Stipend vs. Scholarship vs. Research Grants - Taxation Methods
To whomever you are, firstly - thank you for contributing to research and development and pursuit of furthering our knowledge of a particular field. Without your efforts and intellectual curiosity, we would be naught for progress as a civilization, and relegated to becoming accountants. Keep up the good work..
Now - let’s examine the taxation of the various grants/monetary stimulus you can receive as a research scientist.
Stipend
A stipend fully taxable and reported as wages, although W2 not issued;
Scholarship - partially taxable. Amount spent on tuition and qualified education expenses (provide link) not taxable, the remainder is taxable ordinary income. Reported on 1098-T if from USA stipend is treated as a
Scholarships
Scholarships are tax free (excludable from gross income) if you are a candidate for a degree at an eligible educational institution. These payments will not generate a W2, 1099, but if received from a US institution it will be on form 1098-T.
The payment received by the individual will be tax free if it is used for Qualified Expenses.
- Tuition & required fees
- Books/supplies/equipment required for all students in the course
Expenses that are not qualified include life expenses such as room & board and travel. The grant also cannot include payment for services such as teaching, research, or other services as a condition for receiving the scholarship.
There are exceptions to this rule -- if you receive the amount under one of these programs.
- The National Health Service Corps Scholarship Program (NHSC)
- The Armed Forces Health Professions Scholarship and Financial Assistance Program (HPSP)
Fellowship and Research Grants
Generally, research grants is non-taxable (ie - excludable from gross income) if they meet one of the following conditions:
a. The grant qualifies as a prize or award that is excludible from gross income under Internal Revenue Code section 74(b).
In non-legalese, what this means is that the individual could not have made an action to enter the contest of proceeding on their own, the individual is not required to render future services as a condition to receiving the award, and the prize/award is transferred by the payor to a governmental unit or organization.
b. The grant/prize remains non-taxable if the grant's purpose is to achieve a specific objective - ie produce a report or product, or to improve or enhance a literary, artistic, musical, scientific, teaching, or similar capacity, skill or talent of the grantee.
Non-US citizen grants
Generally, academic institutions who issue grants and fellowship payments to Nonresident Aliens (present in the US) - will issue form 1042-S, which will also contain withholding information. The amount of withholding will depend on the visa status of the recipient.
F-1, J-1, M-1, or Q-1 --- a stipend paid to a non-resident alien with these visas will be subject to federal tax withholding at a rate of 14% unless tax treaty relief is available.
Non-US persons with a B visa will have 30% of payments withheld, without provisions for reduction of withholding.