Publication 520 Contents (Rev. June 2002)

Cat. No. 15024E Important Reminders .............. 1 Department

of the Introduction ..................... 1 Treasury

Internal Scholarships Scholarships and Fellowships ........ 2

Revenue Tax-Free Scholarships and

Service and Fellowships ................ 2

Taxable Scholarships and

Fellowships ................ 3

Fellowships Additional Information ............ 3

Reporting Scholarships and

Fellowships ................ 3

Qualified Tuition Reduction .......... 4

Individuals Abroad ................ 4

Reporting Income ............... 4

Deducting Expenses ............. 5

Paying Foreign Taxes ............ 5

Paying U.S. Income Tax .......... 5

Estimated Tax ................... 6

How To Get Tax Help .............. 6

Index .......................... 8

Important Reminders

Estimated tax. You may have to pay estimated tax if the grantor of a scholarship or fellowship does not withhold tax or withholds

insufficient tax on the taxable part of your scholarship or fellowship grant. For more information,

see Estimated Tax, later.

Individual retirement arrangements (IRAs).

You can set up and make contributions to an

IRA if you received taxable compensation.

Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1

of Form W-2, Wage and Tax Statement. For

more information about IRAs, see Publication

590, Individual Retirement Arrangements

(IRAs).

Photographs of missing children. The Internal Revenue Service is a proud partner with the

National Center for Missing and Exploited Children. Photographs of missing children selected

by the Center may appear in this publication on

pages that would otherwise be blank. You can

help bring these children home by looking at the

photographs and calling 1–800–THE–LOST

(1–800–843–5678) if you recognize a child.

Introduction

This publication covers the rules for scholarships, fellowships, and tuition reductions. These

amounts are tax free if they meet the rules discussed in this publication.

This publication also discusses the estimated tax rules and some of the special rules

that apply to U.S. citizens and resident aliens

who are studying, teaching, or researching

abroad under scholarships and fellowships.
This publication does not discuss certain Educational institution. An educational instiitems that are covered in other publications. tution maintains a regular faculty and curriculum Scholarships and These include: and has a regularly enrolled body of students in

Fellowships attendance at the place where it carries on its • Hope and lifetime learning credits, Cover- educational activities. dell education savings accounts, qualified

This part explains whether your scholarship or tuition programs, and other tax benefits for Qualified scholarship or fellowship. A qualieducation. See Publication 970, Tax Ben- fellowship is tax free. fied scholarship or fellowship is any amount you

efits for Education. A scholarship is generally an amount paid receive as a scholarship or fellowship grant that

for the benefit of a student at an educational is used under the terms of the grant for: • Student loans that were canceled or for- institution to aid in the pursuit of studies. The given. See Publication 525, Taxable and • Tuition and fees required to enroll in, or to student may be either an undergraduate or Nontaxable Income. attend, an educational institution, or graduate.

• Scholarships and fellowships paid to non- A • Fees, books, supplies, and equipment that fellowship is generally an amount paid for resident aliens. See Publication 519, U.S. are required for the courses at the educa- the benefit of an individual to aid in the pursuit of Tax Guide for Aliens. study or research. tional institution. These items must be required of all students in your course of Table 1 provides an overview of the tax treat- instruction. Comments and suggestions. We welcome ment of scholarship and fellowship payments

your comments about this publication and your received by an individual who is, or is not, a Your scholarship or fellowship grant can still suggestions for future editions. degree candidate. qualify as tax free even if the terms do not You can e-mail us while visiting our web site provide that it be used only for tuition and at www.irs.gov. Tax-Free Scholarships and course-related expenses. It will qualify if you use You can write to us at the following address: Fellowships the grant proceeds for tuition and course-related

expenses. However, if the terms of the grant Internal Revenue Service A scholarship or fellowship is tax free only if: require its use for other purposes, such as room Technical Publications Branch and board, or specify that the grant cannot be W:CAR:MP:FP:P 1) You are a candidate for a degree at an used for tuition or course-related expenses, the 1111 Constitution Ave. NW educational institution, and amounts received under the grant are not tax Washington, DC 20224 2) The grant is a qualified scholarship or free.

We respond to many letters by telephone. fellowship. You can use Worksheet A to figure the

Therefore, it would be helpful if you would in- tax-free and taxable parts of your

clude your daytime phone number, including the Candidate for a degree. The term “candi- scholarship or fellowship.

