Question: Are stipends taxable income for Federal income tax purposes? The taxpayer has been serving as a host family for a foreign exchange student and has received monthly payments during 2014. Should this income be taxable to the host family? There is not a specific exclusion for these payments under the Internal Revenue Code. Since there is no exclusion, in order for it to be nontaxable to the host family, it would have to qualify as an expense reimbursement, under an accountable plan.
Amounts received under “accountable plans” are not considered taxable income. Most folks are familiar with accountable plans, as many employers use this method to reimburse employees for their out of pocket expenses. Typically, the employee turns in his receipts and the employer cuts them a check. If the organization that funds the stipend requires the host family to submit receipts and reimburses these expenses, the stipend payments would be considered non-taxable. If however, the organization simply pays a set amount each month, a “non-accountable plan”, the payments would be taxable income to the taxpayer.
In my research, it seems most of the stipends are paid under a non-accountable plan. The payments are reported on Form 1099-MISC as “other income”, which subjects the payment to income tax, but not self-employment tax.
Are Expenses Deductible?
If the payments received are taxable, the logical question is whether the related expenses are deductible. The answer is “it depends.” The first question to ask is if the income qualifies to be reported on a Schedule C, that is, is the activity of hosting an exchange student a trade or business? The IRS provides the following definition: ”An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business.” In my opinion, the activity of serving as a host family is not a trade or business. But, to play the devil’s advocate, what if it is a trade or business? How do you define what your expenses are? Would it be similar to the home office provisions, where you have an allocated bedroom for the student and use the pro-rata square feet to determine a percentage of utilities and such to allocate as a business expense? Would you use the daily per diem rate for meal expense? In my opinion, once you start making up the rules, you are on a very slippery slope with the IRS.
In addition, if the payments received are considered trade or business income, the net income would be subject to self-employment taxes at a rate of 15.3% over and above regular income tax.
Another option available for taxpayers who host exchange students is to take a charitable donation. However, the taxpayer cannot claim a charitable contribution deduction if they are compensated or reimbursed for any part of the costs of having the student live in their home. According to IRS Publication 526, “a taxpayer may be able to claim a charitable contribution deduction for the unreimbursed portion of the expenses if the taxpayer is reimbursed only for an extraordinary or one-time item, such as a hospital bill or a vacation.”
If you qualify for the charitable donation deduction, the qualifying expenses include the cost of books, tuition, food, clothing, transportation, medical and dental care, entertainment and other amounts actually spent for the well-being of the student. Depreciation on your home, the fair market value of lodging, and similar items are not considered deductible.