As a new resident alien, do I need to report a foreign fellowship?

[Henry34]

I'm a graduate student and I receive a fellowship in the form of a stipend from Mexico to help pay for living expenses and health insurance. I entered the United States as a nonresident alien, but am now a resident alien for U.S. tax purposes.

According to publication 519, it is not 100% clear if I need to report this as income or not: "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." (p.47)

Question: does Mexico have a treaty for fellowship grants? Does the tax treaty saving clause provide an exception for it? Does it have a time limit? In short, what should I do?

[DaveF1006]

This is a revision to an earlier post I made. According to IRS publication  901 on page23, "A student or business apprentice who is a resident of Mexico immediately before visiting the United States and is in the United States solely for the purpose of education or training is exempt from U.S. tax on amounts received from
sources outside the United States for the individual's maintenance, education, or training".

The time restriction, as I can tell, is that your graduate studies must commence immediately in the US immediately after arriving from Mexico.

[ Edited 02/18/22|06:00 AM PST]

@Henry34 

[Henry34]

Thanks for your thoughtful (and very prompt) answer, Dave.

(I never thought tax law would be so interesting!)

I see that Mexico and the US do have a tax treaty (Publication 901, p.23) "A student or business apprentice who is a resident of Mexico immediately before visiting the United States and is in the United States solely for the purpose of education or training is exempt from U.S. tax on amounts received from sources outside the United States for the individual's maintenance, education, or training."

And according to the treaty in https://www.irs.gov/pub/irs-trty/mexico.pdf, there is a Saving Clause in paragraph 3 of Article 1, and the Saving Clause does have exceptions in paragraph 4 of Article 1 which exempts students:

"The provisions of paragraph 3 shall not affect [...] b) the benefits conferred by a Contracting State under Articles 20 (Government Service), 21 (Students), and 28 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor lawful permanent residents in, that State." 

[DaveF1006]

@Henry34  Hi Henry. Thank you so much for providing this information for me. In fact, I appreciate you providing me with Publication 901 which definitely sets a clear precedence for excluding the fellowship income. It does say you are exempt from U.S. tax on amounts received from sources outside the United States for the individual's maintenance, education, or training. 

Normally, unless the fellowship income wasn't used for educational expenses such as books and tuition, the fellowship income would not be allowed because living expenses and health insurance are not considered educational expenses. However, in this instance the term maintenance would allow you to declare living expenses and maintenance as also being exempt. Based on this, my taxable opinion is that this fellowship income is not taxable income.

Good luck in your graduate studies and future endeavors. Thanks again for sending this to me.

[sche454178]

Hello all, I have a similar situation, but I came from Israel in 2022 and landed on permanent resident visa (I didn't have a temporary visa), I continued to recieve stipend in 2022 and 2023, Tax treaty allows to exclude it up to 5 years of becoming resident alien I think, but does it apply to my class?

[JamesG1]

See IRS Publication 901 US Tax Treaties, page 22, here. states:

An individual who is a resident of Israel on the date of arrival in the United States and who is temporarily in the United States primarily to study.....

A permanent resident visa does not appear to qualify for the exclusion outlined.

Prior to 2022, did you have a temporary visa and you may qualify under the five years specified here?

An individual is entitled to the benefit of this exemption for a maximum of 5 tax years.

@sche454178

[sche454178]

Thank you for reply, yes, I did have a tourist visa and came to US on tourist visa the same year (2022) before becoming permanent resident, but unfortunately my stipend payments started only at about the same time when I became permanent resident , although decision to pay stipend was made at the time when I had a tourist visa

[DaveF1006]

 To clarify, when were you granted a permanent resident visa?

@sche454178 

[sche454178]

Middle of September 2022

[DaveF1006]

Yes, this needs to be reported as other income. 

1. Log into your account
2. Select Wages and income
3. Less Common income
4. Miscellaneous Income, 1099-A, 1099>start
5. Scroll to the bottom of the page to Other Reportable Income
6. Other taxable income, answer yes
7. Then give a brief description of the income and the amount listed. Call it fellowship income and then the amount.

[sche454178]

Thank you very much! Would it be acceptable just to submit under scholarship/fellowship entry, there is one existing (for fellowships not on W2)?

[DaveF1006]

Yes. you may enter it there as well.