TIP

area code, in your correspondence. date for a degree” means a student (full or

part-time) who: Athletic scholarships. Athletic scholarUseful Items ships are tax free if they meet the requirements

You may want to see: 1) Attends a primary or secondary school or discussed above.

is pursuing a degree at a college or univer- Fulbright grants. A Fulbright grant is gen- Publication sity, or erally treated as any other scholarship or fellow-

❏ 54 Tax Guide for U.S. Citizens and 2) Attends an accredited educational institu- ship in figuring how much of the grant is tax free.

Resident Aliens Abroad tion that is authorized to provide: If you receive a Fulbright grant for lecturing or

❏ teaching, it is payment for services and is taxa- 501 Exemptions, Standard Deduction, a) A program that is acceptable for full ble. A special rule applies if the grant was paid in and Filing Information credit toward a bachelor’s or higher de- nonconvertible foreign currency. See Payment

❏ gree, or 505 Tax Withholding and Estimated Tax of Tax by Fulbright Grantees under Individuals

❏ b) A program of training to prepare stu- Abroad, later. 508 Tax Benefits for Work-Related

dents for gainful employment in a rec- A Fulbright grant is a grant under the Mutual Education

ognized occupation. Educational and Cultural Exchange Act of 1961,

❏ 514 Foreign Tax Credit for Individuals

❏ 525 Taxable and Nontaxable Income Table 1. Tax Treatment of Scholarship and Fellowship Payments

❏ 901 U.S. Tax Treaties Payment for Degree candidate Not a degree candidate

❏ 970 Tax Benefits for Education Tuition Tax free Taxable

Form (and Instructions) Fees Tax free1 Taxable

❏ 1040 U.S. Individual Income Tax Return Books Tax free1 Taxable

❏ 1040A U.S. Individual Income Tax Return Supplies Tax free1 Taxable

❏ 1040EZ Income Tax Return for Single Equipment Tax free1 Taxable and Joint Filers With No

Dependents Room Taxable Taxable

❏ 1040ES Estimated Tax for Individuals Board Taxable Taxable

See How To Get Tax Help near the end of Travel Taxable Taxable

this publication for information about getting

Teaching Taxable these publications and forms. 2 Taxable

Research services Taxable2 Taxable

Other services Taxable2 Taxable

1 If required of all students in the course

2 Does not include amounts received under the National Health Service Corps Scholarship Program or

the Armed Forces Health Professions Scholarship and Financial Assistance Program.

Page 2
Worksheet A. Scholarship and Fellowship Income Worksheet course-related expenses. Assuming that all

other conditions are met, $1,500 of your grant is

1.Enter your scholarship or fellowship income . . . . . . . . . . . . . . 1. tax-free. The $1,000 you received for teaching is

taxable. • If you are a degree candidate, go to line 2.

• If you are not a degree candidate, stop here. The entire Example 2. You are a candidate for a deamount is taxable. See Reporting Scholarships and gree at a medical school. You receive a governFellowships for how to report this amount on your tax ment grant for your medical education and

return. training. The terms of the grant require you to

perform a period of obligated service in a desig- 2.Enter the amount from line 1 that was for teaching, research, or nated medically underserved area of the country any other services (Do not include amounts received for these following completion of your medical studies. A items under the National Health Services Corps Scholarship substantial penalty applies if you do not comply. Program or the Armed Forces Health Professions Scholarship The entire amount of your grant is taxable as and Financial Assistance Program.) . . . . . . . . . . . . . . . . . . . 2. payment for services in the year it is received

3.Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 3. unless it is received under a program for which

an exception, discussed next, applies. 4.Enter the amount from line 1 (except any amount entered on

line 2) used for tuition and course-related fees, books, Exceptions. You do not have to include in

supplies, and equipment required for study at an educational income the part of any scholarship, fellowship,

institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. or tuition reduction representing payment for

teaching, research, or other services if you re- 5.Subtract line 4 from line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

ceive the amount under the National Health

6.Taxable part. Add line 2 and line 5. See Reporting Service Corps Scholarship Program or the Scholarships and Fellowships for how to report this amount Armed Forces Health Professions Scholarship on your tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. and Financial Assistance Program.

Payment to service academy cadets. An appointment to a United States military academy is known as the Fulbright-Hays Act. If you receive Taxable Scholarships and not a scholarship or fellowship. Payment you a supplemental grant under the U.S. Information Fellowships receive as a cadet or midshipman at an armed and Educational Exchange Act of 1948 services academy is pay for personal services. (Smith-Mundt Act) for study, research, or teach- If your scholarship or fellowship does not meet Include this pay in your income in the year you ing abroad, it is treated like a Fulbright grant. the rules described earlier, it is taxable. The receive it unless an exception, discussed above,

Pell Grants and other Title IV need-based following are examples of amounts that are tax- applies.

education grants. These grants are tax free if able.

