On funding and taxes

[minuto]

Hi,

I know little to nothing about the tax situation in the US and I'm trying to calculate how much I would pay in tax when I'll move there to do my PhD. It will be in Boston, MA.

From what I understand tuition is not taxed (thankfully), but monthly stipend is. Is yearly medical insurance taxed? Are there any form of deductions for students, apart from the personal allowance?

Thanks to anyone that can help me shed some light on this!

[TakeruK]

For a good start, I would read this article: https://en.wikipedia.org/wiki/Income_tax_in_the_United_States. The short answer is that you should expect to pay about 10% to 12% of your stipend on federal taxes. It could be less though if your stipend is low.

Note that for the 2018 tax year and onwards, there will be different tax brackets. So make sure you are reading the tables for the correct year!

Here is more detailed info. I'm making lots of assumptions for a "typical" F-1 or J-1 student here. Your country may have tax treaties with the USA that allows for more deductions. In addition, this is just based on my own experience, please consult a tax expert for official advice

As an international student, you will likely be a non-resident alien for tax purposes (if this is not the case, then the text below will be different, but since you say you know nothing about the tax situation so I am assuming this will be your first time in the USA).

Therefore, we don't qualify for very many deductions at all. Actually thanks to Trump's "Tax Cut and Jobs Act", the personal allowance (called the personal deduction) that used to be about $4000 is eliminated. Trump instead doubled the standard deduction, which non-resident aliens do not qualify for. So, with the exception of books and necessary supplies**, most non-resident alien students will not qualify for any deductions at all. 

(**Note: Books and necessary supplies refer only to materials you are required to purchase in order to complete your educational program. So, required textbooks, with receipts qualify. And if your program requires you to, e.g. buy a lab coat in order to attend the lab classes, you can deduct that too. But you can't deduct "optional" expenses not explicitly required by the course, even if you need them. That is, things like binders, papers, pencils are not deductible, unless your course requires you to buy a very specific type of that item.)

So, the 2018 tax brackets are...

10% from 0 - 9,525
12% from 9,526 - 38,700, and
22 % from 38,701 - 82,500.

There are higher brackets but not typical for grad students! Also, I include the 3rd one there just in case but most people will be in the first two. So, if your funding package is $30,000 plus tuition waiver, your tax owing will be something like:

10% on the first 9,525, so you owe $952.50 (9,525 * 10%) for that first bracket. Then 12% on the remainder (30,000-9,525 = 20,475), which is 2,457 (20,475 * 12%), for a total tax owing of $3409.50. This is an effective tax rate of 11.3%. But this is just federal taxes. Depending on where you live, you may pay state or city taxes as well. So it might be a few more percentage points.

Another thing to note is that your stipends may have a large fraction withheld for taxes because you are a non-resident alien. When I was in the USA, about 15% of my stipend was withheld even though my tax owing is always less. So you will have to wait until you file your yearly tax return to get that money back.

[minuto]

Thanks a lot for the detailed post!

My country has a tax treaty with the US and I will see if this brings any benefits. It's a shame that the $4k deduction has been eliminated, I think international students will struggle more from now on.

[TakeruK]

Oh I forgot to answer your other questions:

Your health insurance benefit paid by the school could count as taxable income, depending on how it is accounted. For me, it was not counted.

Also, the new changes come with lower tax brackets. Under the old brackets (the 2nd tax bracket was 15% instead of 12%) and the 4k exemption, the same 30,000 stipend would have 3433.75 in taxes, which is very similar to the 2018 tax owing. 

However, what does change is the difference between what international students (without a tax treaty) owes vs. domestic students. It used to only be the $6350 standard deduction difference. But now, American students can claim 12,000 in the standard deduction, while international students get nothing. Assuming most students have most of their income in the new 12% tax bracket, this is a difference of $1440 in net pay for an American vs. international student.