$3500 in taxes?!?!

[MastersHoping]

Hello everyone,

Usually I know people don't like to disclose exact numbers for money, but oh well whatever. 

Last year I took a leave of absence fall semester and hence only received stipend up till August. In total, I got 19,000$ stipend money, and I earned approximately $7,000 through self-employment, so a total of $26,000 or so. I just filled out TurboTax and it says I owe a total (federal and state) of approximately $3500!!!!! This is about $1500 more than I paid in taxes last year, even though I made 11,000$ in self-employment and I didn't take any leaves of absence. 

Furthermore, my sibling received a similar PhD stipend as me but only paid $600 in taxes. In fact, she got money back this year. I know I get a little extra from self-employment, but this seems absurd!!! I must be doing something wrong on Turbotax, and I really can't afford to pay $3500 in taxes right now.Thoughts? 

[Eigen]

Your amount sounds roughly right, or a bit low. 

Thats roughly what I was paying on a similar stipend a few years ago, especially combined Federal and State. 

Your sister and last years amount is what seems off to me.

[TakeruK]

Are you a citizen/resident taxpayer/otherwise able to claim the standard deduction? If so, then here's a quick estimate of how much you should be paying in taxes:

Income: 26,000
Minus Personal Exemption of $4050
Minus Standard Deduction of $6350
What you pay taxes on: 15,600

The first tax bracket is 10% on the first $9350. So you owe $935 in that bracket.

$15,600 minus $9350 is $6250, so that is taxed at the second tax bracket, which is 15%. 15% of $6250 is $937.50.

Therefore, you should owe a total of $937.50 plus $935 = about $1870 on your federal taxes.

However, the above does not include FICA taxes (social security and medicaid). For self-employment, this is taxed at 15.30%, I believe. So 15.3% of $7000 is another $1071 owed. NOTE: Students are exempt from FICA taxes I believe, but this is only on their grad school stipend, not their own side employment.

So federal + FICA is about $2950. I am not sure what your state tax rates are. But $550 for state taxes on $26000 of income sounds reasonable (would be about 2%). 

Did your school withhold any taxes at all? If they did, make sure you included these amounts to ensure that you don't have to pay taxes you already paid.

[MastersHoping]

I'm in Maryland. Damn that's a lot of taxes. What happens if I can't afford to pay my own taxes now? And I don't believe my school withheld tax throughout the year. 

[Emily Roberts]

Co-signing @TakeruK's example above.

Break the "I owe $3,500 in taxes" down into its components to see if each one is reasonable (your Form 1040 separates federal income from self-employment tax into different lines before totaling them). How much is for federal income tax, federal self-employment tax, and state income tax? How does it compare to the calculation above? Was any tax withheld from your stipend income and was that accounted for on the return? You wouldn't have had any tax automatically withheld from your self-employment income, which is why you're facing such a large bill now since you owe both income tax and self-employment tax (15.3%) on that component.

You also have to be very careful not to get caught up in how much extra you owe at tax time/the size of your refund or compare that number to anyone else's (or even yours in the past). It depends both on your total tax liability AND how much was withheld/paid in estimated tax throughout the year. Compare the total tax you owe this year with the total tax you paid last year, and unless something went really awry with one or both returns you should have paid more last year due to your higher overall income and higher self-employment income. Did something change with your stipend - go from assistantship to fellowship funding, for example? If you used to have automatic tax withholding on your stipend and don't any longer, that could help explain why you are supposed to pay more when filing this year's tax return than last year's.

Since it seems like you're long-term self-employed for a big chunk of your income, you should be paying quarterly estimated tax on that part of your income. Part of what you owe this year may be penalties for not doing so, and that wouldn't necessarily have applied for last year if it was your first year in business.

You may find this article (mine) helpful going forward: http://pfforphds.com/how-to-pay-tax-on-your-phd-side-hustle/

[TakeruK]

1 hour ago, MastersHoping said:

I'm in Maryland. Damn that's a lot of taxes. What happens if I can't afford to pay my own taxes now? And I don't believe my school withheld tax throughout the year. 

I know right?  Canada doesn't tax the majority of graduate student income so I've paid way more income tax to the USA in my 5 years there than to Canada the rest of my life (so far, that will change eventually though). For the $20k to $40k tax bracket, I really do think Americans pay more taxes than Canadians, despite what people often say about the tax rates in our two countries.

I am assuming that you did put aside some money to pay for taxes based on what your expectations were from the last year. You should file your taxes and pay as much as you can. See this page from the IRS on your options: https://www.irs.gov/newsroom/what-if-i-cant-pay-my-taxes. For example, you might be able to ask for an extension or they might choose to not collect on your account for some time. If you have a family member you can borrow from, that would reduce interest/fees from the IRS. Otherwise, talk to the IRS to figure out what you will have to pay in terms of interests etc. and consider whether a loan makes sense.

In the future, I would follow @Emily Roberts's advice and especially look at that linked blog post. I think you would owe enough that you should have paid quarterly taxes and you will likely also get hit with a fee for not doing so. In addition to saving money on that fee, paying quarterly taxes prevents you from having a giant bill at the end of each year.