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I am a dual UK/USA citizen who has lived in the UK all my life. I have never filed a US tax return (I thought I didn't need to - oops).

For the past few years I was studying full time for a PhD. I received various UK tax exemptions.

1. I received approximately £15,900 annual living allowance from the EPSRC (meant to cover rent, food, etc.). In the UK, this living allowance is tax-exempt.

Do I owe US federal income tax on that EPSRC studentship? If not, what exemption can I claim?

2. I have an ISA in the UK. Do I owe US tax on the interest from that? If not, what exemption can I claim?

3. I have a non-ISA savings account in the UK. For the past few years, I did not have to pay UK tax on that interest, because I was a student. Do I owe US tax on that interest? If not, what exemption can I claim?

Advice gratefully received! Thank you.
 

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1. I received approximately £15,900 annual living allowance from the EPSRC (meant to cover rent, food, etc.). In the UK, this living allowance is tax-exempt. Do I owe US federal income tax on that EPSRC studentship? If not, what exemption can I claim?
Maybe. Absent a tax treaty that says otherwise, refer to IRS Tax Topic 421 and IRS Publication 970 for more information. I'll briefly summarize the U.S. taxability of scholarships and fellowships.

In general, scholarships and fellowships (whether public or private) are U.S. tax exempt for the amounts used for educational expenses. Educational expenses include tuition, required fees (such as a student fee required for university enrollment), and books, supplies, and equipment required for coursework. You must be attending a real university or educational institution and progressing toward a real degree. (The IRS doesn't use that language, but that's the gist of it.)

Amounts that aren't used for those purposes are generally U.S. taxable but not necessarily taxed. In particular, if you're a Single filer you get a personal exemption and standard deduction that together total about US$10,000. So if, for example, £15,900 is your entire gross income (as a scholarship/fellowship), and £10,000 of that is used for the expense categories that are tax exempt, then your remaining £5,900 is under US$10,000 (at the relevant exchange rate) and you should escape all U.S. income tax.

There may be more tax relief available than the usual blanket personal exemption/standard deduction depending on the circumstances. You have to be at least a bit careful to keep your fellowship/scholarship separate from actual earned income. For example, if your gross income is £15,900, but £10,000 is your scholarship/fellowship and the remainder is paid to you at an hourly rate (for example) as compensation for being a research or teaching assistant, as ordinary wages, then you'd keep those income categories separate. And that's a good thing because there's a separate U.S. tax relief available on earned income called the Foreign Earned Income Exclusion (FEIE) that's probably America's most generous tax break.

Flipping this around, if (unfortunately) you had qualified educational expenses that exceeded your scholarship/fellowship, there are possible tax reliefs available. IRS Publication 970 explains more about those various tax reliefs.

2. I have an ISA in the UK. Do I owe US tax on the interest from that? If not, what exemption can I claim?
Absent a tax treaty that says otherwise, yes, the interest on that account -- or any other non-U.S. tax advantaged account -- is U.S. taxable (but not necessarily taxed, per above).

Moreover, you'll want to check what you're holding in your ISA. U.K. ISAs can hold various investments, including cash, unit trusts (a.k.a. mutual funds), and publicly traded shares of stock (equities), as examples. Some of these, notably unit trusts/mutual funds, are what are known in the U.S. as PFICs (Passive Foreign Investment Companies) that require special U.S. tax treatment. In particular you'd make what are called mark-to-market elections on your PFICs, meaning you'd determine their value at the end of each calendar year and report the "paper" gain to the IRS using IRS Form 8621. That's a bit complicated, but at your income level that's likely to be rather advantageous in terms of a U.S. tax outcome.

My recommendation is to avoid PFICs, but it's not the end of the world if you've got them already, especially at your income level. Plenty of investments aren't classified as PFICs, so it's fairly easy to avoid the problem, even in a U.K. ISA.

3. I have a non-ISA savings account in the UK. For the past few years, I did not have to pay UK tax on that interest, because I was a student. Do I owe US tax on that interest? If not, what exemption can I claim?
Absent a tax treaty that says otherwise, that interest is U.S. taxable but not necessarily taxed, per above.

In any of the cases above, if a tax treaty says otherwise, you'd use IRS Form 8833 to inform the IRS what treaty relief you're using.

