Scholarships Abroad: Taxable Or Not?

The taxability of scholarships for travel abroad depends on several factors, including the type of scholarship, the recipient's tax status, and the country where the scholarship is awarded. In the United States, for instance, scholarships that cover tuition fees, books, and other educational expenses are generally tax-free. However, any amounts used for incidental expenses like travel are considered taxable income and must be reported on tax returns. Additionally, scholarships awarded to nonresident aliens in the US are subject to withholding tax, whereas those paid to US citizens and residents are not. It's important to note that tax laws vary by country, so individuals should consult official sources or tax professionals for specific information regarding their situation.

Foreign scholarships for US citizens

Scholarships are generally considered to be nontaxable, but this depends on the type of expenses that the scholarship covers. If the scholarship covers expenses like tuition, fees, books, and equipment required for courses, then it is usually tax-free. However, if the scholarship covers incidental expenses such as room and board, travel, and optional equipment, then it is typically taxable.

Now, here is some information on foreign scholarships for US citizens. There are hundreds of opportunities for funding for US citizens who wish to study abroad. These scholarships are offered by various sources, including the US government, private organizations, and specific institutions. Here are some examples of foreign scholarships available for US citizens:

• Fulbright Foreign Student Program: This is one of the most popular government-funded scholarships for international students. It offers scholarships for graduate students, young professionals, and artists to study in the US for one year or more. It is open to international students in all fields excluding medicine.
• Hubert Humphrey Fellowship Program: This is a non-degree scholarship program that provides funding for international experienced professionals to undertake 10 months of academic study in the US.
• #YouAreWelcomeHere Scholarship: This scholarship is aimed at all overseas students studying any subject at a participating college or university in the US (there are 57). Applicants must submit an essay or video demonstrating their interest in promoting intercultural learning and exchange.
• Civil Society Leadership Awards: This scholarship offers full funding for master's students from specific countries who are dedicated to fostering social change.
• David P. Shapiro Autism Scholarship: A $1,000 scholarship open to current or prospective students in the US diagnosed with autism.
• Preply Scholarship: This scholarship is open to all students, regardless of nationality or study level, aged between 16 and 35. Three winners will be awarded up to $2,000 each based on a 500-word essay submission.
• Surfshark Privacy and Security Scholarship: A $2,000 prize available to high school, undergraduate, or graduate students enrolled in the US or another country. The scholarship is open to all nationalities, and applicants must submit an essay.
• Tortuga Backpacks Study Abroad Scholarship: This scholarship, worth $1,000, is awarded twice a year to passionate international students wishing to study in the US.
• East-West Center Scholarships and Fellowships: Scholarships to study in the US within selected institutions, aimed at international students from the Asia-Pacific region.
• Japan-United States Friendship Commission: An initiative offering grant programs to Japanese students wishing to study in the US, and vice versa.
• Wesleyan Freeman Asian Scholarship Program: Scholarships for 11 exceptional Asian students to study at Wesleyan University in Connecticut, covering the full cost of tuition and student fees.
• American University Emerging Global Leader Scholarship: Undergraduate scholarships for international students showing leadership potential to study at American University in Washington, DC.
• Brandeis University Wien International Scholarship Program: Funding for high-achieving students with an interest in contributing to the student community.
• Clark University Global Scholars Program: Scholarships of at least $10,000, along with a guaranteed $2,500 taxable stipend for a paid internship, are available for first-year international applicants.
• Emory University Needs-Based Scholarship Program: Funding opportunities for international students who can demonstrate financial need at Emory University.
• Harvard University Scholarships: Harvard offers a range of competitive international scholarships for students from around the world.
• Illinois State University International Awards: Illinois State offers tuition waivers, merit awards, and graduate assistantships to incoming international students.
• Iowa State University International Merit Scholarships: A merit-based scholarship program for high-achieving international students.
• Michigan State University International Scholarships: Various grants and scholarships for international students to study at MSU.
• New York University Wagner International Scholarships: Scholarships for international students to study at NYU Wagner Graduate School of Public Service.
• University of Arkansas International Scholarships: Funding opportunities for international students of varying backgrounds and nationalities.
• University of Iowa Scholarships for International First Year Students: Various scholarships for international students starting their first year in Autumn 2017.
• University of Minnesota International Scholarships: Offers the Global Excellence Scholarship and the #YouAreWelcomeHere Scholarship, which is renewable and offers $15,000 per year.
• University of Oregon International Scholarships: Scholarships for international students from around the world to study at the University of Oregon.
• University of Wisconsin Superior Non-resident Tuition Waiver Program: Tuition waiver for international students who can demonstrate financial need at the University of Wisconsin.