Scholarship prizes. Cash scholarship prizes they are used for qualifying tuition and Incidental expenses. An amount you receive won in a contest are not scholarships if you do course-related expenses during the grant pe- for incidental expenses is not a tax-free qualified not have to use the prizes for educational pur- riod. scholarship. Incidental expenses are expenses poses. These prizes are taxable regardless of

Veterans’ benefits. Payments you receive for items that are not required for either enroll- how you use the money. A scholarship prize that ment or attendance at an educational institution, for education, training, or subsistence under any you can use only when enrolled as a candidate or in a course of instruction at the educational law administered by the Department of Veterans for a degree at a college is a qualified scholarAffairs (VA) are tax free. institution. Incidental expenses include: ship.

Qualified education expenses reduced. Ed- • Room and board,

ucation credits, certain deductions, and exclu- Additional Information • Travel, sions from income are based on your qualified

• Research, If there is some doubt about the tax treatment of education expenses. You must reduce your your grant, consult the grantor. The grantor may qualified education expenses by your tax-free • Clerical help, and have received advice from the IRS about the qualified scholarship or fellowship grant,

• Equipment. appropriate tax treatment of the grant. You can tax-free veterans’ education benefits, and any also contact the IRS Director for your area. Be other tax-free education benefits. Use your re- sure to ask for the information as soon as possi- duced qualified expenses to determine any of Example. You receive a scholarship from ble so that you can receive an answer in time to the following amounts that apply to you. State University to enroll in a writing course. file your return. If you request this advice by • Hope credit. Suggested supplies for the writing course in- mail, give a complete statement of all the facts. clude a computer. Amounts used for suggested • Lifetime learning credit. supplies are not qualified scholarship expenses.

You cannot include the cost of a computer to Reporting Scholarships and • Interest deduction on student loans.

determine the amount received as a qualified Fellowships • Withdrawals from IRAs that are not sub- scholarship. ject to 10% additional tax. If your only income is a completely tax-free Payment for services. Generally, you must scholarship or fellowship, you do not have to file • Exclusion from income of interest earned include in income the part of any scholarship, a tax return and no reporting is necessary. If all on U.S. Savings Bonds that have been fellowship, or tuition reduction that represents or part of your scholarship or fellowship is taxa- cashed in. payment for past, present, or future teaching, ble and you are required to file a tax return,

• Deduction as an adjustment to income for research, or other services. This applies even if report the taxable amount as explained next.

qualified tuition and related expenses. all candidates for a degree must perform the You must report the taxable amount whether or services to receive the degree. not you received a Form W–2. If you receive an • Deduction for work-related education ex- incorrect Form W–2, ask the payer for a cor- penses. Example 1. You received a scholarship of rected one.

For more information on work-related education $2,500. As a condition for receiving the scholar- For information on filing requirements, see

expenses, see Publication 508. For more infor- ship, you must serve as a part-time teaching Publication 501 or your income tax form instrucmation on all other topics in the above list, see assistant. Of the $2,500 scholarship, $1,000 tions.

Publication 970. represents payment for teaching. The grantor

gives you a Form W–2 showing $1,000 as income. You used all the money for tuition and

Page 3
Form 1040EZ. Report the taxable amount on can get an automatic 4-month extension of time reduction must be for education furnished by

line 1. If the taxable amount was not reported on to file. To get this automatic extension, use Form that institution, and not represent payment for

Form W–2, print “SCH” and the amount to the 4868, Application for Automatic Extension of services.

right of the words “W–2 form(s)” on line 1. Time to File U.S. Individual Income Tax Return.

Generally, you must request the 4-month extenForm 1040 or 1040A. Report the taxable sion by the regular due date of your return. See amount on line 7. If the taxable amount was not the Form 4868 instructions for how to file. Individuals Abroad reported on Form W–2, print “SCH” and the

amount on the dotted line next to line 7 on Form For the most part, U.S. scholars and teachers 1040 or in the space to the left of line 7 on Form Where To File abroad are taxed like those living in the United 1040A. States. You determine the tax treatment of a If you are living in the United States, send your scholarship or fellowship under the rules dis- Schedule SE (Form 1040). Amounts you re- return to the appropriate Internal Revenue Serv- cussed earlier. A payment for services, such as ceive under a grant that represent pay for your ice Center address listed in the instructions to teaching or lecturing, is taxable. This includes services as an independent contractor are in- your federal tax return. cash paid to you for transportation expenses cluded in determining net earnings from self-em- If you are studying or teaching abroad, send and the value of transportation provided by the ployment. If your net earnings are $400 or more, your return to the Internal Revenue Service grantor. you will have to pay self-employment tax. Use Center, Philadelphia, PA 19255-0215 U.S.A. If your scholarship or fellowship is taxable, Schedule SE, Self-Employment Tax, to figure special rules apply to: this tax.

