living stipend - taxable?

[iowaguy]

Are stipends received from the university (i.e. RA, TA, etc) taxable? Trying to figure out my finances for next few years, how much to possibly withdraw from other sources, etc. Just curious what the tax status is for different types of financial support from the university...

Thanks,

IowaGuy

[Usmivka]

Depends on your state and how the University structure the stipend.

If you get a W-2, yes, always.

If the money is as a stipend (1099-MISC) in return for a service (ie you are expected to act as a TA or RA with job duties that the university derives benefit from, it is taxable at the federal level--many states with income tax will also tax this type of work, but not all.

The opposite case is a "non-compensatory" fellowship (1098-T)--you get money just for being you, to do what you want with and no strings attached. These are not specifically taxed at the federal level, however they are not codified as tax exempt. So if your university or fellowship provider has requested a "private ruling letter" confirming your tax free interpretation, yay for you. Without this you are not required by law to pay taxes on the income, but you can be audited which can lead to a lot of extra work on your part--you will be in the right, but may be required to pay $1000 for the privilege of having the IRS make a private letter ruling specifically for you (that is their use fee)--still cheaper than taxes, but a pain.

PS the above is not legal tax advice, which anyone besides the IRS is prohibited by law from providing, including your university.

PPS most folks you get on the phone at the IRS have no clue about this, and can give you advice that is incorrect for this very specific, uncommon case. If you are in the last category, look up the case law and relevent sections of the Internal Revenue Code yourself, and be prepared to go in person to your local IRS office to speak with someone no lower than upper management.

Edited May 16, 2012 by Usmivka

[Gneiss1]

Stipend money used for personal use (i.e. not tuition/school related expenses) is taxable. Some of this may vary by school and state as to how exactly they go about it as to whether you need to withhold the money yourself to pay the IRS or if your school will doit for you. For my RA I had to fill out a W-4 form (I'm in VA btw) and so they withhold the taxes for me and all is good at the end of the year assuming I withheld the correct amount. I have heard from others of needing to set aside tax money on their own (similar to a 10-99 employee) in which you have the option of paying the IRS quarterly which I would recommend as a previous 10-99 employee myself or paying annually. Your school should have information listed somewhere on their website in regards to how they classify their graduate students (i.e. are they considered actual employees or not) and the regulations they use.

Either way your income is taxable and you can estimate what you should be having withheld or witholding yourself here:

http://www.irs.gov/individuals/article/0,,id=96196,00.html

Tuition and school related expenses (books, supplies, etc but NOT rent/room & board) are tax deductable. More info on that here:

http://www.irs.gov/individuals/students/article/0,,id=96674,00.html

[Usmivka]

Stipend money used for personal use (i.e. not tuition/school related expenses) is taxable.

Since this is near and dear to my heart (I have a "non-compensatory fellowship") I'm tacking on the caveat that the reply above only applies to compensatory fellowships. If you have something like the the last case I outlined, money you get for non-tuition uses including housing and food is still not specifically taxed. The second link above is very specifically only for fellowships that relate to "pay for services performed," as clearly stated at the top of the webpage.

Here is a good example of a non-compensatory, tax free fellowship:

"IRS PLR 200607017 (dated Mar. 7, 2005: released date Feb. 17, 2006)

This Private Letter Ruling confirms that payments made to recipients of National Institutes of Health (NIH) National Research Service Awards (NRSA) training and research programs and "research training programs...modeled" on them will not be considered wage compensation reportable on any IRS forms (e.g. IRS Form W-2 or 1099) nor will such payments be subject to withholding for income or employment (FICA/FUTA) tax. The grants may be eligible for consideration as scholarships or fellowships under 117 of the code."

See also IRC 117c.

It is also worth noting that if you get a 1099-MISC you MUST pay quarterly estimated taxes or face a financial penalty. You could pay only once a year as mentioned above, but the IRS will ding you on the order of 10% in late fees.

Edited May 16, 2012 by Usmivka

[Eigen]

I don't think you're reading the second link carefully enough:

To quote,

Taxable Scholarships and Fellowships

If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.

If you are a candidate for a degree, you generally can exclude from income that part of the grant used for:

• Tuition and fees required for enrollment or attendance, or
  
• Fees, books, supplies, and equipment required for your courses.
  

You cannot exclude from income any part of the grant used for other purposes, such as room and board.

A scholarship generally is an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be in either a graduate or an undergraduate program.

A fellowship grant generally is an amount paid for the benefit of an individual to aid in the pursuit of study or research.

This is specifically referring to fellowships (ie, money you get just for being you, not in exchange for services.

The letter you're quoting simply states that the payments are viably counted as fellowships, under the above clause (117 of the tax code). That means that you don't have to pay FICA/FUTA, and tax is not withheld.