Tax treaties

A tax treaty between the United States and a foreign individual's country of residence may provide an exemption from or a reduced rate of withholding for certain items of income. The individual should notify the payor of their foreign status to claim the benefits of the treaty. This is generally done by filing Form W-8BEN, W-8BEN-E, or 8233.

Students, trainees, teachers, and researchers who are nonresident aliens can use Form 8233 to claim an exemption from tax withholding on compensation for services that is exempt from U.S. tax under a U.S. tax treaty. They must attach the appropriate statement shown in Appendix A (for students) or Appendix B (for teachers and researchers) at the end of Publication 519, U.S. Tax Guide for Aliens, to the Form 8233 and give it to the withholding agent. For treaties not listed in the appendices, a statement in a similar format should be attached.

To claim a tax treaty exemption for remittances from abroad (including scholarship and fellowship grants) for study and maintenance in the United States, the payee must generally be a nonresident alien student, apprentice, or trainee. However, if the payee entered the United States as a nonresident alien but is now a resident alien for tax purposes, the treaty exemption will continue to apply if the tax treaty has an exception to the treaty's saving clause.

If the payee qualifies under an exception to the treaty's saving clause and the payor intends to withhold U.S. income tax on the scholarship, fellowship, or other remittance, the payee can avoid income tax withholding by giving the payor a Form W-9, Request for Taxpayer Identification Number and Certification, with an attachment that includes the following information:

• The payee's name and U.S. identification number
• A statement that the payee is a resident alien and whether this status is under the green card test, the substantial presence test, or a tax treaty provision
• The tax treaty and article number under which the payee is claiming a tax treaty exemption, and a description of the article
• A statement that the payee is relying on an exception to the saving clause of the tax treaty under which the exemption is being claimed

A list of countries with tax treaties with the United States can be found in IRS Publication 901. Not all treaties are the same, so it is recommended to review the specific treaty of your country.

Tax liability for non-resident aliens

In the United States, an alien is any individual who is not a US citizen or US national. A non-resident alien is an individual who has not passed the green card test or the substantial presence test. Non-resident aliens are taxed differently from resident aliens and US citizens.

Tax Rules for Non-Resident Aliens

Non-resident aliens are required to pay US taxes on income earned in the US or from a US source. This includes wages, tips, scholarship and fellowship grants, and dividends. Non-resident aliens do not have to pay any taxes on foreign-earned income.

Filing Requirements

Non-resident aliens must file a return if they meet any of the following criteria:

• Engaged or considered to be engaged in a trade or business in the US during the year
• Not engaged in a trade or business in the US but have US income on which the tax liability was not satisfied by the withholding of tax at the source
• Want to claim a refund of excess withholding or want to claim the benefit of any deductions or credits

Forms

Non-resident aliens who are required to file an income tax return must use Form 1040-NR, US Non-resident Alien Income Tax Return. This form must be filed by the 15th day of the 4th month after the tax year ends, which is usually April 15. If the non-resident alien is not an employee or self-employed, the deadline is extended to the 15th day of the 6th month, usually June 15.

Tax Rates

Effectively Connected Income, after allowable deductions, is taxed at graduated rates, the same as those that apply to US citizens and residents. US-source income that is Fixed, Determinable, Annual, or Periodical (FDAP) is taxed at a flat rate of 30% (or lower treaty rate, if applicable) and no deductions are allowed against such income.