Due note you may have a FinCEN Form 114 filing obligation depending on the total value of your foreign financial accounts (U.K. ISA, savings account, etc.) Specifically, if the total value was at least US$10,000 at any point in time, you're required to file that form. It's due by June 30, so the 2014 report is due by June 30, 2015, for example. If you were supposed to file 2013 and/or prior years, no problem, you can go ahead and do that as long as you have a reasonable, truthful explanation for the late filing. ("I didn't know" is popular, and one of the choices on the form consists of words to that effect.) At present the U.S. Treasury is not imposing penalties for unprompted, voluntary late filing of truthful FinCEN Form 114 reports.

My references to IRS form numbers should not be interpreted to recommend that you fill out those forms by hand, manually. Tax preparation software, even the free stuff (such as the free editions of TaxAct.com and TaxSlayer.com, as examples) is very useful in making U.S. tax filing simpler and easier, and I recommend it.

Finally, be aware that U.S. tax and financial reporting is on a calendar year basis, which is different from what you may be used to (or will become used to) in the U.K.
 

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One other thing I should mention is that young adult male U.S. citizens (and U.S. residents, legal or illegal) are required to register with U.S. Selective Service. I'd recommend ticking that particular box if you haven't already. It should just take a couple minutes online, or you can pop the paper version of the form in the post. There is no military draft and hasn't been since 1972, but a few U.S. benefits are tied to whether you were registered with Selective Service back in your young adult years. Those benefits just might be interesting enough in the future -- you never know.

If you're female you have no registration requirement. And if you're "too old" then it's too late anyway, so "water under the bridge."
 

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I am a dual UK/USA citizen who has lived in the UK all my life. I have never filed a US tax return (I thought I didn't need to - oops).

For the past few years I was studying full time for a PhD. I received various UK tax exemptions.

1. I received approximately £15,900 annual living allowance from the EPSRC (meant to cover rent, food, etc.). In the UK, this living allowance is tax-exempt.

Do I owe US federal income tax on that EPSRC studentship? If not, what exemption can I claim?
If that allowance is purely for living expenses - as you seem to indicate - not tuition or other fees etc. then I believe the US would consider it taxable income, and since it's not employment income you can't make it go away with the foreign earned income exclusion (which runs to almost $100k).

Scholarships are one of those areas where the tax situation can really suck for US citizens abroad. Doing a very quick estimate, your £15,900 is approximately $24,500, and for a single person with no dependents you'd owe tax and social security to the tune of about $3500. (That was just one online calculator, tax was about $1700, Social Security $1800, but I'm not certain you'd have to pay the latter.)

Now I for one feel that a UK citizen who's lived his or her entire life in the UK and who receives scholarship support funded by UK taxpayers should NOT be required to send up to 15 percent of that money to a foreign government because they happen to have another nationality. That is, in the grand scheme of things, blindingly wrong and stupid.

So at this point I would start asking myself what is my exposure to the US. Do I have a US place of birth? Does my bank, or any other financial institution, have any reason to suspect US citizenship? If the bank doesn't know and isn't going to report you under FATCA, is should be very easy to stay off the IRS radar. Don't file your tax returns, and don't send UK taxpayers' money to the US.

If you feel that you need to be honest, wait a few years until you have a job and then begin filing, when you can use either the foreign earned income exemption or the foreign tax credit to eliminate anything you might owe the US.
 

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One other point to remember is that there is a filing threshold of $10,150 (for 2014) for single individuals. If you determine that your reportable income (say, only the interest on your various accounts) is less than that figure, you can just skip filing altogether.

I don't know enough about the status of scholarships - but consult the publications recommended to see if you can justify omitting some or all of your grant. There is no one right or wrong answer to these things - it's all in how you interpret it, especially with foreign grants and institutions.
Cheers,
Bev
 

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Thanks nononymous, BBCWatcher, and Bev for your extremely helpful replies.

The £15,900 is not used to pay educational expenses but for rent, food, transport etc..

However, after reading publication 54, chapter 4 (2014), I think I can use the Foreign Earned Income Exclusion. It says 'Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income'. The scholarship was awarded for a research project.

Apologies for not posting a link. I'm not allowed to post links until I have posted at least 5 times on the forum!
 

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Not to worry about the link - you'll have privileges soon enough.

