Nonresident Aliens: Types of Tax Exemptions for Participant Stipend Payments

Background

Operating locations must withhold federal tax from stipend payments to nonresident aliens unless the person claims and documents total exemption.

See "Nonresident Aliens: Taxation of Participant Stipend Payments" for more information.

Types of Tax Exemption

Participant stipend payments to nonresident aliens are exempt from taxation if the payments are from a foreign source.

Note: It is possible to have a payment originating from multiple grants or sponsors. For proper treatment of the payment, the applicability of exemptions must be determined for each participant stipend, and/or sponsor.

Funds from Foreign Sources

When examining a nonresident alien or participant stipend, if the source of the funds is outside the U.S., the payment is not subject to U.S. federal income taxation. The Research Foundation (RF) is not required to withhold federal income tax or report the payment to the Internal Revenue Service (IRS).

According to Internal Revenue Service (IRS) regulations, the source of funding is determined by the "residence of the payer." So, for example, if the money for payment originates from a sponsor in France, then it is considered "foreign source funding" and not taxable. The fact that the Research Foundation facilitates the payment of the funds does not make the source of funds the U.S.

Refer to "Nonresident Aliens: Processing Exemptions for Foreign-Source Participant Stipend Payments" for information on how to process this type of exemption.

IRS Rules

Under Section 117 of the Internal Revenue Code (IRC), as amended by the Tax Reform Act of 1986, any amount received as a "qualified scholarship" by a candidate for degree at an educational institution is excluded from federal income taxation.

The Research Foundation's position is that participant stipends are not degree-related, and therefore the Section 117 exclusion is applicable to fellow payments only and not to stipends for participants in various training programs.

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