Taxing Fellowships in the US

[1Q84]

The issue of taxing fellowships/scholarships is new to me. The IRS website says that fellowships and scholarships usually aren't taxed based on two conditions:

 

 

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

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 at the educational institution.

 

I'm receiving a Teaching Fellowship from my school in return for teaching a freshman course. This is listed as a fellowship, not an assistantship so the amount should be tax-free, no?

 

Do schools generally quote you the untaxed amount or do they factor in the taxes and quote you the net income?

 

Anyone have experience with this?

[TakeruK]

Unfortunately, yes, the US tax on fellowship system is completely different from Canada's, where we do not pay taxes!

 

The amounts quoted are pretty much always the untaxed amount since the amount of taxes you pay can vary a lot from person to person!

 

I think some people on the forums here might be able to avoid paying taxes on certain fellowships but things like teaching fellowships are almost always taxable. However, as the text you pasted said, the amount used towards tuition or other supplies that are mandatory for your course are not taxable. That is, you can estimate your total tax liability by:

 

1. Sum up all sources of US-based income, including tuition waivers, if you have any. 

2. Subtract out the cost of your tuition and fees.

3. Subtract out the cost of any other required costs you incurred and you have kept receipts for. For example, textbooks, lab equipment, etc.

4. For non-Americans, we can only subtract another $3800 for a "personal exemption" (we do not qualify for the "standard deduction" as we are non-residents for tax purposes).

 

Now you should have a remaining amount which is your taxable income. For the 2013 tax year, the tax rate is 10% for the first $8925, then 15% for the next chunk (up to $36,250, which I doubt most grad stipends will go over). So if you end up with a taxable income of $20,000 after step 4, then you pay 10% tax on the first $8925 = $892.50, plus 15% on the remaining, which is (20,000-8925)*0.15 = $1661.25, for a total of just under $2700 in taxes!

 

As non-residents we qualify for virtually no other tax credits or tax breaks, except for having dependents. 

 

On top of all this, you also have to pay State Taxes, but this is a smaller amount. The California state tax calculation is really annoying though.

 

Fortunately, you pay taxes per tax year, so your income in the 2013 tax year should only cover a few months (Sept to Dec?), which means you probably don't have to worry about taxes until April 2015 (for the 2014 tax year). In my experience, because I am a non-resident, my fellowship income has taxes already withheld, but this may vary depending on the exact classification of your income.

[Eigen]

The two IRS factors are the determining ones. Pretty much the second one. It's not taxes if its used for tuition and fees.

But then, since tuition is usually waived, stipends are generally not used for tuition.

Therefore, the second condition isn't met and its taxable.

Also, do you have a teaching fellowship or a teaching assistantship?

An assistantship is a wage, since its in return for services, and is completely taxable.

[1Q84]

Unfortunately, yes, the US tax on fellowship system is completely different from Canada's, where we do not pay taxes!

 

The amounts quoted are pretty much always the untaxed amount since the amount of taxes you pay can vary a lot from person to person!

 

I think some people on the forums here might be able to avoid paying taxes on certain fellowships but things like teaching fellowships are almost always taxable. However, as the text you pasted said, the amount used towards tuition or other supplies that are mandatory for your course are not taxable. That is, you can estimate your total tax liability by:

 

1. Sum up all sources of US-based income, including tuition waivers, if you have any. 

2. Subtract out the cost of your tuition and fees.

3. Subtract out the cost of any other required costs you incurred and you have kept receipts for. For example, textbooks, lab equipment, etc.

4. For non-Americans, we can only subtract another $3800 for a "personal exemption" (we do not qualify for the "standard deduction" as we are non-residents for tax purposes).

 

Now you should have a remaining amount which is your taxable income. For the 2013 tax year, the tax rate is 10% for the first $8925, then 15% for the next chunk (up to $36,250, which I doubt most grad stipends will go over). So if you end up with a taxable income of $20,000 after step 4, then you pay 10% tax on the first $8925 = $892.50, plus 15% on the remaining, which is (20,000-8925)*0.15 = $1661.25, for a total of just under $2700 in taxes!

 

As non-residents we qualify for virtually no other tax credits or tax breaks, except for having dependents. 

 

On top of all this, you also have to pay State Taxes, but this is a smaller amount. The California state tax calculation is really annoying though.

