Are fellowships taxable income? Changing state residency?

[JSocial86]

I have been offered an extremely generous doctoral fellowship, which I am more than likely going to accept along with the offer of admission, but don't know the tax laws regarding graduate fellowships. Does anyone know whether they are considered taxable income? I want to keep as much of the funds as I can, I've been a poor undergraduate for sooooo long!

Also, I am curious if other people that are moving across the country are planning to change their state residencies or not? I have a full tuition remission so residency for tuition reduction is not a factor. Just curious if there are any advantages to doing so or not, especially since I will be there for 5 years.

Thanks in advance for your replies!

[hadunc]

I have been offered an extremely generous doctoral fellowship, which I am more than likely going to accept along with the offer of admission, but don't know the tax laws regarding graduate fellowships. Does anyone know whether they are considered taxable income? I want to keep as much of the funds as I can, I've been a poor undergraduate for sooooo long!

Also, I am curious if other people that are moving across the country are planning to change their state residencies or not? I have a full tuition remission so residency for tuition reduction is not a factor. Just curious if there are any advantages to doing so or not, especially since I will be there for 5 years.

Thanks in advance for your replies!

Fellowship money is absolutely taxable income. In fact, I think it's usually taxed as though you were self-employed, but I can't say for sure so you'd probably want to ask an accountant about that. But yes, you will definitely pay taxes on it.

As to changing state residency, I'm not sure how you could NOT change your residency if you plan to stay for 5 years. Do you own a car? If you do, you typically have to register it in the state within 30 days, unless you plan to use your parents address as your permanent, but that would probably make things more complicated than just changing your residency (which isn't very difficult at all). Also, if you're going to a state school that's giving you a tuition waiver you will have to change your residency or you'll probably have to pay them the difference between in state and out of state tuition. If you're attending a private school, it shouldn't matter. Hope that helps!

[zxcv]

It looks like the consensus of the internet is that fellowship income is NOT taxed as if you are self-employed. But you do still have to pay federal income tax at the normal rate.

[Slorg]

zxcv, could you clarify what you mean by self employed? Nevermind, I misread your sentence.

As I understand from my undergraduate scholarships, scholarships are indeed taxable. However, you can deduct what you spend on tuition (but not housing).

Edited March 11, 2010 by Slorg

[liszt85]

zxcv, could you clarify what you mean by self employed? Nevermind, I misread your sentence.

As I understand from my undergraduate scholarships, scholarships are indeed taxable. However, you can deduct what you spend on tuition (but not housing).

I believe you can also deduct money spent on books and stuff required by the courses.

[rising_star]

I believe you can also deduct money spent on books and stuff required by the courses.

I only wish this were true. The tax folks at three different universities have assured me that it's not. Sorry!

To address the question on state residency, it depends on the university. Some will require you to establish in-state residency because it saves them money on the tuition remission. In other states, it's impossible for you to become an in-state resident for tuition purposes even if you change your voter and vehicle registrations and get a new driver's license. So, I'd ask the program what most students do.

[zxcv]

I only wish this were true. The tax folks at three different universities have assured me that it's not. Sorry!

To quote the IRS:

Qualified scholarship and fellowship grants are treated as tax–free amounts if all the following conditions are met:

1. You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regular enrolled body of students in attendance at the place where it carries on its educational activities; and

2. Amounts you receive as a scholarship or fellowship grant are used for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses of instruction.

http://www.irs.gov/taxtopics/tc421.html

Edited March 11, 2010 by zxcv

[Falmouth]

I agree with the last statement, fees and anything required for a course or the program. I think this is a recent change. Also not mentioned, you don't have to pay social security or medicare on fellowship money. And it is considered earned income so you can contribute to an IRA.

[Babbling Dweeb]

As zxcv posted, this is the method I used this year when I did my taxes and I swear it has to be new because I check every year and this (2009 taxes) was the first time I ever deducted books. Thankfully I had saved my receipts

[rising_star]

Hmmm... that's cool. It must be new because I remember repeatedly being told you couldn't do that. Now, I'll have to track down all of those Amazon.com receipts and figure out which were for courses and which were for research. That could be more trouble than it's worth.

P.S. I love how that wording basically makes it so that if you took online courses, the provision doesn't apply to you. Nice touch, IRS.

[Nofia1]

All of the IRS information on what is taxable re: fellowships, tuition remission, etc. is available in this IRS publication:

http://www.irs.gov/pub/irs-pdf/p970.pdf

[Jae B.]

Good to know the tax rules don't change from undergrad to grad financial aid!

I would change my state residency if I were moving for five years. Unless you get some kind of housing benefit for being out-of-state, but that's more likely for international students. I'm sure there are certain benefits for being a state-resident, instead. Maybe after a few years it will make you eligible for more fellowships or aid, if you're interested in it. The kind that require state residency for x number of years.

At least it makes voting easier. 'Cause, you know, voting is important! But, seriously, I always wonder if mailed ballots really get counted. (Even more than I wonder if in-person ballots do.)

Edited March 15, 2010 by Jae B.