Whether you are an independent contractor • Reporting income,

or employee depends on the facts in your situa- Qualified Tuition • Deducting expenses, tion. The general rule is that you are an independent contractor if the payer has the right to Reduction • Paying foreign taxes, and

control or direct only the result of the work and • Paying U.S. income tax. not what will be done and how it will be done. A qualified tuition reduction is tax free. It is a

You are not an independent contractor if you reduction in tuition that meets the following

perform services that can be controlled by an rules. Separate rules apply to education below Reporting Income employer (what will be done and how it will be the graduate level and education at the graduate

done). This applies even if you are given free- level. You must report all income on a U.S. federal

dom of action. What matters is that the employer income tax return in U.S. dollars. If part or all of Education below the graduate level. A tui- has the legal right to control the details of how your income is in foreign currency, you must tion reduction for education below the graduate the services are performed. If an employer-em- report this income in U.S. dollars at the rates of level is tax free if the reduction is provided by an ployee relationship exists (no matter what the exchange in effect when you received the in- educational institution to its employees for their relationship is called), you are not an indepen- come. You should use the rate that most nearly education or the education of any person treated dent contractor. reflects the value of the foreign currency—the as an employee. It must not represent a pay- For more information in determining whether official rate, the open market rate, or any other ment for services. Under this rule, only the fol- you are an independent contractor or an em- appropriate rate. You must be able to justify the lowing are treated as employees. ployee, get Publication 15-A, Employer’s Sup- rate you use.

plemental Tax Guide. 1) A current employee, A special rule applies if the income is

paid in nonconvertible foreign cur- 2) A former employee who retired or left on rency. See Blocked Income, later. CAUTION

!

When To File disability,

3) A widow or widower of an individual who If you file on the calendar year basis, the due died while an employee, date for filing your return is April 15 of the follow- Foreign Earned Income Exclusion ing year. If you file on a fiscal year basis (a year 4) A widow or widower of a former employee ending on the last day of any month except who retired or left on disability, or You may be able to exclude foreign earned December), the due date is the 15th day of the income from your gross income if your tax home 5) A dependent child or spouse of any person 4th month after the close of your fiscal year. is in a foreign country and you are: When the due date for listed in (1) through (4), above. any act for tax purposes falls on a Saturday, Sunday, or legal holi- • A U.S. citizen and a bona fide resident of

day, the due date is delayed until the next Child of deceased or divorced parents. If a foreign country or countries for an uninbusiness day. both parents have died, and if one of the parents terrupted period that includes an entire tax

Your paper return is filed on time if it is qualified as an employee under (1) through (4) year,

mailed in an envelope that is properly addressed above, their child, if under age 25, can qualify to • A U.S. resident alien who is a citizen or exclude a tuition reduction from income. and postmarked by the due date. You can use a national of a country with which the United A dependent child of divorced parents is designated private delivery service to send your States has an income tax treaty in effect treated as the dependent of both parents. return. See your form instructions for a list of and who is a bona fide resident of a forprivate delivery services. Officers, owners, and highly compensated eign country or countries for an uninter- If you use IRS e–file, your return is consid- employees. Qualified tuition reductions apply rupted period that includes an entire tax ered filed on time if the authorized electronic to officers, owners, or highly compensated em- year, or return transmitter postmarks the transmission ployees if benefits are available to employees

by the due date. • A U.S. citizen or a U.S. resident alien and on a nondiscriminatory basis. This means that are physically present in a foreign country the tuition reduction benefits must be available Extensions. You can get an extension of time or countries for at least 330 full days in 12 on substantially the same basis to each member to file your return. Special rules apply if you consecutive months. of a group of employees, defined under a rea- were: sonable classification set up by the employer. It

must not discriminate in favor of owners, of- In addition, you may qualify to exclude or • Outside the United States (see Publication deduct a foreign housing amount. 54), or ficers, or highly compensated employees.