Withholding Tax Rates

The withholding tax rate for non-resident aliens is 30%. However, this rate may be reduced to 14% (or a lower treaty rate) if the non-resident alien is a student, researcher, or grantee who is temporarily present in the US with an "F," "J," "M," or "Q" visa.

Taxable income

Whether or not a scholarship to travel abroad is taxable income depends on several factors. Firstly, it depends on the location of the awarding institution and the recipient. For instance, scholarships, fellowships, and grants that are US-sourced are not subject to withholding when paid to US citizens and residents, but they are subject to withholding when paid to nonresident aliens. The tax rate for nonresident aliens is 30%, but this may be reduced to 14% or a lower treaty rate if certain conditions are met.

Secondly, it depends on the purpose of the scholarship. If the scholarship is used to cover qualified educational expenses at a qualified educational institution, it is generally not considered taxable income. Qualified educational expenses typically include tuition and fees required for enrollment, as well as course-related expenses like fees, books, supplies, and equipment. However, if the scholarship funds are used for incidental expenses, such as room and board, travel, and optional equipment, they are typically considered taxable income.

Additionally, if the scholarship includes a service requirement, such as teaching or research, the amount designated for those services is usually considered taxable income. It's important to note that there are some exceptions to this, such as services required by specific programs like the National Health Service Corps Scholarship Program.

Finally, if the scholarship funds exceed the qualified educational expenses, the excess amount may be subject to taxation. Therefore, the taxability of a scholarship to travel abroad depends on the specific circumstances and it is always a good idea to consult official sources or a tax professional for the most accurate and up-to-date information.

Tax exemptions

Scholarships and grants are usually not taxed. However, there are certain conditions under which they may be taxed. The tax treatment of scholarships and grants can vary depending on the country and specific legislation. Here is an overview of tax exemptions related to scholarships, with a focus on travelling abroad:

• Qualified Scholarships: In the United States, a qualified scholarship is an amount that covers tuition, fees, health insurance, books, supplies, and equipment required for instruction. These scholarships are typically exempt from taxation and do not need to be reported on a 1042-S form.
• Foreign Sourced Scholarships: Scholarships received by students studying abroad from a foreign institution are generally not subject to taxation by the IRS. This is because the funds originate from a foreign source and are considered foreign-sourced income.
• Pell Grants: Pell Grants are generally exempt from taxation. These are need-based grants that assist economically disadvantaged students in pursuing college.
• National Health Service Corps Scholarship Program: Scholarships awarded by the National Health Service Corps Scholarship Program are exempt from taxation, even if they involve providing services such as teaching or research.
• Armed Forces Health Professions Scholarship and Financial Assistance Program: Scholarships from this program are also exempt from taxation, regardless of whether services are provided in exchange for the scholarship.
• Student Work-Learning-Service Programs: Many student work-learning-service programs under Section 448(e) of the Higher Education Act of 1965 are exempt from taxation.
• G.I. Bill Payments: Payments received under the G.I. Bill are not considered scholarships or taxable income.
• Treaty Exemptions: If you are a non-resident alien student or researcher with a specific type of visa (F, J, M, or Q), you may be eligible for a reduced withholding tax rate of 14% or a lower treaty rate. Additionally, if you are a tax resident of a country with an income tax treaty with the United States, you may be exempt from tax on your scholarship, fellowship, or grant.
• Travel Grants with Service Requirement: Travel grants that include a service requirement are generally non-taxable and excludable from reporting. This applies when the grant follows the same accountability guidelines as reimbursements for U.S. citizens or resident aliens.

It is important to carefully review the specific rules and regulations pertaining to tax exemptions for scholarships, as they can vary depending on your location and the nature of the scholarship. Consulting with a tax professional or referring to official government sources is always recommended for ensuring compliance with tax laws.

Frequently asked questions