Hi, I have been trying to solve this problem. I am filing jointly with my husband. From January to June 2023 my husband was a student on a F-1 visa. From August to December 2023 he started working (H1B visa) and became a resident alien for tax purposes. Overall, each of us received a W-2 from our employer. In addition, for the time he was a student, my husband received a scholarship and the usual form 1042-S. Federal taxes were withheld on the scholarship. State taxes were not withheld because the state does not tax scholarships and fellowships (code 16). He did not receive a 1098-T form because the school is not obliged to send that to international students.
We followed all the instructions to enter the W-2 information + the 1042-S information (scholarship income + federal taxes withheld). The scholarship income was reported in "Miscellaneous income" and the taxes withheld on the scholarship were reported in "Deductions>Estimated Tax payments."
However, when we do this, suddenly it looks like we owe quite a lot of taxes to the state, which is unexpected. As far as I know, the scholarship is not taxed by the state. When I delete the scholarship amount, state taxes go back to normal. How can I report this income correctly without having to pay additional state taxes?
We were advised by Turbotax experts to enter the scholarship amount as a negative number. However, that seems incorrect, because it makes our total income lower than what is reported on our W-2 forms. That is, we need to report that income because we received it, but we don't want to pay unnecessary state taxes on it.
I have been talking to Turbotax experts but couldn't find a definite answer yet. Any help?
Most states tax the income and those that don't should have an adjustment area. It sounds like you did a great job entering everything in the right area. Without knowing the state, I can't guide you on making an adjustment. I do have a workaround.
You could file the federal return. Let it be accepted. Save a copy of the return. Change the income, then do your state return and file it.
Thank you for the suggestion, @AmyC . That might actually work.
The state where we live and work is Illinois. The state where the scholarship and 1042-S were issued is NJ (but my husband wasn't living in NJ during those six months of 2023 and he was a non-resident alien at the time; meanwhile he became a resident alien for tax purposes).
If it helps, from the 1042-S form: income code (1) is 16; exemption code (3a) is 00; exemption code (4a) is 15.
Knowing the state, could you make a suggestion about the adjustment? Thanks,
IL is your resident state. All scholarship income used for qualified expenses is exempt from taxation at the federal and state level. According to Filing Requirements - Illinois Department of Revenue:
NJ follows federal and state, qualified scholarships are not taxed. See NJ Division of Taxation - Exempt (Nontaxable) Income
Based on 1042S code 16 - scholarship income, no tax, not subject to withholding, you would need to determine if all of it was used on qualified expenses or if some was used by the student on other expenses. See Qualified Education Expenses - Internal Revenue Service
@Anonymous
Okay, thanks. I know by experience that the fellowship qualifies; we filed our tax returns in the same way for many years and never had to pay additional state taxes. This is a first. So I have one last question: do I understand correctly that the resident alien status for tax purposes is "retroactive"? That is, even if the tax withheld situation was different when the 1042-S was issued in 2023, when we were still non-resident aliens for tax purposes, now that we file as resident aliens then those rules do not apply anymore? This might explain why we owe taxes to the state this year, whereas our tax return was clear last year.
Thank you for your patience and assistance. This tax season's been a learning curve.