Print/Copy Mail Services Vice President FABackground:
In 1986 the Tax Reform Act substantially overhauled the Internal Revenue Code and included a significant change to section 117 the provision that governs the taxation of scholarship/fellowship grants. Congress amended section 117 so that only tuition and directly related expenses were eligible for the 117 exclusion. The change Congress made to 117 was directed at scholarship/fellowship recipients who were U.S. citizens and permanent resident aliens.
Shortly after the Tax Reform Act the IRS ruled in IRS notice 87-31 that a grant-making institution was not required either to withhold tax or to report scholarship/fellowship payments made to U.S. Citizens. However the ruling did not apply to institutions that made payments to foreign (non-resident aliens) grantees.
Terminology:
Scholarship/Fellowship Source: For scholarship/fellowship payments the "residence of the payor" determines the source of payment. If the payment is from an entity outside the U.S. it would be "foreign source", and if the payment is from an U.S. entity it would be considered to be U.S. source.
Candidate for a degree: A student who is pursuing a degree at a college or university, or attends a primary or secondary school, or attends an accredited educational institution.
Qualified scholarship or fellowship payment: A payment that is used for tuition, mandatory fees, books, or education costs that are required of all students in a course of instruction, is excludable from taxable income under IRS code 117.
Non-Qualified scholarship or fellowship payment: Payments for travel, room and board, or an amount received that any portion received represents payment for teaching, research, or other services be provided by the student as a condition for receiving.
Substantial Presence: Status an individual will receive for tax purposes only. Computed on the days of presence in the U.S. during the current calendar year, 1/3 of days the 1st preceding year, and 1/6 of the days of presence for the 2nd preceding year. Before applying the calculation you must exclude exempt-individual "calendar" years, which are 5 years for a student, or 2 years for a teacher, trainee or researcher. If an individual is in the U.S. as an exempt individual for any part of a calendar year, that year will be counted as a full calendar year when determining exempt-individual years.
Process Flow:
A scholarship or fellowship payment may be, or a portion of, tax free if the student is a candidate for a degree. The next thing to be determined, is what is the source of payment. Most typically if the payment is from an entity outside the U.S. and the University is acting as an intermediary entity the payment is exempt from reporting or taxation. If the payment is from an U.S. source continue the process.
How is the payment going to be paid in our system.
Payments processed through A/R via Resource Aid, and applied to their student account will have the system calculate how much of the payment would be a qualified payment.
Invoice Payments processed through A/P, will be considered a non-qualified payment
A/R payments:
If the payment exceeds the amount that would be qualified payment, the same process that is used to determine the taxable portion of a non-qualified payment paid through A/P will be followed.
A/P payments:
The student will need to complete a CO-NRA form that will be used to determine whether they have passed the substantial presence test. If they meet the test they will be treated the same as an U.S. citizen, and the University has no reporting or withholding obligation on the payment. If not go to step 2.
Determine if the student is eligible for tax treaty benefits. Is their country of residence for tax purposes on the list of countries that have negotiated tax treaties with the United States. If they are not eligible for treaty benefits go to step5.
If they are eligible for treaty benefits they will need to complete a W8-BEN form to claim treaty benefits.A U.S. reportingID number is required on the W8-BEN form, if the student doesn't have a number see step 4 below. Once the W8-BEN iscomplete the payment is nontaxable to the student.
Your student will need to apply for a social security number (SSN), or a individual taxpayer identification number (ITIN). If they plan on working in the future they should apply for a SSN.
For SSN:
Social Security Administration
2504 Oakmont Way
Eugene, OR 97401-5441Office hours: 9:00 a.m-4:30 p.m. Make sure they take their passport and DS-2019.
Documentation required:
A letter from the University that verifies that the student is a current fulltime student, and that they are authorized too work and will be working on campus.The Office of International Affairs will provide the students the letter upon request.
For ITIN:
Internal Revenue Service
300 Country Club Road
Eugene, OR 97401-2299Office hours: 8:00 a.m.-4:30 p.m.
Documentation required:
W-7
Passport with I-94 card
And second photo ID (see W-7 instructions)
The final option to reduce the taxable portion of the scholarship payment is utilizing the personal exemption for scholarship purposes. The taxable portion of the scholarship will be the net amount of the payment after it has been reduced by the personal exemption amount e.g. $3,650.00 for 2009. Is the student or researcher an employee of the University? If so, they are probably using the exemption amount for payroll and we don't want to allow them to claim it twice, and incur a tax liability at year end.