 

Fortunately, you pay taxes per tax year, so your income in the 2013 tax year should only cover a few months (Sept to Dec?), which means you probably don't have to worry about taxes until April 2015 (for the 2014 tax year). In my experience, because I am a non-resident, my fellowship income has taxes already withheld, but this may vary depending on the exact classification of your income.

 

This is helpful yet depressing news. Thanks! I may have a lot of tax questions for you later, as a fellow Canuck in California.

 

The two IRS factors are the determining ones. Pretty much the second one. It's not taxes if its used for tuition and fees.

But then, since tuition is usually waived, stipends are generally not used for tuition.

Therefore, the second condition isn't met and its taxable.

Also, do you have a teaching fellowship or a teaching assistantship?

An assistantship is a wage, since its in return for services, and is completely taxable.

 

I didn't get a tuition waiver so $18k of that fellowship is going towards tuition! At least they can't tax that...

 

See it's hard to say. The official title is a Teaching Fellowship but basically I'm teaching a freshman course for pay, so I guess that's an assistantship?

[Eigen]

Titles can be important.

You'll have to find out from the school. I'm not as familiar with teaching fellowships, but if its a job, you'll get a W2 from the school, and it's all taxable.

Otherwise, subtract the tuition and fees from your stipend, and call it a day.

[TakeruK]

I had meant to include this link with my first post, which was where I got a lot of my info when I first found out about the whole taxes on fellowships deal: http://en.wikipedia.org/wiki/Income_tax_in_the_United_States

 

While we are studying in the US, we are still "residents of Canada for tax purposes" (unless you did drastic things to get rid of your Canadian residency status). This means that you are allowed to claim the tuition and fees you pay to your US school as Canadian Education Tax Credits!! You probably know that  you can save / carry over education tax credits from year to year, so at least when you return to Canada, you will have a pile of tax credits and you might not have to pay (or pay only a reduced amount) of income tax for awhile. (I only found out about the tuition thing just last week, so I have to file a correction to my already submitted return!)

 

Here's something you should read about filing Canadian taxes as a Canadian resident who is living in the US: http://www.cra-arc.gc.ca/E/pub/tg/t4131/ (I find it easier to view in HTML). See especially the first few sections on what it means to have residential ties in Canada. The "factual resident" (i.e. resident for tax purposes but not actually living in Canada at the moment) description below explicitly describes students as a type of factual resident. Just to be safe, you should try to keep as many ties in Canada as possible -- don't cancel/close your bank accounts, change your permanent address to be a Canadian one (maybe a parent or family member?) etc.

 

Here is another publication from the CRA about being a student in another country: http://www.cra-arc.gc.ca/E/pub/tg/rc192/README.html Of particular interest is scrolling down to the section about the Tuition and Textbook amounts (direct link: http://www.cra-arc.gc.ca/E/pub/tg/rc192/rc192-e.html#P192_0010) where it tells you which version of the Form TL11 you need to complete next year (TL11 is the equivalent to the T2202A but for foreign universities).

 

Also, by the way, if you are used to filing taxes online, unfortunately, if you are living outside of Canada, we will have to mail in a paper tax return! And we are ineligible to file our US taxes online because we are not residents of the US. So it's like the worst of both worlds? Fortunately, we do not have to pay "double taxes" though -- we file income from US sources with their IRS and any income from Canadian sources with the CRA. 

Edited April 28, 2013 by TakeruK

[Carthage32]

Hi TakeruK, you seem to know this tax business pretty well, so could I ask a few questions? 

 

1. I am on a fellowship, for which taxes were withheld by the university. They issued me a Form 1042-S, which I used to file my US tax return. The withheld amount was around $1,600 and I ended up getting $870 refunded. Is that what you would expect, or would you expect to get all of the withheld amount refunded? 

 

2. When I file my Canadian tax return (yes, I know I'm late!), would I report just the fellowship amount, or the tuition waiver too?

 

3. In my Canadian taxes, am I allowed to claim Canadian Education Tax Credits (considering that I'm not paying for the tuition myself, but have a waiver)?

 

Thanks so much!!

[TakeruK]

Hi TakeruK, you seem to know this tax business pretty well, so could I ask a few questions? 

