Paying taxes on stipend

[Jiren]

Is this something that every graduate student does? Are there graduate student who don't pay taxes on their stipend? Do they get caught?

[TakeruK]

Depending on the source of your income, your school might withhold taxes (often more taxes than you actually owe). So, if you don't file a return, you might end up losing more money.

Beyond that, if you are choosing to break the law (depending on what country you are talking about though, since not all countries tax their students), then I don't really have any advice for you here. Probably should talk to a lawyer.

[MastersHoping]

In the USA, your stipend is attached to your social security number (at least if you're a U.S. citizen and at least at my university), so if you don't file taxes it will be very unusual if the government is not aware that you are receiving a stipend. My university doesn't withhold taxes, but tax evasion could get you in serious trouble. Believe me, I wouldn't pay taxes if I didn't have to either. Although the likelihood of the IRS coming after you for such small amounts (I'm estimating less than $1000 for most grad students) is not very high, they can retroactively charge you plus interest if your'e ever audited in the future. 

[toear5]

Related question -- what is the best way to calculate taxes for budgeting purposes? I've been using Smart Asset's income tax calculator for various cities where I am considering programs, but I seem to be coming up with conflicting information between what I've heard from some current grad students and the income tax calculator. I figure that it probably makes more sense to rely on what current grad students are pulling in net per month from their stipends, but in the cases where schools might not automatically pull taxes from each check, I need a reliable way to budget as it will be a significant part of my decision. 

[TakeruK]

I used the sample calculations from the Wikipedia article. Here's the link to the 2018 marginal tax rate table: https://en.wikipedia.org/wiki/Income_tax_in_the_United_States#Marginal_tax_rates_for_2018

Don't forget to subtract the 12,000 standard deduction if you qualify for it (most Americans should). That's a new change for 2018. Also, students do not pay FICA taxes so you can ignore that part of the calculation.

It's not always the best idea to use what grad students have as net pay since their deductions and withholdings can be different than yours. 

In general, the tax rate is going to be between 10% and 12% for most single American grad students, maybe less if you have a lower stipend.

[toear5]

Didn't know about the FICA exemption for students which is making me feel a lot better about financials lol. Thanks for the info! 

[AP]

Taxes are very different for everyone, and it depends A LOT on how universities categorize you. In my school, we are 'employees' so we pay taxes on stipend. The only people I know that don't do their taxes are those claimed by their parents/spouses. Not my case. 

[CandideCoating]

I'm so confused about this stipend business. If we have to pay taxes on it, because we are 'employees' of the school, then why is it considered 'aid' for calculating your "estimated financial aid"? It isn't aid - it is work. 

[TakeruK]

38 minutes ago, CandideCoating said:

I'm so confused about this stipend business. If we have to pay taxes on it, because we are 'employees' of the school, then why is it considered 'aid' for calculating your "estimated financial aid"? It isn't aid - it is work. 

I am not sure how the US student loans/financial aid works, but it makes sense to me that work income is included in determining how much needs-based student loans/aid you can receive. I guess it's weird to call it "aid" when it's your employment income, but if you are granting money on a needs-based basis, it makes sense to award more to people who do not also have employment income from their school. 

Also, some US schools consider your RA or TA ship "aid" because they believe they are "overpaying" you since the arrangement, in their minds, is that you get a big pile of money and the small amount of work you do is not really as employment. I think this is how schools take advantage of the dual student/employee status of grad students

P.S. One last note: The IRS taxes income whether or not it's employment-based. So at my PhD school, we receive fellowships and a letter saying we provided no work in exchange for the money (i.e. we're not employees). American students get the 1099-MISC tax form, not the W-2. However, we still pay taxes on it! (In Canada, non-employment based income isn't taxable if it's a scholarship/fellowship/aid to support studies).

[FishNerd]

2 hours ago, TakeruK said:

P.S. One last note: The IRS taxes income whether or not it's employment-based. So at my PhD school, we receive fellowships and a letter saying we provided no work in exchange for the money (i.e. we're not employees). American students get the 1099-MISC tax form, not the W-2. However, we still pay taxes on it!

So at one of the schools I've been accepted to I have received a TAship and a fellowship. The TAship is taxed at time of disbursement since I would be technically working for that money, but in my award letter for the fellowship it states that taxes are not deducted from that part of my stipend at time of disbursement. The pay from these two sources of money will be disbursed to me separately (one at the beginning of the month, the other at the end). I realize that I will still need to pay taxes on my fellowship awrd though as you state (and as my award letter states), so I guess my question is how that is done since taxes are not taken out of that money when it is disbursed and is that money taxed at a different rate than my TAship will be taxed?

[TakeruK]

1 hour ago, FishNerd said:

So at one of the schools I've been accepted to I have received a TAship and a fellowship. The TAship is taxed at time of disbursement since I would be technically working for that money, but in my award letter for the fellowship it states that taxes are not deducted from that part of my stipend at time of disbursement. The pay from these two sources of money will be disbursed to me separately (one at the beginning of the month, the other at the end). I realize that I will still need to pay taxes on my fellowship awrd though as you state (and as my award letter states), so I guess my question is how that is done since taxes are not taken out of that money when it is disbursed and is that money taxed at a different rate than my TAship will be taxed?

