A scholarship can be partly tax-free, partly taxable scholarship income, and partly compensation for services. The name placed on the payment—scholarship, fellowship, grant, stipend, assistantship, or allowance—does not by itself determine the federal tax treatment.
For a student who is a nonresident alien for U.S. federal tax purposes, the useful way to analyze an award is to separate its components. Degree-candidate status, the permitted use of the money, any service requirement, the source of the payment, an applicable income tax treaty, and the way the payer reports the amount can all affect the result. Immigration status such as F-1 or J-1 is relevant to some withholding rules, but it is not the same as federal tax residency.
Degree-Candidate Status Comes First
The federal exclusion for a qualified scholarship under Internal Revenue Code section 117 generally begins with one question: was the recipient a candidate for a degree at an eligible educational institution?
For scholarship purposes, the IRS definition is broader than simply being enrolled in a traditional four-year university program. It includes a person pursuing a degree at a college or university and can also include a student attending an institution with a qualifying program that provides credit toward a bachelor’s or higher degree or training for gainful employment in a recognized occupation, provided the other institutional requirements are met.
Holding a student visa does not create the scholarship exclusion by itself. A student can be temporarily present in the United States in F, J, M, or Q status and still have scholarship amounts that do not meet the qualified-scholarship rules.
Split the Award by What the Money Pays For
A scholarship should not automatically be treated as one indivisible amount. For a degree candidate, the exclusion generally applies only to the portion used, consistently with the conditions of the grant, for qualifying education expenses.
For this purpose, qualified expenses include tuition and fees required for enrollment or attendance, plus course-related fees, books, supplies, and equipment required for the courses. The IRS scholarship rules require course-related items to be required for the course of instruction; simply buying something that is useful for school does not make the expense qualified.
| Award Use | General Federal Treatment | What Matters |
|---|---|---|
| Required tuition | Potentially excludable | The student must otherwise meet the qualified-scholarship requirements. |
| Mandatory enrollment fee | Potentially excludable | The fee must be required for enrollment or attendance. |
| Required textbook | Potentially excludable | The book must be required for the course. |
| Required laboratory supplies or equipment | Potentially excludable | The requirement must relate to the course of instruction. |
| Optional computer or equipment | Generally not a qualified scholarship expense | Being useful for study is not enough if the item is optional. |
| Room and board | Not a qualified scholarship expense | Housing and meals are outside the section 117 qualified-expense categories. |
| Travel allowance | Not a qualified scholarship expense | Travel is treated as an incidental expense under the scholarship rules. |
| Research or clerical costs that do not meet the qualified-expense rules | Generally not excludable under the qualified-scholarship rule | The section 117 exclusion has a narrower expense definition than the ordinary meaning of an educational expense. |
| Teaching or research services | Classified separately as compensation in many cases | A service requirement can take the payment outside the noncompensatory scholarship rules. |
Consider a degree student who receives an award covering $30,000 of required tuition and providing another $9,000 specifically for housing. Assuming the other qualified-scholarship conditions are satisfied, the tuition component and the housing component do not receive the same treatment merely because they come from the same award. The tuition portion may fall within the section 117 exclusion, while the housing portion does not qualify for that exclusion.
The Award Terms Can Control the Classification
How the grant may be used matters. The IRS rules look not only at the student’s expenses but also at the conditions attached to the scholarship or fellowship.
If an award is designated for room and board, it does not become a qualified tuition scholarship merely because the student also has a tuition bill. Conversely, an award restricted to required tuition and course expenses may fit the qualified-scholarship rules to the extent the other requirements are satisfied.
The method of payment does not settle the issue. A university can apply scholarship funds directly to the student’s account rather than transferring cash to the student. Direct payment to the institution does not remove the need to identify what the scholarship paid for.
For a mixed award, the award letter and the institution’s account records can therefore matter more than the label appearing on the deposit. Restrictions stating that an allowance is only for housing, travel, research support, tuition, books, or another specified purpose can affect how the payment is analyzed.
A Stipend Can Be Compensation Rather Than a Scholarship
A payment tied to required services presents a different issue. Under the general rule, the portion of a scholarship or fellowship that represents payment for teaching, research, or other services required as a condition of receiving the award cannot be excluded as a qualified scholarship.