• Serving in a combat zone (see Publication Graduate education. A tuition reduction for Tax home. Your tax home is the general area

3, Armed Forces’ Tax Guide). graduate education is tax free if the reduction is of your main place of business, employment, or

provided by an educational institution to a grad- post of duty, regardless of where you maintain

Automatic extension. If you are not able to uate student who performs teaching or research your family home. Your tax home is the place

file your return by the due date, you generally activities for that institution. The qualified tuition where you permanently or indefinitely work. You

Page 4
are not considered to have a tax home in a 3) You use blocked income for your nonde- Credit or deduction for foreign taxes paid.

foreign country for any period in which your ductible personal expenses. If income taxes are imposed on you by a foreign

abode is in the United States. Your abode can country, you may be entitled to take either a tax 4) You dispose of it by gift, bequest, or de- be your home, habitation, residence, domicile, credit or a tax deduction on your U.S. income tax vise. or place of dwelling. If your tax home remains in return. Usually, it is to your advantage to claim

the United States while you are abroad, you will the credit, which you subtract directly from your

not qualify for the foreign earned income or Deducting Expenses U.S. tax liability. Get Publication 514.

housing exclusions or the foreign housing deduction. But you may be able to deduct your If your grant for lecturing or teaching abroad is

away-from-home expenses (for travel, meals, wholly taxable, you can deduct your ordinary Payment of Tax by Fulbright

and lodging). See Deducting Expenses, later. and necessary business expenses. Ordinary Grantees

and necessary business expenses include your As explained earlier, all income must be re- away-from-home expenses (travel, meals, and More information. For more information on ported in U.S. dollars. In most cases, the tax lodging) if you are temporarily away from your tax home, the foreign earned income exclusion, must also be paid in U.S. dollars. If, however, at tax home in the United States. Your expenses and the foreign housing exclusion and deduc- least 70% of your entire Fulbright grant has been do not include the expenses of anyone accom- tion, see Publication 54. paid in nonconvertible foreign currency (blocked panying you. Generally, you are considered to income), you can use that currency to pay the be temporarily away from your U.S. tax home if U.S. tax, but only the part that is on the blocked you expect your stay abroad to last, and it does Blocked Income income. last, for one year or less. For details about these

There may be cases in which a scholarship or expenses, including whether your stay is tempofellowship grant is made in a foreign currency rary, see Publication 463, Travel, Entertain- Paying U.S. tax in foreign currency. To

ment, Gift, and Car Expenses. qualify for this method of payment, you must that is not convertible into U.S. dollars or into

other money or property that is convertible into prepare a statement that shows the following

U.S. dollars because of: Paying Foreign Taxes information.

• You were a Fulbright grantee and were • Restrictions imposed by the foreign coun- The United States has income tax treaties with paid in nonconvertible foreign currency. try, certain countries. Under these treaties, the citizens and residents of the United States are • The total grant you received during the • An agreement with the United States, or

exempt from foreign income taxes on certain year and the amount you received in non- • The terms and conditions of the U.S. Gov- amounts received while they are temporarily in a convertible foreign currency. ernment grant. treaty country. The kinds of income that may be • At least 70% of the grant was paid in non- This nonconvertible income is commonly called exempt by treaties include: convertible foreign currency. blocked or deferrable income.

• Certain pay for personal services per- The statement must be certified by the U.S.

How to report. There are two ways to report formed by a U.S. citizen or resident tem- educational foundation or commission paying

blocked income: porarily present in a treaty country, the grant or other person having control of grant

payments to you. • Wages of U.S. professors, teachers, and 1) Report the income and pay your federal researchers who teach or do research in a You should prepare at least two copies of this income tax with U.S. dollars that you have treaty country, and statement. Attach one copy to your Form 1040 in the United States or in some other coun- and keep the other copy for identification pur- try, or • Certain remittances, grants, allowances, poses when you make a tax deposit of noncon- and awards received by U.S. students, ap- 2) Defer reporting the income until it be- vertible foreign currency. prentices, and trainees who are studying comes unblocked. Any expenses related in a treaty country. Figuring actual tax. When you prepare to the income must also be deferred. your income tax return, you may owe tax or the For more information on these tax treaty provi- entire liability may have been satisfied with your Defer reporting. If you choose to defer re- sions, get Publication 901. Although Publication estimated tax payments. If you owe tax, figure porting the income, you must file with your fed- 901 is written for foreign nationals receiving in- the part due to (and payable in) the nonconvert- eral income tax return an information return on a come from U.S. sources, treaty provisions are ible foreign currency by using the formula in separate Form 1040 labeled “Report of Deferra- generally reciprocal, applying equally to U.S. Table 2. ble Foreign Income, pursuant to Rev. Rul. citizens or residents deriving income from for74–351.” You must declare on the information eign sources. 1) Substitute actual amounts for estimated return that you will include the blocked income in amounts.

your gross income when it becomes unblocked.