 

1. I am on a fellowship, for which taxes were withheld by the university. They issued me a Form 1042-S, which I used to file my US tax return. The withheld amount was around $1,600 and I ended up getting $870 refunded. Is that what you would expect, or would you expect to get all of the withheld amount refunded? 

 

2. When I file my Canadian tax return (yes, I know I'm late!), would I report just the fellowship amount, or the tuition waiver too?

 

3. In my Canadian taxes, am I allowed to claim Canadian Education Tax Credits (considering that I'm not paying for the tuition myself, but have a waiver)?

 

Thanks so much!!

 

Just to be clear -- this was my first year filing both US and Canadian taxes and I'm obviously not a tax expert, so I can only tell you what I think is true based on my experience this year and from figuring out stuff from talking to other international/Canadian students/phoning the CRA.

 

1. I think this sounds right -- if you are a "non-resident alien*" (NRA), they pretty much withhold as much taxes as possible when they pay you. So if we get a 1042-S, it's likely that we'll get a refund rather than pay extra taxes. This is different for Americans who might get a W-2 for their fellowship. Also, as NRAs, we don't get to deduct a lot of stuff from our taxable income, so I would expect to still have to pay a bunch of taxes, that is, I wouldn't expect to get all of my taxes withheld given back. In the 2012 tax year, I did get everything back, but this was because I just started in October 2012 so my US income was really low.

 

*Non-resident alien: Unless you have some American ties (spouse? family? green card?), for the first 5 years of your F-1 or J-1 status, you are a NRA. After this, if you spent an average of 180 days per year in the last 3 years (or something like this) physically residing in the US, then you can be a resident alien for tax purposes and able to claim a lot more deductions.

 

2. The way I read the CRA publications (in my previous post), we are a resident of Canada for tax purposes (even if you spend all of your time in the US, as a student, you can claim intention to return to Canada). This means that I only filed my Canadian-based income with the CRA and I only filed my US income with the IRS. So, this means I'm not "double-taxed" on anything. I think this is the correct thing to do, and the CRA accepted my filed return. 

 

Note: Exception is for state taxes. In California, you are taxed by the state on foreign income sources if it is for work performed in the state of California. So, my Canadian fellowship that is paying part of my stipend here would be taxed at the state level in California but not at the federal IRS level. This likely varies from state to state though!

 

3. Yes, I think this is true. We would file a form TL-11. I didn't know about this when I filed my Canadian taxes, but a Canadian friend told me about it and he has done it successfully for the last 3 years. Also, when I brought in the TL-11 for my school's financial office to fill out, they knew exactly what to do so this is something that many Canadians commonly do. I haven't filed my own TL-11 yet, since I forgot to do it in April, I had to wait until they process my original return before I can file a correction. This has now happened but I have been too busy to figure out exactly how to file a correction. We have something like 10 years to file a correction though, so I'll probably do it sometime this summer. 

 

Finally, the CRA has a hotline you can call for random tax questions. There was a short wait on hold in early April but it wasn't too bad and it should be less busy now. Also, if you haven't done so already, I would really recommend setting up an online account "My Account" on the CRA website. You can track the status of your return, see how much room you have left in your TFSA, educational tax credits etc. and an electronic copy of all your tax forms (T4s etc.) so you don't have to wait for a Canadian employer to send you their version, you'll get it as soon as they submit it to the CRA. You can also do things like change your residential or mailing address easily, and it seems like you can file corrections too!

[Usmivka]

The IRS updated its forms such that only two named fellowships (http://www.irs.gov/taxtopics/tc421.html) are completely tax free. Both have a post-graduation service requirement. While there are a few other fellowships out there that fall into the grey area as neither explicitly tax free nor "fee for service," you are now required to report as gross income anything you use towards room and board and incidentals regardless. I'd carefully read the bulletin in the link and decide what that means for your situation. Also confirm that your fellowship source will back you up if you claim tax exempt status for any portion of your fellowship--all but one or two of those in the grey area will not, which leaves you on the hook for additional fines if the IRS audits you and disagrees with your interpretation. Make sure to include a specific revenue ruling (citable as precedent) that backs your case, or a private letter ruling (unique to your situation and only applicable to you, can't use others' as precedent).

[juilletmercredi]

It is NOT tax-free.

 

The amount that is tax-free is the amount that pays for tuition, fees, and required expenses.