This difference caused a huge problem at my PhD school a few years ago when the school decided to switch from withholding taxes on fellowships to not withholding them in the middle of a tax year. This caused some people to have to pay penalties to the IRS because they suddenly needed to pay quarterly taxes and the school made this change 2 quarters into the year. It worked out in the end---the school agreed to pay everyone's fines but it was a stressful time for all resident taxpayers (non-resident taxpayers still have withholdings from fellowships).

Now to answer your actual question. No, your tax rate is the same for both sources of income. When you file your taxes at the end of each tax year, you will likely have a W-2 for your TA work that shows how much you earned and how much tax was withheld. You will also get another form for your fellowship that will show the same thing (but no taxes withheld). At my school, American students got the 1099-MISC for their fellowship income, but it can vary I've heard. Non-resident taxpayers like me got a 1042-S. 

So. when you file your taxes, you add up all the income from all sources and then you (or the tax software) determines how much tax you are owed based on your income. It is compared to how much tax you already paid through withholdings and you probably have to pay the difference since you did not have taxes withheld from your fellowship. 

However, there is a complication. The IRS has some rule where if you have a tax owing of some amount then you must pay taxes during the year, either through withholdings or quarterly estimated tax payments. Of course, the IRS doesn't like it when you are late on tax payments throughout the year and will charge interest on accumulated taxes but they have no problem on holding onto your withholdings until you file your return! For more info see this page: https://www.irs.gov/faqs/estimated-tax. For my friends in the above story, they were 100% paid through fellowships so they definitely had to make estimated tax payments.

In your case, if the TA is the majority of your stipend, then you are probably okay. But it would be a very good idea to figure out how much total tax you will have to pay in one full tax year. Then you can ask your school's Human Resources department to increase your withholdings from your TA paychecks so that by the end of the year, you would have paid enough taxes so that you don't have to make estimated tax payments each quarter and/or you don't have to make a giant lump sum tax payment each April. 

[FishNerd]

Thank you @TakeruK! My fellowship amount will actually be the majority of my stipend rather than my TA funds, but perhaps I can still look into increasing withholdings from my TA paychecks. If I'm not able to do that will I likely have to do quarterly tax payments? I am always used to all money I have taken in being automatically taxed at time of disbursement so I had no clue what would happen with my fellowship money in this case and you've definitely helped cleared it up. My aunt typically does my taxes for me so maybe I can consult with her to see what she has to say about it all (I will definitely mention increasing withholdings on my TA paychecks as something that could maybe be done since this isn't something I had thought of or knew was a possibility).

[TakeruK]

8 minutes ago, FishNerd said:

Thank you @TakeruK! My fellowship amount will actually be the majority of my stipend rather than my TA funds, but perhaps I can still look into increasing withholdings from my TA paychecks. If I'm not able to do that will I likely have to do quarterly tax payments? I am always used to all money I have taken in being automatically taxed at time of disbursement so I had no clue what would happen with my fellowship money in this case and you've definitely helped cleared it up. My aunt typically does my taxes for me so maybe I can consult with her to see what she has to say about it all (I will definitely mention increasing withholdings on my TA paychecks as something that could maybe be done since this isn't something I had thought of or knew was a possibility).

I did forget to say something above: you (probably) don't have to worry about it for the 2018 tax year since if you are starting this fall, you will only have 4 months of income at most from non-withheld fellowship. So this is something you can figure out once you are settled (yay). 

The IRS page I linked is a little confusing (I'm really glad that I never had to properly parse it). But if I understood correctly, you only need to pay estimated taxes if your total tax owing and your tax paid thru withholdings is more than $1000 and that your total withholdings and possible refundable credits (to apply against the tax owed) will be less than 90% of the total tax owed this year (or less than 100% of the total tax owed in the previous year).

So, for the 2019 tax year, you basically would have to be in a case where the tax on the fellowship itself is more than $1000 and your withholdings from the TA work is less than 90% of your total tax owed. Since you say that most of your income is from the fellowship, the second condition is likely true. So, if the tax owed from your fellowship is more than $1000 then you might have to pay quarterly taxes unless you increase your withholdings. Your effective tax rate is probably around 10% if you are a resident taxpayer that can claim the $12,000 standard deduction. Therefore a quick check is that if your fellowship is valued at $10,000 or more, then you should look into this a little further. 

If it is more than $10,000, then you should see how much is being withheld from your TA paycheck. Multiply that by 12 and that's an estimate of how much tax you would have already paid by the end of the tax year. Then, estimate the total actual tax you'll pay by calculating 10% of your total stipend (maybe 11% if you want to be safe). If the difference between actual taxes to be owed and your withholdings is more than $1000 then you might want to think about increasing the withholding. If it's only a little bit over, the fine is not very big so it's up to you to decide if it's worth acting on. 

See here for info on changing your withholdings: https://www.irs.gov/individuals/employees/tax-withholding 

[FishNerd]

@TakeruK, wow thanks so much for this breakdown! I'm relieved I probably won't have to immediately have it figured out by the time I start. My fellowship will be valued at more than $10,000 so I will definitely be looking into all this more. I'm not sure how much will be withheld on the TA paycheck so that's a missing gap I will have to fill to figure this all out. As soon as I know where I'm going, or even during my decisions process, I will definitely be consulting my aunt so we can crunch the numbers together.

This is such a big change for me because my stipend was so piddly during my master's that what taxes were taken out were negligible, so I've really never worried about taxes before (other than normal yearly tax filings of course). But having super good offers is a great place to be in so I can't complain if I have to jump through a few hoops to get it all figured out.

Edited March 2, 2018 by FishNerd