Q. Does he report this taxable scholarship income on his state taxes as well?
A. Yes.
Q. If so, which state? (resident state with no additional income, or non-resident state where he did receive a W-2 for income less than $500)?
A. Resident state only. Taxable scholarship is not considered as earned in the state the school is located in.
The $500 W-2 from the non-resident state must also be reported on his resident state return.
This is the general rule: The income is work state (WS) source income since it was earned there. Resident States (RS) tax all their resident's income, regardless of where earned. You will file a non-resident tax return for the WS and report the WS income. You will file a full year resident return for the RS, reporting all your income. The RS will give you a credit, or partial credit for any tax paid to the WS.
What are the two states? If you have a reciprocal state situation, you do not file a non resident return.
https://www.thebalancemoney.com/state-with-reciprocal-agreements-3193329
For state filing requirements, the WS does not, usually, go by what you earned in their state but by your total income . For example, if WS has a $10,000 filing requirement and your total income for the year was $15,000; you would be required to file even though you may have only had $500 of income in that state.
For quick links to State Filing Requirements: https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-return/need-file-state-return/L446Rv...
