My wife was on F-1 in Spring 2010 (graduating semester) pursuing PhD and she received $8,100 as fellowship/scholarship. And, $1,300 was deducted as NRA tax. She paid around $1,000 as tuition fees for that semester. She has not received a W-2 and no 1098-T was given as she was a non-resident alien.

After graduating, she started working in August 2010 for which she received W-2 with appropriate federal taxes withheld. Currently, she is on H-1. We are filing taxes as married joint status.

I was not sure how to report her scholarship income and if it has to be reported at all in the first place.

Should I deduct both taxes and tuition paid from the scholarship and then report it as wages; or report scholarship as wages, use tuition deduction if allowed and add taxes deducted from the scholarship to our total federal taxes?

Please advise!

If you are a degree candidate and if the financial aid (includes scholarship and fellowship) is for tuition fee, other fees, books, supplies and equipment, then it is not taxable. For a degree candidate aid for boarding and travel are taxable. If you are not a degree candidate, then all the financial aid is taxable. Your U.S. Tax Return: The U.S. Income Tax Topics 1 (http://taxipay.blogspot.com/2008/08/us-income-tax-topics-1.html)
If the school does not issue W-2 or 1098-T, they should issue you form 1042-S.