Nonresident Aliens Receiving Tuition Waivers

Nonresident Aliens Receiving Tuition Waivers

Tuition waivers are no longer reported on Form 1042-S. New Internal Revenue Service Regulations under section 1441, provide that effective for payments after 12-31-00, amounts that are exempt from tax under Internal Revenue Code section 117 are not subject to reporting on Form 1042-S. Tuition waivers are exempt from tax under Internal Revenue Code section 117. If you would like to know the amount of your tuition waiver(s), please consult your tuition account via the Income Accounting website.

Lowell Hancock, International Tax Specialist, with the Internal Revenue Service has offered the following tips via an email message to a Nonresident Alien Issues email list:

Regarding new developments on foreign student / foreign scholar income
Tax returns for 2001, I would mention three items as follows:
2001 was the first calendar year for which withholding agents were not required to report nontaxable scholarships and fellowships to nonresident alien recipients on form 1042-S. However, the lines on Forms 1040NR and 1040NR-EZ which deal with scholarship/fellowship income have not been changed. Therefore, nonresident alien students or scholars who had scholarship or fellowship income for tax year 2001 should generally comply with the following procedures:

A. Nonresident alien students who received scholarships/fellowships which consisted only of a tuition waiver and/or other nontaxable scholarship or fellowship, and who did not receive any form 1042-S, should not report their scholarship or fellowship income at all on either form 1040NR or form 1040NR-EZ. They should enter nothing on any of the lines which deal with scholarship or fellowship income.

B. Nonresident alien students or scholars who received a taxable scholarship or fellowship during 2001, which the withholding agent reported on form 1042-S, should report such taxable scholarship or fellowship reported on form 1042-S on line 12 of form 1040NR or on line 5 of form 1040NR-EZ. If the NRA student has no additional items which may be excluded from income under IRC 117 (such as fees, books, supplies, or equipment required for his courses), then he will make no entry on line 31 of form 1040NR or on line 9 of form 1040NR-EZ, and should continue filling out the rest of the form. If the NRA has additional items which may be excluded from income under IRC 117 (such as fees, books, supplies, or equipment required for his courses), he should total the additional deductible items and report the total deduction for them on line 31 of form 1040NR or on line 9 of form 1040NR-EZ, and should continue filling out the rest of the form. However, an NRA student who is deducting such additional items MUST attach a schedule to his income tax return listing and explaining the additional items he is deducting.

C. A Nonresident alien student who received scholarships/fellowships which consisted of both taxable and nontaxable components, and who receives a form or forms 1042-S which report both the taxable and nontaxable components of his scholarships and fellowships, should combine both the taxable and nontaxable components of his scholarship or fellowship as reported on form(s) 1042-S and enter the total on line 12 of form 1040NR or on line 5 of form 1040NR-EZ. He should then enter the nontaxable component of his scholarship or fellowship as reported on form(s) 1042-S on line 31 of form 1040NR or on line 9 of form 1040NR-EZ. Thus, only his net taxable scholarship or fellowship income will be included in his Adjusted Gross Income on line 33 of form 1040NR or on line 10 of form 1040NR-EZ. If the NRA student has additional deductible items which are excludible from income under IRC 117 (such as fees, books, supplies, or equipment required for his courses), then he should follow the instructions given above in Instruction “B”.

D. If the NRA student or scholar is from a tax-treaty country whose income tax treaty with the USA allows an exclusion of his entire scholarship or fellowship from gross income, then he should not follow the instructions given in Instructions “A”, “B”, or “C” above. Instead, he should write in his entire scholarship or fellowship amount which is excludible under the income tax treaty only on line 22 of form 1040NR or on line 6 of form 1040NR-EZ, and not enter it on any other line of his income tax return. This will ensure that his excludible scholarship or fellowship income under the treaty will not be included in his Adjusted Gross Income and not be taxed.

E. If the NRA student or scholar is from one of republics of the Commonwealth of Independent States (CIS) which does not already have a separate income tax treaty with the USA (i.e., any CIS republic except for Russia, Kazakstan, Ukraine, Latvia, Lithuania, or Estonia which have their own separate treaties with the USA), then such NRA student’s scholarship or fellowship exclusion under the treaty is limited to $10,000 per calendar year. An NRA student or scholar in this situation should attach a separate schedule to his income tax return on which he first computes the taxable portion of his scholarship or fellowship under U.S. law (i.e., IRC 117). He should begin his computation with his scholarship or fellowship income as reported on form 1042-S. If any taxable portion of the grant remains after applying the exclusions of IRC 117, he should then apply the $10,000 exclusion allowed by article VI(1) of the USA–CIS treaty. If any taxable portion of the grant remains after this, it is taxable and should be included in his Adjusted Gross Income on line 33 of form 1040NR or on line 10 of form 1040NR-EZ. He will report his scholarship income which is exempt under the USA–CIS treaty on line 22 of form 1040NR or on line 6 of form1040NR-EZ, and not include that amount in his gross scholarship income on line 12 of form 1040NR or line 5 of form 1040NR-EZ. He will report the balance of his grant as reported on form 1042-S on line 12 of form 1040NR or line 5 of form 1040NR-EZ. Any components of the grant which are excludible from income under IRC 117 are reported on line 31 of form 1040NR or on Line 6 of form 1040NR-EZ.

Lowell G. Hancock
Tax Specialist
SB/SE TEC Area 15 (International)

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