If a dependent student is on a scholarship, what tax obligations are they under?
One misconception that many students have is that money received from a scholarship is tax-free. This is partially true -- scholarships are excluded from gross income to the extent that they are used to pay for direct costs of higher education, including tuition, fees, books, and other equipment or supplies required for enrollment. However, the amount of any scholarship that exceeds that direct cost of schooling is fully taxable, including scholarships that are used for room and board or other personal living expenses. Thus, students are required to report the amount of any scholarships received as income on their tax return for the amount of the scholarship that exceeds the direct cost of schooling (or is used for room and board) and will pay tax on this amount.
What tax credits are available to help students and families pay for education expenses, and who is eligible to claim them?
There are two tax credits available for higher education expenses: The American opportunity tax credit and the lifetime learning tax credit. A qualifying student may only select one of these credits in a given year. Furthermore, a student who is claimed as a dependent is not eligible to claim these credits on his or her own tax returns -- instead, the person claiming the student (such as the parents) must claim the credit.
- American opportunity tax credit -- is available for the first four years of undergraduate education expenses (including tuition, fees, and textbooks) if the student is enrolled at least half time. The credit provides a 100 percent credit for the first $2,000 of qualifying educational expenses and a 25 percent credit for the next $2,000 of expenses, for a maximum credit of $2,500.
- Lifetime learning tax credit -- this credit is available for undergraduate or graduate expenses (tuition and fees only -- not textbooks). The credit (lets you claim 20 percent of) $10,000 of qualifying educational expenses (over a year), for a maximum credit of $2,000.
Are there specific rules that international students must adhere to when filing their taxes?
The first step for international students is to determine whether they need to file as a "resident alien" or a "nonresident alien." For tax filing purposes, resident aliens are those that are considered lawful permanent U.S. residents (the "green card test"), or those that have met the "substantial presence test." The substantial presence test is fairly complicated, but requires individuals to have been physically present in the U.S. for at least 31 days during 2011 and 183 days during the 3-year period that includes 2009, 2010, and 2011, counting all of the days present in 2011, one-third of the days present in 2010, and one-sixth of the days present in 2009. However, time spent in the U.S. as a teacher or trainee (on a J or Q visa) or a student (on an F, J, M, or Q visa) is not counted toward the substantial presence test.
International students that are considered resident aliens for tax purposes (by passing either the "green card test" or "substantial presence test") follow the same tax laws as U.S. citizens. International students who are considered nonresident aliens for tax purposes will file Form 1040NR or Form 1040NR-EZ. Many of the tax rules for filers of Form 1040NR are different than the rules for U.S. citizens or residents -- for instance, nonresident aliens are generally not permitted to claim the standard deduction. Furthermore, the U.S. has entered into tax treaties with many countries that may allow the student to exempt certain types of income from taxation or be taxed at a lower rate, or may provide other benefits.
See IRS Publication 519, U.S. Tax Guide for Aliens, for more guidance, including a list of countries that have tax treaties with the U.S.
Many thanks to Amy Hageman, CPA and assistant professor of accounting in Kansas State University's College of Business Administration, for participating in this interview.