This remains true even when the institution describes the payment as a stipend, fellowship, scholarship, or grant. For nonresident withholding purposes, the IRS states that grants requiring personal services as a necessary condition for payment are treated as compensation for those services rather than as noncompensatory scholarship or fellowship grants.
The payment label is not the tax classification. Required teaching, laboratory work, research duties, administrative work, or another service obligation can cause all or part of an award to be treated under compensation rules.
Suppose a department offers $18,000 of support and the written arrangement identifies $12,000 as unrestricted fellowship support while $6,000 is earned by performing required teaching duties. The two components may need different tax treatment. Treating the entire $18,000 as scholarship income solely because the department calls the package a “fellowship” would ignore the service component.
There are narrow statutory exceptions for certain service-related scholarship programs, including specified National Health Service Corps, Armed Forces health professions, and qualifying work-college programs. Those exceptions should not be generalized to ordinary teaching and research assistantships.
The Source of a Scholarship Matters for a Nonresident Alien
Nonresident aliens are subject to U.S. federal tax rules that distinguish U.S.-source income from foreign-source income. Scholarship and fellowship sourcing therefore deserves separate attention after the payment has been classified as a genuine scholarship, fellowship, or grant rather than compensation.
Scholarships, fellowships, and grants are generally sourced according to the residence of the payer. An award from an entity created or domiciled in the United States is generally U.S.-source, while an award from an entity created or domiciled in a foreign country is generally foreign-source.
There is also a specific rule for activities outside the United States: a scholarship, fellowship, grant, targeted grant, or achievement award received by a nonresident alien for activities conducted outside the United States is treated as foreign-source income.
That sourcing rule does not convert compensation into scholarship income. Salary or other compensation for personal services follows the sourcing rules for services, under which the place where the services are performed generally determines the source.
| Payment Situation | General Source Rule |
|---|---|
| Scholarship from a U.S.-domiciled university or foundation | Generally U.S.-source. |
| Scholarship from a foreign-domiciled organization | Generally foreign-source. |
| Grant for activities conducted outside the United States | Foreign-source for a nonresident alien under the special outside-U.S. activity rule. |
| Pay for teaching or research services | Use the personal-services source rules rather than the scholarship source rule. |
Why 14% May Be Withheld From a Taxable Scholarship
A qualified U.S.-source scholarship paid to a degree candidate is not subject to the nonresident scholarship withholding rule. The taxable portion of a U.S.-source noncompensatory scholarship is different.
Under the current IRS withholding rules, taxable scholarship and fellowship grants paid to nonresident aliens temporarily present in the United States in F, J, M, or Q nonimmigrant status are generally subject to a 14% withholding rate when the applicable statutory conditions are met. Other nonresident alien recipients may instead fall under the general 30% withholding rule. An income tax treaty can reduce or eliminate withholding in some cases.
A 14% withholding rate is not a statement that the student’s final federal income tax rate is 14%. Withholding is an amount collected by the payer during the year. The income tax result on a federal return is a separate calculation.
This distinction explains why two numbers can differ. A payer may withhold federal tax from a taxable scholarship during the year, while the eventual return may show a different amount of federal income tax after the applicable tax rules, treaty position, income items, and amounts already withheld are taken into account.
Nondegree Grants Have a Separate 14% Rule
Not being a degree candidate generally prevents the section 117 qualified-scholarship exclusion from applying in the same way, but it does not mean every U.S.-source grant automatically uses the same withholding rate.
Publication 515 provides a separate rule for a nondegree candidate present in F, J, M, or Q status. A 14% withholding rate can apply to the total U.S.-source grant when the grant is for study, training, or research in the United States and is made by one of the types of organizations specified by the rule. Those include certain tax-exempt organizations, foreign governments, U.S. federal, state, or local government agencies, international organizations, and specified binational or multinational educational or cultural organizations.
If those conditions are not met, Publication 515 provides for 30% withholding on the U.S.-source amount. This nondegree withholding rule is separate from the section 117 exclusion available to qualifying degree candidates, so the two concepts should not be treated as interchangeable.
A Tax Treaty Can Produce a Different Result
Domestic scholarship rules are only one layer of the analysis. The United States has income tax treaties with a number of countries, and some treaties contain provisions for students, trainees, or researchers that can exempt scholarship, fellowship, grant, or maintenance amounts that would otherwise be taxable under U.S. domestic law.