The amounts that are used for non-qualified expenses (as discussed at the end of page 2 of the letter you linked) room, board, etc. are still reported as income. To quote from the letter you linked:

Thus, scholarship receipts that exceed expenses for tuition, fees, books, supplies, and certain equipment are not excludable from a recipient's gross income under section 117.

Edited May 16, 2012 by Eigen

[Usmivka]

I'm sorry if I'm not making my case clearly. I just grabbed the first PLR I googled. As it turns out this one is from the school's perspective, not the students'. I cite the most appropriate Revenue Rulings below which are more to the point.

I disagree with your interpretation of the fellowship definition link, and think you are missing the difference between a compensatory and non-compensatory fellowship. Fellowships of the type I describe, and in the letter I linked, are not scholarships or compensatory fellowships--you made that jump on your own. The second link from above still only applies to pay for services rendered (which can include pursuit of a degree if the money comes from the school), hence the big header near the top of the page--it doesn't matter whether it comes form a fellowship or scholarship, the key point is that you get the money because you are doing something for your employer in return.

In reference to the end of the PLR, additional/separate scholarships that a student may receive are still taxed, per the standard hedging that the IRS puts in every one of these letters. Further, the IRS will not come out and say, "this is tax free" because congress has not regulated this type of funding one way or the other. All they can say based on current law is that this type of fellowship does not need to be reported. That is most certainly not saying that the fellowship has turned into a scholarship. The letters from the student's perspective are more to the point.

For further reading:

The full text of Part c of IRC117 further clarifies this point, and that noncompensatory fellowships are not required to be taxed--you can request copies from the library of congree or look in theFederal Register, I am not seeing it online right now (I'm sure it is somewhere though). This clause was inserted after the Bingler v Johnson case (394 US 741 (1969) 1969-2 CB 17), which is sort of the watershed moment in taxation of grad students.

Further, Revenue Rulings 75-280 (http://www.charitableplanning.com/document/673349), 73-88, 76-463 and about a half dozen others can be used as precedent (unlike a PLC) and very clearly state that non-compensatory fellowships that largely follow the outline in these rulings are tax free. The linked RR is pretty iron clad about research stipends not being includable in gross income when the money comes from the Feds.

--

The proof in the pudding for me is that I wasted 6 months on this with the IRS, and can confirm that my own fellowship is never required to be reported as gross income based on the letter I finally got from them. Again, the IRS is very specific that this can't be used as precedent for anyone else and that I can't give tax advice to anyone--what I can and am doing is referencing the appropriate section of the IRC and suggesting that anyone this is important to take a look at the references above and come to their own conclusions based on standing case law and legislation. This is a very specific set of ciurcumstnaces that only applies to certain outside fellowships like the NDSEG.

Now I'm generally a pro-tax person, but since I'm not required by law to pay taxes on these, I'll pocket the extra $3k a year. I assume most of the people reading this forum will feel the same. The reason this class of "service" fellowship exists is because we get the money from the government in the expectation that we will provide tangible benefits to American science and the public that 'pay-off' the cost.

Edited May 16, 2012 by Usmivka

[Eigen]

As an aside, in the letter, the "taxpayer" entity is the university, not the individual.

And I'm still pretty sure you're misreading the second link. "Pay for services" is one of 4 subcategories covered in the document, not the only one.

And scholarships and fellowships are different but similar entities, hence why the IRS puts out the "Scholarships and Fellowships" publication.

That said, I think the IRC117 is quite clear in how they are treated. Anything used for related expenses is "qualified", assuming it's for a fellowship and not for services rendered. (see IRC117)

I would be interested to know what fellowship you keep obliquely referring to, because from my experience, none of the well known national fellowships are tax exempt.

[Eigen]

I'll also refer you to a very nice guide written by CUA's legal counsel, that outlines most of the decisions in reference to fellowships:

http://counsel.cua.e...edlaw/SandF.cfm

You'll notice consistently that the PLRs (including both of the ones you've cited) are simply in relation to whether or not the payments can be considered fellowships rather than an exchange for service. You'll also notice that, as I mentioned, the "taxpayer" that the PLR is directed to is the institution- the institution does not have to report the payments to the fellows. That's not synonymous with the fellows not having to report the income.

Once the PLR has allowed that the payments can be considered a fellowship, then the payments are treated under IRC117, which has 3 conditions that must be met for the payments to not be reported. The first condition is that the payment is not used for living expenses, but rather tuition and "qualified" fees. Which brings us back around to where we started.

If, in fact, the income was *not* a fellowship, not even the tuition and qualifying fees would be able to be counted as reductions.

I'll also note that your first example (NIH-NRSA) doesn't even apply to graduate students, but rather to post-doctoral fellows.

So again, PLRs are for the institution to determine whether a payment is, in fact, a fellowship, or not. If a fellowship, you report income not used for tuition and required fees.Also, if it's qualifying, there's the FICA exemption.

