Is my fellowship taxable?

[bdexicon]

I am a domestic student with a 30k/yr fellowship. It is paid out over 8 months and I recently got a check for $3,000, which means the school didn't take any of it out for taxes.

My question is, do I have to save 10% or whatever of this money to pay the government at the end of the year? It's very inconvenient for me, but I really don't want to get screwed.

I should mention that both my payroll department and department say they are not legally allowed to give me personal tax advice. It's very annoying that I can't get a straight answer.

Thanks!

Edited August 20, 2012 by bdexicon

[BrokenRecord]

What state are you in?

Even though the payroll office can't give you tax advice, they should be able to tell you if you are an employee or independent worker of the university or you can ask your department. Considering no taxes were withheld, you may be considered a independent worker and will receive a 1099 instead of a W-2 at the end of the year. If you are an independent worker, you will have to withhold your estimated taxes and pay them at the end of the year (be sure to confirm this with payroll and your department who is paying you). In general, graduate students who are full-time are exempted from Medicare and FICA, but DO have to pay federal and possibly state taxes on a living stipend (which I am assuming the 30k/yr is). Expenses directly related to your education (tuition, fees, REQUIRED textbooks and equipment as a condition of your enrollment) are tax exempt. Here is a paycheck calculator and info from the IRS that could help you out in this regard.

[bdexicon]

Thanks BrokenRecord.

I'm in California, and I'm definitely not getting a W-2. I looked up federal income tax rates and it looks like it's 15% for $8700-$35000 a year. I looked up CA state taxes and apparently it's 6% for my bracket. Does this really mean I should save 21% of my income for taxes? That seems VERY high, especially not including Medicare or FICA.

I appreciate your help!

[TakeruK]

Taxes are "progressive". If it's 15% for $8700 - $35000 a year, it means you only pay 15% on the portion that is between $8700-$35000 a year. Let's say your stipend is $20,000/year. Then, your federal tax would be:

(20,000 - 8700) * 0.15 = $1695

California tax also has some amount of tax exempt income too, so it's not 6% on your whole income.

So overall, I guess a quick estimate would be "21% of your income over $8700". But you may qualify for other tax credits as well that could reduce this number. In addition, in your first year, i.e. the 2012 tax year, you will only be earning this stipend for 4 months, so depending on other income earned in 2012, you might not have to pay taxes on the stipend until April 2014 (for the 2013 tax year)!

[SlickMcFavorite]

I talked to my payroll dept and they would give me zero information as well.

As far as I can tell, you are NOT a 1099 contractor while you're on fellowship nor are you a W-2 employee. The income might be exempt from certain taxes, though, as was indicated by TakeruK. Also, don't forget that you also get the "standard deduction" (unless you're married) of just under $6000 that you can subtract from your taxable income. So you'll only be taxed on (30-8.7-6) 15,300 of your income at the federal level. I'm not sure what the rates are in California, but probably similar.

[TakeruK]

The "standard deduction" was 5800 in 2011 but you also get the "personal exemption" of 3700, for a total of $9500 of non-taxable income. The information is here: http://en.wikipedia.org/wiki/Income_tax_in_the_United_States ; I had looked into this when considering stipends since fellowships are NOT taxable in Canada! (I also learned that the "standard deduction" is only available to American residents-for-taxation-purposes, so not for F-1 or J-1 holders).

So, if you are a single American, first you take $9500 off your income. Then you pay 10% of the first $8500 of the remaining income. Then you pay 15% on the portion between $8500 and $35350. If you make more than 35,000 then the portion above that is taxed at a higher rate, but most grad students don't make this much. Wikipedia has a nice example with all the numbers worked out.

Just remember that:

(1) You don't pay tax on all of your income, only the amount above whatever deductions you have (most Americans will have $9500 as stated above)

(2) Taxation is marginal -- there are tax brackets, but if your total income lies in the 8700-35000 bracket (15%), that doesn't mean you pay 15% on all of your income. You only pay 10% for the 10% bracket (0-8700) then 15% for the 15% bracket (8700-35000). This means that you will never have to pay more tax for making more money (i.e. it's not any better to make $8699/year than $8701/year in terms of amount of tax paid).

From talking to older students (international and domestic), the advice I got was to roughly put aside 10% of income for taxes. Luckily, as I said above, we will be filing for the 2012 tax year in 2013, where we have only earned our grad stipend income for 3-4 months, which means we won't have to pay much taxes but we can learn how the system works and play around with the numbers (i.e. if using computer software, just increase your stipend to whatever you would have earned for a full year in order to estimate our tax costs for the 2013 tax year).

[bdexicon]

Thank you so much -- this is exactly what I needed to hear. I will do the same for California state taxes.

[Usmivka]

I apologize if someone else mentioned this and I missed it, but an important point:

You have to pay quarterly estimated taxes on April 15, June 15, and Sept 15 for Federal taxes, and very likely for CA state taxes as well. If you wait until the end of the year to pay everything, you will be subject to an additional fine. It isn't much (no more than 10s of dollars) but it is a pain in the ass to calculate and if you are audited and haven't calculated it on your own it can turn into a much larger expense. And at least in MA, the state LOVES to audit grad students--go figure since we don't make enough to be worthwhile targets.

[kaguyahime]

Depending on how your stipend is paid out, you will most likely be receiving a 1098T from your school.

You can check out what the IRS has to say about this:

http://www.irs.gov/instructions/i1098et/ar02.html#d0e214