You also must state that you give up any right to Paying U.S. Income Tax 2) Subtract estimated tax payments from the

part of your actual tax payable in noncon- claim that any part of the blocked income was You must pay any income tax due with U.S. vertible foreign currency. includable in income for any earlier year. dollars. This rule may not apply to the tax on a

All amounts reported on the information re- Fulbright grant that was paid in nonconvertible You must attach all of the following to the

turn must be reported in the foreign currency foreign currency, as explained later. return.

involved. If you have blocked income from more

than one foreign country, include a separate Table 2. Formula to Determine Estimated Tax That May Be Paid information return for each country. in a Nonconvertible Foreign Currency Your choice to defer reporting income cannot

be changed without the consent of the IRS. Use

Form 3115, Application for Change in Account- Adjusted gross income

ing Method, to request a change. that is blocked income*

Income becomes unblocked and reportable Total estimated Estimated tax on × = for tax purposes when any of the following hap- Total adjusted U.S. tax blocked income

gross income* pen.

1) It becomes convertible. *

 Estimated amounts 2) It is converted into dollars or into other

money or property that is convertible into

U.S. dollars.

Page 5
Your estimated tax is the total of your ex- For more information, see Publication 1546, • A copy of the certified statement dis- pected tax for the year minus your expected The Taxpayer Advocate Service of the IRS. cussed earlier. withholding and credits.

• A detailed statement showing the alloca- Use Form 1040–ES to figure and pay esti- Free tax services. To find out what services

tion of tax attributable to amounts received mated tax. See Publication 505 for information are available, get Publication 910, Guide to Free

in foreign currency and the rates of ex- on estimated tax. Tax Services. It contains a list of free tax publichange used in determining your tax liabil- cations and an index of tax topics. It also deity in U.S. dollars. Who should make estimated tax payments? scribes other free tax information services,

Generally, you must make estimated tax pay- including tax education and assistance pro- • The original deposit receipt for any bal- ments if you expect to owe at least $1,000 in tax grams and a list of TeleTax topics. ance of tax due that you paid in noncon- after subtracting your withholding and credits, vertible foreign currency. Personal computer. With your per- and you expect your withholding and credits to sonal computer and modem, you can be less than the smaller of: access the IRS on the Internet at 1) A copy of the certified statement discussed 1) 90% of the total tax for the year, or www.irs.gov. While visiting our web site, you earlier. can: 2) A detailed statement showing the alloca- 2) 100% of the total tax shown on your preceding year’s tax return. You must have • Find answers to questions you may have. tion of tax attributable to amounts received

filed a return for the preceding tax year in foreign currency and the rates of ex- • Download forms and publications or

change used in determining your tax liabil- that covers all 12 months. search for forms and publications by topic

ity in U.S. dollars. or keyword.

When to pay estimated tax. For estimated 3) The original deposit receipt for any bal- • View forms that may be filled in electroni- tax purposes, the year is divided into four pay- ance of tax due that you paid in noncon- cally, print the completed form, and then ment periods. The payment due dates are April vertible foreign currency. save the form for recordkeeping. 15, June 15, September 15, and January 15. If

you have income subject to estimated tax during • View Internal Revenue Bulletins published Figuring estimated tax on nonconvertible the first payment period, you must make your in the last few years. foreign currency. If you are liable for estimated tax (discussed later), figure the amount first payment by the due date for the first pay- • Search regulations and the Internal Reve- ment period. You can pay all your estimated tax you can pay to IRS in nonconvertible foreign nue Code. at that time, or you can pay it in four installments. currency using the formula in Table 2. If any of the due dates fall on a Saturday, Sun- • Receive our electronic newsletters on hot If you must pay your host country income tax day, or legal holiday, the due date is the follow- tax issues and news. on your grant, subtract any estimated foreign tax ing business day. credit that applies to your grant from the esti- • Get information on starting and operating

mated tax on the blocked income. Penalty. a small business. If you do not pay enough of your

estimated tax in each payment period, you may Deposit of foreign currency with disbursing You can also reach us with your computer have to pay a penalty. You will not have to pay a officer. Once you have determined the using File Transfer Protocol at ftp.irs.gov. penalty if you had no tax liability last year and amount of the actual tax or estimated tax that you were a U.S. citizen or resident for the whole you can pay in nonconvertible foreign currency, TaxFax Service. Using the phone at- year. For this rule to apply, your prior tax year deposit that amount with the disbursing officer of must have been a tax year of 12 months. tached to your fax machine, you can the Department of State in the foreign country in receive forms and instructions by callwhich the foundation or commission paying the ing 703–368–9694. Follow the directions from

