INFORMATION ON U.S. GOVERNMENT TAXES
In 1986 the U.S. Government passed a law referred to as the Tax Reform Act which no longer allows the financial assistance provided through a scholarship or fellowship to be completely tax exempt. Funds for food and incidental expenses, housing and health insurance, and initial and terminal travel when they are provided by the East-West Center are subject to U.S. taxes. Tuition, fees, books, and expenses directly attributable to the pursuit of your degree are tax exempt. The effects of this law vary depending on a student’s country of citizenship or permanent residence and the source of the funds supporting your fellowship.
Tax Treaty Countries
The United States Government has tax treaties with a number of countries. While treaty provisions vary from country to country, it appears that most students from China, Japan, Korea, the Philippines, Indonesia, and Thailand will be exempt from U.S. government taxes for activities held in the United States that are funded by the East-West Center from U.S. funds. It should be noted that some treaties have time limits and maximum dollar amounts. It is the students’ responsibility to determine whether or not they qualify for exemption from taxes by virtue of a tax treaty.
U.S. Citizens/Legal Permanent Residents, Non-Residents from Non-Tax Treaty Countries & Non-Residents From Countries Whose Tax Treaty is Not Applicable.
Students from countries in these categories are subject to the 1986 Tax Reform Act.
Paying Taxes
How taxes are actually paid depends on a student’s country of citizenship or permanent residence. In the case of U.S. citizens or permanent residents, the Center accumulates all taxable income (stipend, housing, health insurance) for the year. A certification letter of the income is provided for you after the end of the tax year. No income taxes are withheld from your monthly stipend. Students who are U.S. citizens or permanent residents have sole responsibility for paying their State and Federal taxes and are urged to manage their funds carefully and to file estimated taxes (quarterly payments) in order to avoid penalties for underpayment of taxes. Forms for filing estimated State and Federal taxes are available from the State and Federal tax offices or via the internet.
For non-resident students from non-tax treaty countries or from countries whose tax treaty is not applicable, the Center is required to withhold taxes each month on any funds provided by U.S. Government sources. By law, the rate of withholding is 14% of the total taxable income which generally includes a monthly stipend, housing, and health insurance. The following example will help you estimate the amount you will need to withhold for taxes. If you receive an award that includes housing, health insurance, and a monthly stipend, add the value of these categories to come up with a total that is considered taxable income. Estimate 14% of the total to calculate the amount to have withheld each month to cover taxes.
At the end of each tax year, the taxable benefits are reported to the respective federal and state tax agencies. All students including those from tax treaty countries are required to file an income tax return. It is through this process that you will be able to determine if you are eligible for a refund of all or a portion of the taxes withheld, or if, depending on your other/total income, you owe additional taxes.
INFORMATION ON STATE OF HAWAII TAXES
The State of Hawaii taxes all East-West Center scholarships and fellowships in the same manner as the U.S. Government with two very distinct and important exceptions. First, tax treaties which the U.S. Government has signed with certain countries do not exempt citizens of those countries from State taxes. The exemption only applies to U.S. Government taxes for activities held in the United States. Secondly, while the State taxes the same portion of your fellowship as does the U.S. Government, the Center cannot withhold funds on a monthly basis to pay for those taxes.
All students are responsible for any State of Hawaii taxes that they may owe. The specific amounts will vary from individual to individual as everyone’s taxable income is different. Nevertheless, to provide a realistic idea of the amount of money each student may be responsible for, here are specific examples. In 2009 some single students who were here for 12 months, with no other taxable income except their East-West Center fellowship paid approximately $600 in State of Hawaii taxes. A married student with two dependents residing off campus with no other taxable income except the Center fellowship paid approximately $1000 in State of Hawaii taxes.
Paying State Taxes:
Since the Center is unable to withhold State taxes from the monthly stipend, students are strongly urged to manage their funds carefully and to pay estimated State taxes as a means of meeting their obligation to the State. Paying estimated State taxes is done through the filing of a declaration of intent to file estimated taxes (Form N-1) no later than April 20th of each tax (calendar) year. This will enable students to pay taxes in four scheduled payments. Even though estimated taxes are paid throughout the year, students are still required to file a tax return at the end of the calendar year and pay any additional taxes owed.
Forms for filing estimated State and Federal Taxes are available from the State and Federal tax offices or via the internet.