Posted by Saaib Uppal, CPA
With 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.