The existence of a treaty with a student’s home country is not enough by itself. The applicable treaty article and its conditions have to fit the recipient and the income. Depending on the treaty, relevant conditions can include prior residence in the treaty country, the purpose of the U.S. visit, limits on the period during which the provision applies, the type or source of the payment, and other article-specific requirements.
This creates an order of analysis that helps keep separate rules from being mixed together. First determine what the payment represents under domestic law. Then determine its source and domestic tax treatment. A treaty is considered after that to see whether it modifies the U.S. result.
A treaty scholarship provision can be broader than the domestic qualified-scholarship exclusion. Publication 515 explains that many scholarship and fellowship treaty provisions can exempt the scholarship or fellowship amount even when the grant does not meet the domestic definition of a qualified scholarship.
Saving Clauses Can Affect Longer U.S. Stays
Most U.S. income tax treaties contain a saving clause that generally permits the United States to tax its residents as though the treaty were not in effect. Some treaties contain exceptions that preserve particular student, trainee, teacher, or researcher benefits even after an individual becomes a U.S. resident for federal tax purposes.
The U.S.–China treaty provides a well-known example. The IRS explains that Article 20 can continue to apply to qualifying scholarship income of a Chinese student even after the student becomes a resident alien for U.S. federal tax purposes because of the treaty’s saving-clause treatment. That example is treaty-specific; it does not create a general exemption for every student from China or every student who becomes a resident alien.
W-8BEN and Form 8233 Serve Different Scholarship Situations
The document used to claim a treaty withholding benefit depends partly on whether the payment is noncompensatory scholarship income or compensation for personal services.
For treaty-exempt noncompensatory scholarship or fellowship income, Form W-8BEN is generally the withholding certificate used by an individual. The form is provided to the withholding agent rather than filed with the IRS as an income tax return.
Compensatory scholarship or fellowship income is treated as personal-services income for this purpose. Form 8233 is used when a nonresident alien claims a treaty withholding exemption on qualifying compensation for personal services.
There is an exception for a recipient who receives both compensation and noncompensatory scholarship or fellowship income from the same withholding agent and claims treaty withholding exemptions for both. Under the Form 8233 instructions, one Form 8233 can be used for both types of income when the conditions for that exception are satisfied.
Treaty withholding claims also involve taxpayer identification requirements. The required type of TIN and the documentation accepted can depend on the form and the payment situation, so a treaty benefit should not be inferred solely from nationality or the presence of a treaty.
What Form 1042-S Can Reveal About a Scholarship
Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is a central information document for many taxable U.S.-source scholarship and fellowship payments to nonresident aliens. Receiving a Form 1042-S does not itself establish that every dollar shown on the form is ultimately subject to federal income tax; the form reports how the withholding agent classified and reported the payment.
For 2026 reporting, Income Code 16 identifies scholarship or fellowship grants on Form 1042-S. The form also contains the gross amount reported, the Chapter 3 withholding information, federal tax withheld, and other recipient and withholding-agent data.
| Form 1042-S Field | What It Helps Identify |
|---|---|
| Box 1 | The reported income type. Income Code 16 is used for scholarship or fellowship grants. |
| Box 2 | The gross income reported on that Form 1042-S. |
| Box 3a | The Chapter 3 exemption code, when applicable. |
| Box 3b | The Chapter 3 tax rate reported for the payment. |
| Box 7a | The amount of U.S. federal tax withheld. |
The 2026 Form 1042-S instructions contain a reporting change that is relevant to scholarship payers. A Chapter 3 exemption code is now required in all cases in which the tax withheld is less than 30%. The instructions specifically state that a scholarship or fellowship grant subject to 14% withholding under section 1441(a) is reported with Chapter 3 exemption code 02 in Box 3a. Code 02 means exempt or reduced withholding under the Internal Revenue Code.
That reporting code should not be confused with a tax-treaty exemption. A 14% statutory scholarship withholding rate can produce code 02 because the rate is reduced under the Internal Revenue Code rather than under a treaty.
