Posted by: Saaib Uppal, CPA | January 24, 2014

Stipends to Host Families: To report or not to report?

Posted by Saaib Uppal, CPA

Host Family StipendsWith the January 31, 2014 deadline for furnishing Forms 1099-MISC to their recipients quickly approaching, independent schools have an important decision to make. The situation in question is in relation to stipend payments that are given to host families in a foreign exchange student program. Should those payments be taxable for the recipient host family? If yes, what due diligence should the school follow to make sure they have met all reporting requirements as well as communicated the tax implications to the above-mentioned families?

The first step is to decide if these stipends were paid in accordance with a qualified expense reimbursement program. In determining whether or not the expenses were paid in conjunction with an expense reimbursement program, the school must have in place a valid “accountable plan,” the requirements of which have been laid out in one of our previous posts 8 Tips for Running a Valid Accountable Plan. In general, under an expense reimbursement program, the host family submits proof of qualifying expenses to the school for reimbursement. The expenses are basically considered expenses of the school. The benefit to the host family of an accountable cost reimbursement plan is that the payments from the school to the family would not be classified as taxable income. It is important to note that being reimbursed for expenses paid for students living with you may preclude you from the charitable deduction available for such situations, which the IRS generally limits to $50 per month.

In most cases, independent schools do not have an accountable plan for reimbursing expenses paid for students living with you. There is currently no exclusion from taxable income for payments made by independent schools to host families, absent an accountable cost reimbursement plan. As a result, payments made to families under these circumstances would be taxable to the host family and the school should issue a Form 1099-MISC if total payments exceed reportable thresholds. As this can come as a surprise to the family, the school should send a letter to explain the purpose of the Form 1099 as well as recommend that the family talk to a CPA regarding proper reporting on their personal tax return.

With 2013 having come and gone, it would be difficult to qualify any stipend payments for this past year to as an expense reimbursement if a program was not already in place during the year. Therefore, schools should begin to prepare both the Forms 1099-MISC that must be sent out by January 31 and the letter that we recommend above. With the popularity of foreign exchange programs continuing to rise for independent schools, it may be time for schools to evaluate whether an accountable cost reimbursement plan covering expenses for students living with host families would be advantageous to adopt. The tax benefits extended to parents under this option may benefit the school by increasing the number of available host participants.

Photo by Paradox 56 (License)

Responses

[...] government said Friday it would loosen strict foreign exchange controls, after it abandoned its long-standing policy of intervening to support the peso currency. [...]

This was a great question to propose.

It is long overdue for independent schools to come up with an “accountable plan” for the host families of their foreign exchange students.

Essentials, i.e. healthcare, for foreign exchange students are much more expensive.Hosts families are definitely overqualified for a tax refund for their foreign exchange students.

It should be a requirement for the schools to have an accountable plan prepared for host families in the beginning stage of expecting a foreign exchange student.

http://www.mbsaccountancy.com

I was wondering if this would be the same for host families who are providing housing to developmentally disabled adults

Emily- Thanks for your question. There are many factors that can affect the taxability of payments received so we are not able to give you a definitive answer. You may be interested in the information on page 31 of the IRS document linked here http://www.irs.gov/pub/irs-pdf/p525.pdf, but again this is not an answer to your question. We are more than happy to discuss the specifics of your situation in more detail if you would like. ~Saaib

Since the expenses wouldn’t be taxable if paid under an accountable plan, isn’t it logical that they could be deducted from the income earned even if the host family had to pick them up as income?

That’s a great question. The first question the taxpayer would have to ask themselves is if they believe the income qualifies to be reported on Schedule C. 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.” If the taxpayer believes that reporting the stipend income on the Schedule C is appropriate, then the expenses related to the hosting of said student would be reported on the same form. ~Saaib

I have hosted a child from China this past year. It is the first time hosting that came with a stipend. $900.00 a month. She is 12 and will be in the US for the next 4-6 years to study. While many will think 900 is a lot… in fact it is more of a break even point. We are not doing this as a business, nor is it a hobby… Do we a have a choice in weather we report the stipend? I thought we had to report it then deduct all our cost associated with housing and caring for her?? Very confused now

Maleta~ That’s a great question. Our research concluded that barring a qualified expense reimbursement program, compensation received by a host family are reportable income for tax purposes. The next step would be for the taxpayer to ask themselves if they believe the income qualifies to be reported on Schedule C as a ‘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.” If the taxpayer believes that reporting the stipend income on the Schedule C is appropriate, then the expenses related to the hosting of said student would be reported on the same form. ~Saaib Uppal, CPA

I am hosting a student and receive $800 per month. We do receive a 1099 at the end of the year. Can I write off the additional expenses? The food, the extra driving, the extra electric, heat, and etc? We are only doing this for the experience and barely break even.

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