grant is located. the prompts. When you order forms, enter the

catalog number for the form you need. The items Estimated tax installments. You may ei- How To Get Tax Help you request will be faxed to you. ther deposit the full estimated tax amount before

the first installment due date or make four equal For help with transmission problems, call the You can get help with unresolved tax issues,

payments before the installment due dates. See FedWorld Help Desk at 703–487–4608. order free publications and forms, ask tax quesWhen to pay estimated tax, later. tions, and get more information from the IRS in Phone. Many services are available by several ways. By selecting the method that is Deposit receipt. Upon accepting the for- phone. best for you, you will have quick and easy ac- eign currency, the disbursing officer will give you cess to tax help. a receipt in duplicate. The original of this receipt • Ordering forms, instructions, and publica- (showing the amount of foreign currency depos- Contacting your Taxpayer Advocate. If you tions. Call 1–800–829–3676 to order cur- ited and its equivalent in U.S. dollars) should be have attempted to deal with an IRS problem attached to your Form 1040 or payment voucher rent and prior year forms, instructions, and unsuccessfully, you should contact your Tax- publications. from Form 1040–ES. Keep the copy for your payer Advocate. records. Mail the return or your payment The Taxpayer Advocate represents your in- • Asking tax questions. Call the IRS with

voucher to the Internal Revenue Service Center, your tax questions at 1–800–829–1040. terests and concerns within the IRS by protect- Philadelphia, PA 19255–0215, U.S.A. ing your rights and resolving problems that have • TTY/TDD equipment. If you have access not been fixed through normal channels. While to TTY/TDD equipment, call 1–800–829–

Taxpayer Advocates cannot change the tax law 4059 to ask tax questions or to order or make a technical tax decision, they can clear Estimated Tax forms and publications. up problems that resulted from previous contacts and ensure that your case is given a com- • TeleTax topics. Call 1–800–829–4477 to

The grantor of a scholarship or fellowship does plete and impartial review. listen to pre-recorded messages covering

not withhold tax unless the grant represents To contact your Taxpayer Advocate: various tax topics.

payment for services. Grants representing payment for services are wages for withholding pur- • Call the Taxpayer Advocate at

1–877–777–4778. Evaluating the quality of our telephone serv- poses. The grantor must report them on a Form ices. To ensure that IRS representatives give W–2. • Call the IRS at 1–800–829–1040. accurate, courteous, and professional answers, You may have to pay estimated tax if the • Call, write, or fax the Taxpayer Advocate we evaluate the quality of our telephone serv- grantor of a scholarship or fellowship does not office in your area. ices in several ways. withhold tax or withholds insufficient tax on the

taxable part of your scholarship or fellowship • Call 1–800–829–4059 if you are a • A second IRS representative sometimes

grant. TTY/TDD user. monitors live telephone calls. That person

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only evaluates the IRS assistor and does • Eastern part of U.S. and foreign publications from U.S. Embassies and consunot keep a record of any taxpayer’s name addresses: lates. You can request Package 1040–7 for

or tax identification number. Eastern Area Distribution Center Overseas Filers, which contains special forms

P.O. Box 85074 with instructions and Publication 54. • We sometimes record telephone calls to Richmond, VA 23261–5074 Also during the filing season, the IRS con- evaluate IRS assistors objectively. We ducts an overseas taxpayer assistance pro- hold these recordings no longer than one gram. To find out if IRS personnel will be in your week and use them only to measure the CD-ROM. You can order IRS Publica- area, you should contact the consular office at quality of assistance. tion 1796, Federal Tax Products on the nearest U.S. Embassy. CD-ROM, and obtain: • We value our customers’ opinions. Phone. You can also call your nearest Throughout this year, we will be surveying • Current tax forms, instructions, and publi- U.S. Embassy, consulate, or IRS office our customers for their opinions on our cations. listed below to find out when and where service. • Prior-year tax forms and instructions. assistance will be available. These IRS telephone numbers include the country and city • Popular tax forms that may be filled in Walk-in. You can walk in to many post codes required if you are outside the local dial- electronically, printed out for submission, offices, libraries, and IRS offices to pick ing area. and saved for recordkeeping. up certain forms, instructions, and publications. Some IRS offices, libraries, grocery • Internal Revenue Bulletins. Berlin, Germany (49) (30) 8305 – 1140

London, England (44) (207) 408 – 8077 stores, copy centers, city and county govern- Mexico City, Mexico (52) (55) 5080 – 2191 ments, credit unions, and office supply stores The CD-ROM can be purchased from Na- Paris, France (33) (1) 4312 – 2555

have an extensive collection of products avail- tional Technical Information Service (NTIS) by Rome, Italy (39) (06) 4674 – 2560