Edited May 16, 2012 by Eigen

[Usmivka]

I'm afraid you were busy writing while I was still in the middle of editing. My final version is above. Individuals can recieve private letter rulings. Again, my bad for sending one based on an institution, which has different wording and a different focus. Please see the RR linked above. I think my case is pretty tight at this point, and as I said, I've already confirmed that my NDSEG is federal tax exempt. NDSEG sends a tax notice to everyone saying they are responsible for determining whether they are required to report the fellowship as income, but can't specifically say that most are not required to include this funding as income, because the IRS does not allow them to provide legal advice. I did the groundwork witht he IRS. I then confirmed with the program manager at NDSEG that many of the fellowship recipients have come to the same conclusion and do not include the fellowship in income. I suspect NSF does not qualify because it has progress and reporting requirements, but something like Hertz does.

Edited May 16, 2012 by Usmivka

[SeriousSillyPutty]

[Confession: I haven't read all of the above, as I don't think it relates to my comment. Sorry if this is redundant, though.]

Also, be warned: At my university I've been warned that, while grad stipends are taxable, taxes ARE NOT taken out of our paychecks, like they are at other jobs. So, we're supposed to file something with the IRS giving them a heads up on the situation, so that they can take our money quarterly, so that we don't owe them a big lump sum come April 15.

[tauren]

I wanted to say at one university I was at taxes were automatically taken out. For my fellowship,however, taxes are not taken out but they are taxable (this was stressed by the director that not reporting the stipend as income is fraud) and like SeriousSillyPutty, we're supposed to pay estimated taxes to keep from owing a lot come April 15. I'm guessing as mentioned above if all funds are solely for academics then it is not taxable, however living stipends are.

[Eigen]

I'm afraid you were busy writing while I was still in the middle of editing. My final version is above. Individuals can recieve private letter rulings. Again, my bad for sending one based on an institution, which has different wording and a different focus. Please see the RR linked above. I think my case is pretty tight at this point, and as I said, I've already confirmed that my NDSEG is federal tax exempt. NDSEG sends a tax notice to everyone saying they are responsible for determining whether they are required to report the fellowship as income, but can't specifically say that most are not required to include this funding as income, because the IRS does not allow them to provide legal advice. I did the groundwork witht he IRS. I then confirmed with the program manager at NDSEG that many of the fellowship recipients have come to the same conclusion and do not include the fellowship in income. I suspect NSF does not qualify because it has progress and reporting requirements, but something like Hertz does.

Yeah, we crossed.

The new documents make more sense, and it also makes sense that it's the NDSEG. I wonder if there are any other fellowships that fall into the same basket? All of the other "major" external fellowships I know don't seem to.

[BrokenRecord]

Thanks everyone for the heads up!! I was wondering the same thing about my own stipend. I do have another question: Can you take out loans if you are receiving a fellowship (tuition, health insurance and stipend) from your department? I wouldn't think a stipend would be taken into account for financial aid because it is essentially a part-time job.

[Usmivka]

Yes, although why this allowed and outside jobs aren't is beyond me. Well maybe not incomprehensible, but frustrating. I miss my mountains and am jealous of your location.

[confusedgradadmit]

The best advice I can give you is to go see an accountant. I normally just get my taxes done by my parents' accountant, since it just takes her a few minutes to do it and she's a full-time employee of my parents' business anyway. But even if you just go see one, it'd be like $50 or so and that way you know you're getting all the money back you can. Besides, who has time for extra paperwork? That's why we have a division of labour in our society. It's definitely worth it. I got like $3000 back on a $30,000 income (though I'm in Canada), which was pretty much everything I paid into it. Who knows what I would have missed by doing it myself.

[juilletmercredi]

Make sure you see an accountant who knows about fellowships and scholarships and can do them properly, and be aware that in many parts of the country seeing an accountant will cost you more than $50.

I have an NSF GRF and the stipend is taxable. See this page:

http://www.irs.gov/t...pics/tc421.html

The page says that anything you use for room and board and personal expenses, regardless of whether the scholarship is considered "compensatory" or not, is taxable. Now if you want to individually wrangle with the IRS to figure out whether or not that applies to your fellowship, you can go ahead, but I'd wager in the vast majority of cases you'd lose. To me it's safer to pay the taxes. I know quite a few people on a variety of external fellowships (including the NRSA) and we all pay taxes on our stipends.

I will also say different stipends are different. At my university, the first two years my NIH stipend required me to be hired as an officer of the university, and so I was paid monthly, had taxes automatically withheld, and received a W-2 at the end of the year. That was awesome, because I didn't have to think about it, and I never owed anything in April. Now that I am on external, I have to withhold them myself and am supposed to pay quarterly. The GSAS funded fellowships here are also paid monthly and are taxed before you get them.

Edited July 14, 2012 by juilletmercredi