That's exactly what I meant about staking out your tax position. It's highly unlikely your return(s) will be subject to all that intense scrutiny anyhow. On the FinCEN, I'd report the various accounts, but unless your bank has contacted you about providing data, I wouldn't worry too much about it. But what some folks have done is to report various accounts as simple bank accounts, and if they are technically PFICs or any of those other reporting nightmares, they figure someone will "be in touch" later to explain what's missing.
Cheers,
Bev
 

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Nononymous, Barney is most probably well shielded in terms of the U.S. self-employment tax. (Though the downside is he cannot earn U.S. Social Security and Medicare benefits, at least not at the present time.) First of all his university is most likely his employer for these purposes, so he's not actually self-employed, a critical requirement everywhere to be subject to the SE Tax. (It depends, but that's often the case with research fellows.) Second, the U.S. and the U.K. have a social security treaty. Per the terms of the treaty Barney would only have to contribute to U.K. national insurance (and it's up to the U.K. whether it wishes to collect or not). He has no U.S. ties that would trigger U.S. consideration under the treaty, and it doesn't matter whether the U.K. collects or not -- the treaty just says "go left or go right," basically. And Barney is solidly on the U.K. side of the treaty.

Barney, you still might want to take a look at what unreimbursed educational expenses you had to pay: books, required fees for enrollment, whatever. It's hard to believe you had zero such expenses. (Possible, but hard to believe.) IRS Publication 970 will guide you on how you can handle those expenses. You can at least deduct qualified expenses, and there's some merit in making such deductions even if you qualify for the FEIE. ("Defense in depth," basically, if the FEIE is later questioned for whatever reason.)

Yes, I agree, you're probably on firm ground per Publication 54 on using the Foreign Earned Income Exclusion. Just read through those rules very carefully about three times to make sure you're comfortable with your interpretation of the rules applied to the circumstances you know (and we really don't know fully).
 

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Given the near-impossibility of the IRS following up on this, calling the scholarship "earned income" and excluding it under the FEIE is probably an acceptable strategy. (I mean that quite literally - if asked to describe the source of income, I would not write "scholarship" on the return.)

You're not being given a ton of money to live on, and it's being given to you by UK taxpayers, so do what you need to do to prevent tithing a chunk of it to the US, which would be perverse. (Depending on how easily you can be identified as a US person, and what your plans might be in terms of eventually living in the US, you might still want to remain non-compliant.)
 

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Nononymous, let's keep the politics out of this discussion, shall we? Let's stick to exploring and advising on what the requirements actually are in this area, and then Barney can decide whether he wants to consider other factors (such as his own personal politics) or not.

Barney, do you have the precise name of EPSRC's award, grant, fellowship, or whatever it was called that you received? With the precise program name of what you received I might be able to offer better guidance. The general advice, though, is that earned income (that would qualify for the FEIE) is income you receive for providing some type(s) of personal service(s) -- a quid-pro-quo arrangement for your labor. EPSRC (or its agent, e.g. the university) gives you X and you are obliged to work to produce Y, in other words. A fee for a service. That implies at least some modicum of oversight and assessment of your performance once you've received the funds.

Contrast that description with the so-called MacArthur "Genius Grants," as an example, formally called the "MacArthur Fellows Program." If you're lucky to receive one of those awards it comes with no strings attached whatsoever. It would be very hard to see how a Genius Grant would be considered earned income according to the IRS definition.

That's why IRS Publication 54 lists scholarship and fellowships under "Variable Income." They can be earned income, non-earned income, or partially some of both. It depends on the circumstances.

However, if you decide all or part of what you received isn't earned income (and thus cannot be excluded via the FEIE), don't panic just yet. There are other possibilities. For example, what you received might be a foreign source gift according to the IRS's definition, and (if so) it's reportable (on IRS Form 3520) but not U.S. taxable.

Anyway, take it slowly and try to fairly assess what this particular income represented. If you feel comfortable that the income fits a particular definition, great. If you're still uncertain, feel free to post a follow-up.
 

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The politics of this situation are pretty offensive - public money intended to support education potentially being siphoned out of a country due to US tax rules - but I'll do my best to set feelings aside.

If one can't write off the fellowship as "earned" then non-compliance is an option to consider. If you're a dual citizen with few if any "visible" ties to the US it remains a reasonable course of action.
 

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And frankly, given the amounts involved in most "scholarship grants" I doubt anything you report is going to be seriously questioned. Unless your grant is well over $100,000 or so, report it as quasi-salary, exclude it with a 2555 and if they have any doubts or questions, they'll be in touch. (But don't hold your breath.)

Keep a record of your justification and if you hear nothing in return for 4 years, you're home free under the statute of limitations. You reported it, and they have 4 years to question how you did so.
Cheers,
Bev
 
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