRA Tax Trainings. The Doubletree Guest Suites is an all suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions.  Hotel features include:

• Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
• Low cost transportation to and from Logan International Airport
• High-def flat screen televisions in each room
• Scullers Jazz Club

In addition to the spring training, Windstar is also offering NRA tax trainings in August and December.  Agendas for each session will be available approximately ninety days prior to each training.  E-mail paul.carpinella@windstar.com for dates and pricing.

Click here to view a complete agenda and register for Windstar’s Spring Nonresident Alien Tax Training.

Join Windstar Technologies and COKALA for a Seminar on Nonresident Alien Payments

Windstar and COKALA Tax Information Reporting Solutions, LLC are teaming together for a third consecutive year to offer a two-day seminar on payments to nonresident aliens.  This year’s session will take place June 2^nd - 3^rd at the Marriott Courtyard Dunn Loring Fairfax hotel in Vienna, Virginia. 

The seminar has separate tracks geared specifically for educational organizations and corporations and will educate attendees on tax regulations governing payments to non-U.S. companies and individuals, and the immigration laws that may prohibit payments to those foreign visitors or vendors.  Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major are serving as session presenters for the program.

Visit www.cokala.com to register.

Spring into Compliance with Windstar Publishing Tax Guides

Award winning author Paula N. Singer, Esq.’s line of ten comprehensive tax guides help employers, tax preparers, and taxpayers understand the complex area of nonresident alien taxation. 

Titles include:

U.S. Tax Guides for Foreign Persons and Those Who Pay Them^® Series
- U.S. Taxation of Foreign Students
- U.S. Taxation of B-1 Business Visitors
- U.S Taxation of H-1B Specialty Workers
- J-1 Nonstudent Exchange Visitors Performing U.S. Services
- L-1 Intracompany Transferees on U.S. Assignment
- Tax Treaty Benefits for Foreign Nationals Performing U.S. Services
- A Guide for Filing IRS Forms 1042 and 1042-S

Cross-Winds™
Cross-Winds: What You Need to Know About Exchange Visitors

U.S. Tax Returns
International Aspects of Individual U.S. Tax Returns
(awarded a bronze medal in the Accounting/Tax category of the Axiom Business Book Awards)

Tax Policy
A Simple, More Efficient Tax Collection System for America

Click here to view full descriptions on each of the tax guides.

Windstar Will Dock at the Following Trade Shows

Windstar Spring Nonresident Alien Tax Training
Doubletree Guest Suites
Boston, MA    
April 28 – May 1, 2009

* * * * * * * * * * * * *

American Payroll Association’s 27th Annual Congress
Long Beach Convention Center
Long Beach, CA
May 19 – 23, 2009

* * * * * * * * * * * * *

NAFSA 2009 Annual Conference
Los Angeles Convention Center
Los Angeles, CA
May 26- 29, 2009

* * * * * * * * * * * * *

Windstar Technologies/COKALA Tax Information Reporting Solutions Nonresident Alien Payments Seminar
Marriott Courtyard Dunn Loring Fairfax
Vienna, Virginia
June 2 - 3, 2009

* * * * * * * * * * * * *

Check in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information and speaking engagements.

©Copyright 2009 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties. When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting. Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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