Do I need to report foreign fellowship which is exempt from US-tax (tax-treaty)?

[Marcelx90]

Hi,

I'm from Germany and a US-resident for tax purposes for 2020. Last year, I received a German fellowship.

When I search for "report fellowships on Form 1040" in the internet, I basically always find the answer: You need to report all income (also foreign income) on Form 1040.

However, in my particular case, I want to claim a tax-treaty with Germany (Article 20(3)) making the fellowship completely exempt from any taxes.

In Publication 519, it states:

• "Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens [...] How to report income on your tax return: In most cases, you will not need to report the income on your Form 1040 or 1040-SR because the income will be exempt from U.S. tax under the treaty."

I didn't receive a W-2 for my fellowship or any other document. I never withheld taxes from my fellowship. I have never previously filed any other form claiming the tax treaty (like 8233, 8833, W-8BEN, W-9 or others). I have never informed the IRS about the fellowship in any way.

Because of these confusing advices I saw in the internet, I'm looking for a clear answer to the question:

Do I need to report this fellowship at all?

Any help is appreciated!

[ThomasM125 · Accepted solution]

In general, you are not required to report the income if it is not taxable. It is similar to where you receive scholarship income, but you use it to pay for education expenses, so you don't need to report it because it is exempt from taxation.

However, in this case you are exempting the income by claiming the treaty. So, it may be wise to enter the income and then exclude it by referencing the treaty. That way the IRS is informed as to why you excluded the income.

Also, the income would not necessarily be excluded by default, until you opted to do so by mentioning the treaty on your tax return.

[Marcelx90]

Thank you for the reply, @ThomasM125 

How would you report this on Form 1040?

I assume, I would enter the amount of the fellowship along with my other income (shown on W-2) on line 1 of Form 1040.

And on line 8, Schedule 1, I would add the negative amount of the fellowship and a short statement about the tax treaty exemption along with the article? That should substract the fellowship from my taxable gross income?!

[ThomasM125]

@Marcelx90 Yes, that is correct! You can enter the income as scholarship income by going to the Education section in Deductions and Credits and working through the Expenses and Scholarships(Form 1098-T) section. Just enter the income as scholarship income and it will appear as wages on your form 1040.

[Marcelx90]

@ThomasM125I'm a postdoctoral researcher and not a student. So, I can't file Form 1098-T.

I thougth about adding the fellowship under "miscellaneous income".

As far as I see, I don't need to file additional forms?

[ThomasM125]

You can use the form 1098-T section to enter the scholarship income without entering the form 1098-T. When you start the routine, you will be asked if you have the form, just say no.

Treating the scholarship as wage income will designate it as earned income, which may give you some benefits that you wouldn't get if you treat it as other income, as that is unearned income.

[Marcelx90]

Thank you, @ThomasM125 

Final question: I've been told I don't necessarily need to file additional forms along with my income tax return. So, I guess the short statement on line 8, Schedule 1, about the tax treaty exemption should be enough and will be accepted by IRS, or do you recommend me to file additional forms (like one of those mentioned in my very first message) in this respect? If so, which ones should I file?

[ThomasM125]

You are fine just listing a description of the treaty. However, in TurboTax you can only enter an abbreviation for the description of the "Other Income" entry, so you may want to mail your return in and attach a more detailed description.