A qualified scholarship paid to a nonresident alien degree candidate presents another distinction. Publication 515 states that a qualified U.S.-source scholarship meeting the section 117 conditions is not subject to withholding and is not reportable as the taxable scholarship amount on Form 1042-S. The nonqualified portion—such as an amount devoted to travel, room, or board—is the portion that enters the nonresident scholarship withholding and reporting rules.
Mixed Awards Can Produce More Than One Tax Document
A single financial-aid package can contain components with different classifications. A student might receive required tuition support, a living allowance, and payment for teaching duties from the same institution.
For example, assume a degree candidate receives $24,000 applied to required tuition, $8,000 designated for housing, and $7,000 for required teaching services. The $24,000 tuition component may fit the qualified-scholarship exclusion if the statutory conditions are satisfied. The $8,000 housing amount is not a qualified scholarship expense and may be treated as taxable scholarship income if it is U.S.-source. The $7,000 service amount belongs in the compensation analysis rather than the noncompensatory scholarship analysis.
The reporting can therefore differ within one funding package. A taxable scholarship component may appear on Form 1042-S with Income Code 16, while wages for teaching or other employment may be reported under compensation rules, including Form W-2 where appropriate.
This is also why the absence of withholding from one part of an award does not describe the treatment of every other part. Tuition support, living support, and employment pay can follow separate paths even when they all originate with the same university.
The Documents That Explain an Award Often Matter More Than Its Name
Several records can answer different classification questions. The award letter can establish whether money is restricted to tuition, housing, travel, research, or another use. A student account statement can show how the institution applied the funds. Course materials can establish whether books or equipment were actually required rather than optional.
| Record | Question It Can Help Answer |
|---|---|
| Award letter or grant agreement | What is the money intended or permitted to pay for? |
| Student account statement | Was the award applied to tuition, fees, housing, or another charge? |
| Course requirements | Were books, supplies, or equipment required for the course? |
| Assistantship or employment agreement | Is teaching, research, or another service required in exchange for payment? |
| Form W-2 | Did the payer report part of the funding as wages? |
| Form 1042-S | What U.S.-source foreign-person income and withholding did the payer report? |
| Treaty withholding documentation | Was a treaty position presented to the withholding agent? |
A common source of confusion is attempting to classify an award from the bank deposit alone. A $2,000 payment provides almost no information about whether it represents housing support, a noncompensatory fellowship, required teaching, reimbursement for a qualified course item, or another type of payment. The underlying terms provide the context.
How Scholarship Income Connects With Form 1040-NR
Form 1042-S withholding is not a substitute for determining the federal income tax treatment on a return. A nonresident alien with taxable scholarship or fellowship income, treaty-exempt income, or other taxable U.S. income may have a federal filing requirement under rules that depend on the tax year and the person’s full set of facts.
Treaty-exempt scholarship income also should not be assumed to disappear from federal reporting. The IRS instructions for nonresident scholarship treaty claims generally provide for treaty-exempt amounts to be reported through Form 1040-NR and Schedule OI using the lines specified for the applicable form year.
Current line numbers can change when the IRS revises a form. For that reason, the instructions for the Form 1040-NR and Schedule OI version corresponding to the tax year provide the better source for the exact reporting location rather than relying on a line number from a prior year.
Federal scholarship treatment also does not settle a state income tax question. States use their own residency, sourcing, exclusion, and filing rules. Federal nonresident alien status and state tax residency are separate classifications.
Resources Used
- IRS Publication 970, Tax Benefits for Education — federal rules for degree candidates, qualified scholarship expenses, nonqualified expenses, and payments for services.
- IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities — scholarship sourcing, nonresident withholding rates, nondegree grants, compensation, and treaty treatment.
- IRS guidance on withholding for scholarships, fellowships, and grants paid to nonresident aliens — 14% and 30% withholding rules and the treatment of service compensation.
- IRS guidance on claiming treaty exemption for a scholarship or fellowship grant — treaty eligibility, W-8BEN and Form 8233 documentation, TIN requirements, and saving-clause treatment.
- IRS Instructions for Form 8233 — compensatory scholarship income and the exception allowing Form 8233 to cover certain compensation and noncompensatory scholarship income from the same withholding agent.
- 2026 Instructions for Form 1042-S — Income Code 16, Chapter 3 reporting, the 14% scholarship rate example, and 2026 exemption-code requirements.