 

If you get a stipend or fellowship to pay for room and board, you do have to pay taxes on that.  If you "avoid" paying taxes on virtually all fellowships in the U.S. used to pay for living expenses, then you're illegally not paying taxes (unless the amount is less than $5,000).

 

Schools generally quote you the untaxed amount, and I've found that they vary wildly in how much responsibility they take over taxes.  Sometimes, they hire you as an RA or TA and they take the taxes out of your check.  Sometimes, they give you all the money and you have to pay taxes yourself.

 

It's typically about 15-20% of the total stipend.

[Carthage32]

Great, thanks so much, TakeruK! This is super-helpful!

[Carthage32]

One additional thought:

 

I also started my program this year (in Sept 2012), so my total US income is pretty low. So, I wonder why I didn't get all of my withheld amount back. Maybe I did something incorrectly with the tax return...

 

Also, can we claim that our fellowship is exempt from taxation due to the Canada-US tax treaty? Someone was telling me about filing a form W-8BEN, but I didn't really understand the whole thing.

[TakeruK]

One additional thought:

 

I also started my program this year (in Sept 2012), so my total US income is pretty low. So, I wonder why I didn't get all of my withheld amount back. Maybe I did something incorrectly with the tax return...

 

Also, can we claim that our fellowship is exempt from taxation due to the Canada-US tax treaty? Someone was telling me about filing a form W-8BEN, but I didn't really understand the whole thing.

 

I did also (try to) look at the international tax treaty but it's super full of legalese and things that apply to all sorts of cases other than students! I think the main gist of the tax treaty is that we won't be double taxed -- that is, as long as we remain Canadian residents and US "non-resident alien" status, we will only pay taxes to Canada on Canadian income, and taxes to US on American income. Tax treaties, in general, do not get you out of paying any tax at all, from my knowledge.

 

I don't think you file Form W8's with your tax return. I remember filling one out for a University because they reimbursed me for a prospective student visit. I also think I filled out a W8 when I started at my school here, last fall. As far I understand it, you give it to a US employer who is paying you, a non-US citizen, compensation for something. They use it to keep track of who is getting paid or something? Sorry, my knowledge is obviously fuzzy here! 

 

I might have forgotten to mentioned this above, but I got all of my tax withholdings back in the 2012 tax year because my US income was only $2250. This was because 2/3 of my stipend is paid for by a Canadian fellowship while the remaining 1/3 and tuition waiver is paid for by the school. In this same thread, on April 26, I posted a link to a Wikipedia article and tried to explain how to compute how much tax you would owe. If I was single, and had all of my stipend paid for by my school, according to my numbers above, I would have to pay a total of $345 on federal taxes (for the $7250 I would have received in the three months between Oct and Dec 2012).

 

So, if you basically had to pay $730 on 4 months (Sept to Dec?) of fellowship income, that does sound a bit high. But maybe you have a really high paying fellowship? Or, maybe you are not paid monthly but you might have received a giant lump sum last fall for a period of time beyond Dec 2012. Obviously, I don't want to make you write your stipend value here, so here is some ballpark numbers for you to use to judge if you probably paid the right amount of tax (if you don't feel like doing the calculations I mentioned above, or want to confirm your calculations):

 

If you are paid monthly, AND your annual stipend is $X, AND you started in Sept 2012 and thus only had 4 months of income, AND you are single, then you would pay the following federal tax amounts for the 2012 tax year:

 

$20k stipend = $287 in taxes

$25k stipend = $453 in taxes

$30k stipend = $620 in taxes

$35k stipend = $787 in taxes

 

So, if the amount of taxes you ended up paying don't match up with the stipend ranges above, then maybe there is a problem! For example, you might have forgotten to deduct the "personal exemption" of $3800 from your taxable income (which would cost you $380 or so). Did you do your taxes on paper or with tax software?

 

However, you should also remember that there is state taxes in addition to federal taxes. I can't estimate those rates for you, but the taxes withheld might be at both the state and federal level. And, unlike Canada, you have to file state taxes separately from federal taxes. So, in order to get your state tax withholdings refunded, you would have to file state taxes too!

 

Hope that helps you figure it out! You can also send me a PM with more details if you are still confused and want to discuss actual numbers in private.

[Carthage32]

Thank you! PM sent.