Do International Students Pay Taxes on Scholarships?

The taxability of scholarships for international students in the United States is a frequent source of confusion. While many assume these educational funds are exempt, the Internal Revenue Service (IRS) can consider a portion of scholarship or grant money as taxable income. The amount of tax owed depends on several interconnected factors, including the student’s tax residency status and how the funds are used.

Determining Your Tax Status and Scholarship Taxability

An international student’s U.S. tax liability depends on their classification for tax purposes as either a “nonresident alien” or a “resident alien.” This distinction is based on the Substantial Presence Test, not on immigration status. The test measures the number of days a student has been physically present in the U.S. over a three-year period.

To calculate this, you add all the days you were present in the current year, one-third of the days from the previous year, and one-sixth of the days from the year before that. If the total equals or exceeds 183 days, you meet the test and are considered a resident alien for tax purposes. However, students on F-1 or J-1 visas are exempt from counting days toward this test for their first five calendar years in the U.S., meaning most remain nonresident aliens during their studies.

Once tax status is known, the taxability of a scholarship is determined by how the money is spent. The IRS divides expenses into qualified and non-qualified categories. Qualified education expenses include tuition, fees required for enrollment, and course-related costs like books and supplies that are mandatory. Funds used for these purposes are not taxable.

Any portion of a scholarship used for non-qualified expenses is considered taxable income. These expenses include room and board, travel, and other personal living costs. For example, if a student receives a $25,000 scholarship and has $18,000 in tuition and required fees, the remaining $7,000 is subject to U.S. income tax. This taxable portion is subject to a 30% withholding tax rate, which may be reduced to 14% for students on F, J, M, or Q visas.

The Impact of Tax Treaties

The general rules for taxing scholarships can be modified by international agreements known as tax treaties. The United States maintains income tax treaties with dozens of countries to prevent individuals from being taxed on the same income by both their home country and the U.S. These agreements often contain specific provisions that apply directly to students and researchers.

A tax treaty can reduce or even eliminate U.S. tax on a scholarship. For instance, a treaty might allow a student to exempt a certain amount of income or the entire taxable portion of their scholarship. These benefits often extend to funds used for non-qualified expenses like room and board, which would otherwise be taxable under standard IRS rules.

Claiming these benefits is not automatic; a student must take proactive steps to invoke a treaty provision. To determine if a treaty exists and what specific exemptions are available, students should consult IRS Publication 901, U.S. Tax Treaties. This document provides detailed tables outlining the benefits available to residents of each treaty country.

Required Tax Forms and Documentation

Before a tax return is filed, specific forms are exchanged between the student and their university to manage tax withholding. The primary document a student provides is Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. Completing this form certifies a student’s non-U.S. status, which is necessary for the university to apply the correct tax withholding rules.

A student who is eligible for tax treaty benefits uses Form W-8BEN to claim them. In Part II of the form, the student must identify their country of residence, cite the specific article of the tax treaty that provides the exemption, and state the rate of withholding they are claiming, which is often 0%. A U.S. Taxpayer Identification Number (TIN) or Social Security Number (SSN) is required on the form to claim these benefits.

In return, the student will receive a document from their university by March 15 of the following year: Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. It reports the total amount of scholarship money paid in Box 2 (Gross Income) and the amount of U.S. federal tax withheld in Box 10. The form also uses a specific income code in Box 1, such as ’16’ for a scholarship, to identify the nature of the payment.

Filing Your U.S. Tax Return

International students classified as nonresident aliens must use Form 1040-NR, U.S. Nonresident Alien Income Tax Return, to report any taxable scholarship income to the IRS. This form is specifically designed for foreign nationals and differs from the Form 1040 used by U.S. citizens and resident aliens.

The information provided on Form 1042-S is used to complete Form 1040-NR. The gross taxable income amount from your 1042-S should be reported on the appropriate line, and any federal tax withheld is entered on a separate line to be credited against any tax you may owe. You must attach a copy of your Form 1042-S to your mailed tax return.

If the tax withheld by the university exceeds the total tax calculated on your return, you are due a refund from the IRS. Conversely, if the tax withheld was insufficient to cover your total liability, you must pay the remaining balance by the tax filing deadline.

The deadline to file Form 1040-NR and pay any tax due is April 15 if you received wages subject to U.S. income tax withholding. If you did not receive wages subject to withholding, the deadline is June 15. The completed Form 1040-NR can be submitted by mail, and some tax preparation services offer e-filing options for this form.