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cricket34
Returning Member

Is this scholarly award taxable?

I am guessing the answer to the following is 'yes, it is taxable' but I'm struggling to confirm.  A student at a U.S. college has received a prestigious award of $10,000 to conduct a charitable project (of their own design) in a country overseas during the summer between their junior and senior years.  The entire amount is to be spent on logistics to carry out the award: travel to the country, living expenses while there, purchases necessary to carry out the project (including materials for donation, local marketing, paying collaborators, doing outreach), etc. 

 

Is this award taxable?  

 

It would appear to be taxable because it does not cover qualified education expenses (or education expenses of any kind).

 

However, is it possible that this award would count as a grant to an individual?  And if so - so long as it was awarded on an objective and nondiscriminatory basis under a procedure approved in advance by the IRS, might it actually NOT be taxable?  In particular, I am exploring this co-requirement: 

 

The grant's purpose is to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or similar capacity, skill or talent of the grantee.

 

Would the award described above qualify as a grant "to achieve a specific objective," or am I mis-reading this part of the tax code?  I drew it from here: https://www.irs.gov/charities-non-profits/private-foundations/grants-to-individuals

 

To complicate matters, in some cases the student having received this award is an U.S. citizen, and some years, the student receiving it is a citizen of another country, studying in the U.S. on a visa.

 

Any input is welcome - thank you!

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6 Replies

Is this scholarly award taxable?

Unfortunately, you are looking at the wrong page.  You are looking at the page to determine whether a grant to an individual is a deductible expense for a charity.  (Because in general, charities are supposed to be set up for public benefit and not the benefit of individuals.  Charity payments to individuals are highly regulated.)

 

The award is taxable to the student.

 

What is potentially mitigating is the possibility of reporting the activity as a schedule C business, where the student can deduct their expenses.  This isn't really an activity carried out as an "ongoing trade or business", but that may be the best way to report it.

 

Important question: Is this part of the student's degree requirement?  Will they get a grade and course credit for the activity?

 

@Hal_Al any thoughts?

cricket34
Returning Member

Is this scholarly award taxable?

Good to know - thank you!  I was just "googling" for potential answers and that reference to grants was one of the first ones that popped up.  I'm really struggling to find the parts of the tax code that might otherwise apply to this situation.  In particular, because this award is distributed to carry out a charitable project and in no way contributes to salary or payment for the student themselves (except incidentally, as providing means for them to arrive and stay at the host country while enacting the project), I'm surprised if it would simply count in the IRS's eyes as personal income without any caveats.

 

And no, the award has nothing to do with the student's education.  It is entirely unrelated to their degree, except for the fact that to be considered for the award, the student had to be enrolled at a degree-granting institution that  participates as a member in the foundation's award program.

 

It is an interesting thought, to report the funds in Schedule C; I hesitate, though, to advise any students to do this without there being a confirmed precedent for it.  This award has existed for many years, and is distributed yearly to dozens of students across the U.S.  I'll be a little surprised if there is not formal, well-established tax advice to be gathered on the topic, and am hoping to stumble upon it through at least one of the various sources to which I'm reaching out.

Is this scholarly award taxable?

@cricket34 

Grants and scholarships in excess of the cost of education are always taxable.  Cost of education meaning tuition, required supplies, and sometimes room and board, depending on the tax provision being considered.  Since the overseas project is not coursework, there is no "cost of education" to consider.

 

Furthermore, I expect there is no particular requirement that he actually perform the project, or that he perform well enough to "succeed" (whether that means publication or something else).  It's basically free money on the promise of doing work.  If anyone else paid your child $10K to do a project, your child would be an independent contractor and would deduct their expenses and pay tax on any net profit after expenses.  The fact that the child is a student, and the money is being paid by a charitable foundation rather than a for-profit company, seems like it should change things, but it probably doesn't. 

 

I think the most likely answer will be a schedule C, but @Hal_Al is another expert who know a lot about college issues.  The alternative is to report it as a taxable scholarship in excess of tuition, which will make it taxable income but not subject to social security or self-employment tax, but will not allow the deduction of expenses.

cricket34
Returning Member

Is this scholarly award taxable?

Indeed, NO.  There most definitely is full expectation and accountability for the student to perform the proposed work overseas.  All of the $10,000 is to be precisely accounted for in a detailed report following conclusion of the project at the end of the summer.  It sounds, though, as though the IRS has no particular separate consideration for such awards.

 

Furthermore, these students, though young, are adults - not children.  (I have in my life only run across a small handful of college students who are under the age of 18 - and none who have received this award!)  And too, they have been rigorously selected from a competitive pool of applicants based on a list of requirements including the writing of a deeply-researched proposal that includes a full budget detailing the spending every dollar of the award specifically on the vetted project.  In the past, our students have used these awards to do a wide variety of things - most recently, to build a community space for disabled children in a war-ravaged area.  This is the first year wherein our office has decided not only to assist students in applying for the award, but also understanding the tax implications - a service that, honestly, is far overdue.

 

I will continue to seek input on this topic, and I note that it does sound like the award is taxable, but I wanted to clarify that in no way, shape or form is this "free money" for anyone.  Of note, the student is responsible for returning any unspent money to the foundation, if they cannot otherwise account for it in their summer-end report.  Thank you for your thoughtful feedback, though - it's been helpful to dive deeper into the details that we need to consider.

cricket34
Returning Member

Is this scholarly award taxable?

Well it took forever, but I finally got my answer: the award is NOT taxable for international college students, since the entire amount was to be used internationally and is thus considered non-US-source income.  The award *is* taxable for students who are US citizens.  Here is the language I received from the experts I spoke with:

 

"These fellowship disbursements are non-US source income, so long as (a) the recipient is a “nonresident alien” for US tax purposes and (b) the fellowships are granted for activities to be conducted outside the US.  Because the income is non-US source, it’s not subject to US income tax withholding and not reportable as US-source income.

 

"A “nonresident alien” is a person who isn’t a US citizen, doesn’t have a green card, and does not spend substantial time in the US. Time spent in the US as a student, however, doesn’t count (that is, students are exempt from the “substantial presence” test for determining tax residency)."

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