What Is 1042-S Exemption Code 15 for Scholarships?

Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” is a tax document for reporting income paid to foreign individuals. The form uses a system of codes to detail the type of income and the basis for any tax treatment. This system allows the Internal Revenue Service (IRS) and the recipient to understand why a certain tax rate or exemption was applied.

Defining Exemption Code 15

Exemption code 15 on Form 1042-S signifies that scholarship or fellowship grant income is exempt from tax under a specific provision of U.S. law, not a tax treaty. This code is used when the payment meets the criteria of Internal Revenue Code Section 117, which permits nonresident aliens to exclude certain scholarship amounts from their gross income. The exemption is tailored to individuals temporarily in the U.S. on an F, J, M, or Q visa for the purpose of study or research.

The scope of this exemption is limited to qualified tuition and related expenses. This includes funds used for tuition and fees required for enrollment or attendance at an educational organization. It also covers books, supplies, and equipment required for courses of instruction.

Any portion of a scholarship that covers other costs, such as room, board, travel, or optional equipment, is not covered by the Section 117 exemption and is considered taxable income. These amounts are reported on Form 1042-S with a different code and are often subject to a 14% withholding tax rate for nonresident aliens in F, J, M, or Q status. Exemption code 15 is used exclusively for the non-taxable portion of the grant when no tax treaty benefit is claimed.

Documentation to Support the Exemption

To claim the tax exemption, a foreign student or researcher must provide specific documentation to the paying institution before any funds are disbursed. The primary document required is Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting.”

The individual must provide their full name, country of citizenship, permanent residence address, and U.S. taxpayer identification number. A foreign tax identifying number is also required. On the form, the student or researcher makes a specific claim for a tax exemption, certifying that they meet the requirements for the scholarship exclusion under U.S. tax law.

The withholding agent relies on the completed Form W-8BEN to justify not withholding tax on qualified scholarship payments. The form remains valid for the year it is signed and for three subsequent calendar years, and it is the individual’s responsibility to submit a new form if their circumstances change.

Reporting and Tax Filing for the Recipient

After the calendar year ends, the recipient will receive a completed Form 1042-S from the payer, which must be sent by March 15 of the following year. The form will identify the income in Box 1 with code 16 for scholarship grants, show the gross amount paid in Box 2, and use exemption code 15 in Box 4a to confirm the amount was not subject to tax withholding.

Upon receiving Form 1042-S, the foreign individual must use it to complete their U.S. income tax return on Form 1040-NR, “U.S. Nonresident Alien Income Tax Return.” Even though the scholarship income reported with exemption code 15 is not taxed, it must still be reported. The individual will report the scholarship amount on the appropriate line and then exclude it from the taxable income calculation.

Filing a tax return is a requirement for most nonresident aliens who have any U.S. source income, even if that income is fully exempt from tax. This reporting process creates a clear record demonstrating compliance with U.S. tax law.