Receiving a scholarship or grant as a US citizen studying abroad can be a financial relief, but it also comes with tax implications. The IRS requires US citizens and resident aliens to report worldwide income, including foreign scholarships and grants, on their US tax returns. Understanding when these funds are taxable, how to report them, and which exclusions may apply can help you avoid unexpected tax liabilities.
Are Foreign Scholarships and Grants Taxable?
The taxability of a scholarship or grant depends on how the funds are used and the type of program funding them. Generally, the IRS considers scholarships and grants tax-free if they meet the following conditions:
The recipient is a degree-seeking student – The scholarship must be awarded to a student pursuing a degree at an educational institution.
The funds are used for qualified educational expenses – This includes tuition, required fees, books, supplies, and equipment necessary for coursework.
However, if the scholarship or grant is used for expenses not considered qualified, such as:
- Room and board
- Travel
- Research (unless required for a degree)
- Stipends for living expenses
Then, the portion of the grant used for these expenses is considered taxable income and must be reported on your US tax return.
Scholarships From Foreign Governments or Universities
Scholarships and grants awarded by foreign universities, international organizations, or foreign governments are treated the same as those from US institutions. They remain tax-free only if they are used for qualified education expenses.
However, tax treaties between the US and other countries may provide exemptions for foreign scholarships. Some treaties allow US students studying abroad to exclude part or all of their foreign scholarship from taxable income.
For example:
- The US-Germany Tax Treaty provides tax exemptions for certain educational grants received by American students in Germany.
- The US-France Tax Treaty may allow US students in France to receive tax-free scholarships from French institutions.
To determine if your foreign scholarship qualifies for treaty benefits, refer to IRS Publication 901 (US Tax Treaties) and file Form 8833 (Treaty-Based Return Position Disclosure Statement) when claiming an exemption.
How to Report Foreign Scholarships and Grants on your US Tax Return
If any portion of your foreign scholarship is taxable, you must report it on your US tax return (Form 1040). Here’s how:
Report on Schedule 1 (Form 1040)
- The taxable amount should be reported as “Other Income” on Schedule 1, Line 8 and then transferred to Form 1040, Line 8.
- If the scholarship is fully tax-free, no reporting is required.
Scholarships That Function as Employment Income
- If your grant requires you to perform services, such as teaching or research assistance, the IRS may classify it as wages or self-employment income rather than a scholarship.
- In this case, you may need to file Schedule C (Profit or Loss from Business) and pay self-employment tax (Social Security and Medicare taxes).
Form 1098-T (If Applicable)
- If you are enrolled in a US-based program or a partner institution, you may receive Form 1098-T (Tuition Statement), which reports your scholarship amount and tuition paid.
- Most foreign universities do not issue Form 1098-T, so students must keep records of scholarship payments and tuition receipts for reporting purposes.
Additional Reporting Requirements: FBAR & FATCA
If your foreign scholarship or grant is deposited into a foreign bank account, you may be required to file additional forms:
FBAR (FinCEN Form 114) – Foreign Bank Account Reporting
- If the total balance in your foreign accounts exceeds $10,000 at any time during the year, you must file an FBAR with the US Treasury.
FATCA (Form 8938) – Foreign Asset Reporting
- If your foreign financial assets exceed $200,000 (single) or $400,000 (married filing jointly) at year-end, you must file Form 8938 with the IRS.
Even if the scholarship itself is tax-free, you must still comply with foreign account reporting rules if your bank balance exceeds these thresholds.
Tax Deductions and Credits for Students
Even if a portion of your scholarship is taxable, you may still qualify for education-related tax benefits to offset your tax liability:
American Opportunity Tax Credit (AOTC)
- Provides up to $2,500 per year for eligible students in their first four years of higher education.
- Covers tuition, books, and required course materials.
Lifetime Learning Credit (LLC)
- Provides up to $2,000 per year for tuition and fees.
- Available for undergraduate, graduate, and professional students.
Tuition and Fees Deduction
- Allows students to deduct up to $4,000 in qualified education expenses.
Important: You cannot claim a tax deduction or credit for an expense already covered by a scholarship. Only expenses paid out of pocket or with loans qualify.
Common Mistakes to Avoid
Failing to Report Non-Tuition Expenses
- Many students mistakenly assume all scholarship funds are tax-free.
- If any portion is used for room, board, or travel, it must be reported as taxable income.
Not Claiming Tax Treaty Benefits
- If your country has a tax treaty with the US, failing to file Form 8833 could result in unnecessary taxation.
Overlooking FBAR and FATCA Reporting
- If you deposit scholarship funds into a foreign bank account, you may need to file FBAR (FinCEN Form 114) or FATCA (Form 8938).
Incorrectly Classifying Research Grants
- If your research grant requires you to provide services (such as a teaching assistantship), it may be considered taxable wages rather than a scholarship.
If you receive a foreign scholarship or grant, it is essential to determine whether it is taxable or tax-free under IRS rules. Understanding what qualifies as a qualified education expense and checking for tax treaty exemptions can help reduce your tax liability.
Since foreign scholarships often do not come with tax reporting forms like US-based ones, keeping detailed records of your expenses and payments is crucial. Additionally, if your scholarship is deposited into a foreign bank account, be sure to comply with FBAR and FATCA requirements to avoid penalties.
If you are unsure how to report your foreign scholarship or need help determining tax treaty benefits, consulting a US expat tax professional can ensure accurate filing and compliance with IRS rules.
