NSF GRFP & estimated taxes

[meankney]

Hi all, I was notified that I received an NSF fellowship in April of this year (after I filed my taxes) and did not start receiving my fellowship money until July. I know that I will have to pay taxes on my fellowship, but I am totally mixed up about estimated taxes. I've looked at a lot of the IRS publications online, but I'm still confused! I've heard from several sources that the IRS will let you get away with not paying estimated taxes for your first year (in this case, the 2011 tax year), but that starting April 15, 2012, I will have to start making estimated tax payments. Is this true? Can anyone who's further along in their NSF fellowship shed some light on this for me? Also, how much total did you end up paying in taxes on your fellowship (state and federal)? Are there estimated tax payments for your state, too?

Any advice would be much appreciated. I don't want to end up not saving enough/paying a bunch of penalties for being so clueless!

[Eigen]

A lot depends on your specific situation, because whether you have to pay estimated taxes or not depends on (a) how much you will owe at the end of the year, and (b how much you payed the previous year.

From what I recall (I don't have the publication in front of me), you have to owe more than $1k in taxes at the end of the year (you probably will if you've got no dependents and are single), and what your tax burden is relative to the previous year. It's the latter part that gives you a "grace year" for when your income suddenly spikes, I think.

Of course, as little as you'll probably make (and owe), you could also just pay penalties (the interest on your taxes) at the end of the year and do it all together.

Edited September 30, 2011 by Eigen

[juilletmercredi]

I got my fellowship in April of 2010. I started receiving the money in September 2010; the award amount for September to December 2010 was $10,000. On that plus a $3,000 TAship stipend I received (which was also untaxed), I paid federal taxes of about $1200 and state and city taxes of about $1440. I live, attend school in and file taxes in the State of New York. The total of about $2,700 was about 20.7% of the total $13,000.

I've calculated, and been advised, to withhold about 20% of the fellowship for my own taxes - ~5% for state + city taxes taxes and 15% for federal taxes. (I have no idea why my state taxes were so large last year, but I've done a little bit of investigating and this doesn't seem to be the norm.) Given my experience with the amount that they taxed me last year, I'd wager this is about correct.

Because I owed nearly $2,700 for the tax year 2010 I was told to make expected tax payments. Quite frankly, I haven't bothered. It's far easier for me to save the entire 20% (about $6,000) over the course of a full year and make the payment in full in April 2012. Yes, they will charge me penalties, but I'd rather pay the relatively small amount they will charge me than keep track of the paperwork and receipts on a quarterly basis. I can barely keep track of my own schedule! I'm good at saving and not touching the money so that's not a problem for me.

Just as an extra note - there is virtually NO advice out there on this anywhere, and few people were willing to help me. There's no one at the university who was able to help advise fellowship students of tax requirements. Everyone had a different answer to questions I asked. There were people who seemed to be of the notion that because I was a student, I didn't have to pay taxes (wrong). There were others who believed I should receive a tax refund (also wrong), even though they couldn't articulate why. In the course of my discussions with students I apparently brought several students to the realization that they had to file and pay taxes on their own fellowships - they had fallen prey to the wacky and misinformed belief that they did not have to pay taxes on their fellowship income. (It's not true, and don't let anyone tell you that.) H&R Block was worthless - they charged me nearly $300 for the privilege of doing what I could've done with their free tax software at home.

There's a limited amount of information from current and former GRFs online, but a great deal of it is expressing the same frustration and confusion that I experienced.

[Eigen]

Most fellowship granting institutions (NSF included) seem to be really hands off with explaining how to pay taxes. I think they just want to cover their asses by using vague "you must pay taxes according to IRS guidelines" statements.

The other problem is that unlike wage earnings, it's almost impossible for the IRS to *know* whether you owe taxes or not. No one sends in a W2 form or any other slip showing how much you've been payed, the IRS would have to dig for/request fellowship records in order to track it down. I think this leads to a lot of misunderstandings about how to pay taxes, since most people are trained to pay what gets shown on tax forms- W2, 1098, 1099.

[meankney]

It is super frustrating that there is little to no information available online beyond reading the IRS documents, which are incredibly confusing for me. In addition, my school states that they are unable to provide any tax information to students (a liability thing, maybe?). Thanks for the additional info, juilletmercredi. I've been setting aside $500 a month (20%) of my fellowship per month, as well, so it's comforting to know that someone else thinks that this amount will likely cover both state and federal taxes when the time comes.

[Eigen]

The IRS has good estimated tax calculators, as does Turbotax, if you want to give it a shot.

[newpsyche]

Hi, all! So...what ended up happening? If you don't mind my asking, how much was taken out at the end of the year? I don't know how much I should be setting aside!

[Eigen]

It depends on the individual, so not something anyone else can answer for you, hence the point of the thread and tax calculators.