How to report tax-free Japanese fellowship for US researcher working in Japan for 6 months

[vql]

Hello,

I am a US-citizen researcher receiving a tax-free fellowship to do research in Japan for 6 months.   The Japanese fellowship stipulates the following:

"As the maintenance and other allowances provided by JSPS to researchers are not employment
based wages, they are not subject to withholding tax. In addition, as these allowances take the form
of travel expenses required to support the researchers' stays in Japan and are limited to covering
actual expenses, they are exempted from taxation."

I have the following questions:

1- Would the US-Japan Tax Treaty, Article 20, exempt me from paying US tax on the above tax-free Japanese fellowship?   I satisfy both conditions in Article 20 of the Treaty as explained below:

Technical Explanation, U.S.-Japan Income Tax Treaty, signed November 6, 2003

Article 20, page 75

"A teacher or researcher who satisfies these two conditions will be exempted from tax by
the host Contracting State on any remuneration for such teaching or research for a period not
exceeding two years from the date he first visits that Contracting State temporarily for the
purpose of teaching or conducting research. "

I did not have to pay tax on this fellowship in Japan.  Do I have to pay tax on this tax-free Japanese fellowship in the US?

2- How do I enter the above tax-free Japanese fellowship in TurboTax Premier 2024, and how to take the tax exemption in the US?  

Thank you.

vql

[pk]

@vql , as I read the text of the US-Japan treaty and the technical explanation ( you have provided ) regarding article 4,  

(a) A US citizen  ( taxed on world income , no matter where the tax home is ),  under this article  is not to be taxed by the host country ( this being Japan ).

(b) Because US taxes its citizens/ immigrants ( GreenCard ) on citizenship basis , it will still tax you on your world income irrespective of your tax home.  Most countries  tax  a person on residency basis  ( world income for residents and domestic income for non-residents ).  There are of course  others with in between forms  based on  many other  criteria such as ownership of home etc. etc.

My conclusion is that as a researcher in Japan and meeting eligibility outlined   in article  20, Japan will not tax your income while the US will.   What I need to  check   code sections  ( for the exact language  )  on whether (and if you had  been able to qualify  for Physical Presence test )  you could  use Foreign Earned Income Exclusion .  My  sense of the code says NO, but ....

Does this make sense ?

Is there more I can do for you ?

[vql]

@pk Thank you very much for your reply, which I understand.  I will read carefully Article 4 that you mentioned.

How do I enter the fellowship amount, which does not have a 1099 form?  Miscellaneous income?  Business income with expense deductions (e.g., travel expenses)?

Thank you.

vql

[pk]

@vql , I would put it under "other" category.

Note that if you were to report as   " non-employee " or business income, there would be  Self-Employment tax ( Equivalent to FICA but at  15.3% ).

However, I do recognize that this could be  interpreted as  "wages"   because the term remuneration is used in the treaty.  That would mean putting it as  W-2   income   ---- wages  while in a foreign country is  mostly treated as self-employment ( because of the need to  contribute  SECA -- Self-Employment Tax ).

Given the above I would suggest to  use the  contract / award letter from the Japanese University whom  employed you.   Then  determine whether this was an award / stipend or wages.    Also  I don't know whether  your  US  University  employer continued to pay your wages in the USA and the Japanese portion was  for living  &  incidental expenses.

[vql]

@pk Thank you very much for your reply, based on which the relevant information on employment or award is given in the description of the fellowship below (also quoted in my first message above):

"As the maintenance and other allowances provided by JSPS to researchers are not employment
based wages, they are not subject to withholding tax. In addition, as these allowances take the form
of travel expenses required to support the researchers' stays in Japan and are limited to covering
actual expenses, they are exempted from taxation." 

Since the Japanese fellowship is "NOT employment-based wages," it is then considered as an award.

My follow-up questions:

What are the tax benefits of an award versus self-employment wages?  Are awards tax free in the US?

Surely there must be a place to enter the award amount in TurboTax, which I need to explore.  Any hints would be appreciated, but the above questions are more important since they determine how to report the fellowship amount.

Thank you again for your great help.

vql

[Hal_Al]

Stipends & fellowships are best reported as taxable scholarship.*  

Enter at Educational Expenses and Scholarships**, under Deductions and credits (not the income section).

After answering no to having a 1098-T, answer yes to qualifying for an exception (that gets you to the entry screens). You will have to go thru the whole education interview to get to the scholarship screen. At the scholarship screen, enter the amount of the grant. When asked if any was used for room and board, answer yes. Then enter the amount you want to be taxable (usually all of it), in the pop up box. R&B are not "qualified educational  expenses".  So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.  This will put it on line 8r of Schedule 1.

If you do have a 1098-T, one of the follow-up questions will be do you have any scholarships not shown on the 1098-T. Enter the additional scholarship/stipend there.  

*Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

**If you are using desktop (download) TT, instead of online, there's an alternate entry point. 

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

-Less Common Income

      -Click "Visit All".

  - On the next screen, click yes

         You'll eventually reach a screen to enter the scholarship amount.

[vql]

@Hal_Al Thank you very much for your amazingly detailed TT-use guidance, which would benefit not just me, but many people who would search for answers to similar questions in the future, like I did before I finally decided to join the TurboTax Community (TTC) to pose my own specific questions for the first time above, even though I have used TT for several years, as the answers from the TTC that I had found through my web search did not quite answer my specific questions.

Your clarifying footnotes * and ** were also highly helpful (for me and for any reader who will come to this thread).

Thank you very much once again.

vql

PS: I also learned from your reply to use a few convenient acronyms, particularly "TT".

[vql]

@pkI received this message from you in my email but for some reasons your message did not appear in this thread:

=============================================

----- Forwarded Message -----

From: TurboTax Community <[email address removed]>

To:

Sent: Tuesday, February 25, 2025 at 04:47:42 AM CST

Subject: Did you get the answer you needed?

pk (Level 15) mentioned you in a post! Join the conversation below:

Date: February 22, 2025 10:49 AM

Did it solve your problem?

=============================================

Thank you very much for kindly checking with me.  I am exploring various ways to report the Japanese fellowship, such as Foreign Income, Scholarships, Business Income.  From here on, it is more dependent on each person's particular situation.  I may have more questions in the future.

Thank you once again.

vql