Singapore (65) 6476 – 9413 able to print from a CD-ROM or photocopy from calling 1–877–233–6767 or on the Internet at

Tokyo, Japan (81) (3) 3224 – 5466 reproducible proofs. Also, some IRS offices and www.irs.gov. The first release is available in

mid-December and the final release is available Overseas taxpayers can also call the U.S. for libraries have the Internal Revenue Code, reguhelp at (215) 516–2000. lations, Internal Revenue Bulletins, and Cumu- in late January.

lative Bulletins available for research purposes. IRS Publication 3207, Small Business Re- If you are in Guam, the Bahamas, U.S. Virgin

source Guide, is an interactive CD-ROM that Islands, or Puerto Rico, you can call (787)

Mail. You can send your order for contains information important to small busi- 759–5100 or 1–800–829–1040.

forms, instructions, and publications to nesses. It is available in mid-February. You can Mail. For answers to technical or acthe Distribution Center nearest to you get a free copy by calling 1–800–829–3676 or count questions, you can write to: and receive a response within 10 workdays after visiting the IRS web site at www.irs.gov.

your request is received. Find the address that

applies to your part of the country. Services Available Outside Internal Revenue Service

• Western part of U.S.: International Section

Western Area Distribution Center the United States P.O. Box 920

Rancho Cordova, CA 95743–0001 Bensalem, PA 19020–8518. During the filing period (January to mid-June),

• Central part of U.S.: you can get the necessary federal tax forms and

Central Area Distribution Center

P.O. Box 8903

Bloomington, IL 61702–8903

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Index

A Figuring estimated tax on Individuals abroad ......... 4 Student loans, canceled or

Aid . . . . . . . . . . . . . . . . . . . 2 nonconvertible foreign forgiven .............. 2

Aliens ................. 2 income ............... 6 M Suggestions ............. 2

Assistance (See Tax help) Figuring U.S. income tax ..... 5 More information ( Supplies ................ 2 See Tax help)

Athletic scholarships Financial aid ............. 2 ....... 2

Foreign currency, deposit N T

with disbursing officer ..... 6 B Tax help ................ 6 Nonconvertible foreign Foreign earned income Blocked income ........... 5 currency .............. 5 Tax home ............... 4 exclusion ............. 4

Books ................. 2 Nonresident aliens ......... 2 Tax returns, where to file ..... 4 Foreign tax credit .......... 5 Tax withholding ........... 1 Foreign taxes ............ 5

C Tax-free scholarships and Forms: P fellowships ............ 2 Candidate for a degree ...... 2 Form 1040 or 1040A ...... 4 Paying U.S. tax in foreign Taxable scholarships and Comments .............. 2 Form 1040EZ ........... 4 currency .............. 5 fellowships ............ 3 Form 4868 ............ 4 Payment of tax by Fulbright Taxpayer Advocate ........ 6

D Form W–2 ............ 1 grantees .............. 5

Schedule SE Teaching ............... 3 ........... 4 Pell Grants .............. 3 Deferrable income ......... 5 Teaching abroad .......... 4 Free tax services .......... 6 Prize .................. 3 Degree candidate ......... 2 Title IV need-based Fulbright grantees: Publications (See Tax help) Deposit of foreign currency education grants ......... 3 Fulbright grants ......... 5 with disbursing officer ..... 6 Payment of tax .......... 5 Travel ................. 3 Q TTY/TDD information ....... 6

E Qualified scholarship or G Tuition ................. 2

fellowship ............. 2 Education below the Graduate education ........ 4 graduate level .......... 4 Grants: U

Educational institution ....... 2 R Pell ................. 3 U.S. income tax, paying ..... 5

Equipment .............. 2 Reporting income ......... 4 Title IV need-based

Estimated tax . . . . . . . . . . 1, 6 Reporting scholarships and education ............ 3

fellowships ............ 3 V Expenses in connection with Veterans’ benefits ......... 3 the grant .............. 5 Room and board .......... 3 H

F Help (See Tax help) S W

Help from grantor ......... 3 When to pay estimated tax . . . 6 Fees .................. 2 Scholarship prizes ......... 3

Where to file tax returns ..... 4 Fellowships: Scholarships:

How to report I How to report ........... 3 Who should make estimated ........... 3

Incidental expenses ........ 3 Tax free .............. 2 tax payments ........... 6 Tax free .............. 2

Taxable .............. 3 Income tax .............. 5 Taxable .............. 3 ■ Individual retirement Service academy cadets ..... 3

arrangements (IRAs) ...... 1 Services, payment for ....... 3

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