Department Fellowships Taxable?

[noidea]

Hello,

 

I received a Boston University ECE Fellowship, but I don't know if it is counted as a taxable income. I am an international student and by the official letter, I will not have any duty in school ( as RAship or TAship), will any tax be cut from my fellowship does anybody know? Or where can i learn it?

 

 

[TakeruK]

Most likely yes. You can try to ask the program if they know but a lot of times, the tax laws are complicated and the department staff might not actually know. Your best bet would be with HR since they will deduct taxes but they might not know your specific situation until you enroll.

 

I am in a similar situation--I am on a fellowship paid by my own university and my letter specifically states I have no formal TA or RA obligations. I get a letter from HR every year stating that the payment is *not* for any goods or services, so that I am not an employee in any way. But, US tax laws generally will tax fellowship income above our costs for tuition and books for graduate students too. That is, for the "stipend" part of our fellowships, we will be taxed as if we earned that money working in any other job. We do not get taxed on tuition waivers and we can claim mandatory expenses such as textbooks against our taxable income if we keep receipts properly.

 

In the end, you should expect to pay a little more than 10% in taxes. You can compute your estimated tax due from the Wikipedia article on income tax (http://en.wikipedia.org/wiki/Income_tax_in_the_United_States). As international students (and thus non-resident aliens) we do not qualify for the "standard deduction" mentioned here, we will only get the "personal deduction" of about $3800. The US has a progressive tax system, so you pay a certain percentage for each income falling in some tax level. Let's say your annual stipend is going to be $25,000. If we round the personal deduction to $4000, then you will have to pay tax on $21,000. From the Wikipedia listed tax brackets, you will pay 10% on the first (about) $9000 and 15% on the remaining $12,000, which means you will owe about $2700 per year in taxes, or about 11%. If you are married or have other dependents or other ways to claim taxes, you might get more money back when you file taxes. You may also have to pay additional state tax (above numbers are for federal tax) which will vary a lot from state to state.

 

Please note that for budgeting purposes, you should keep in mind that many schools will actually deduct more tax from you than necessary. I think this might be because they want to make sure that international students don't run away without fulfilling tax obligations. From other students on this forum, and from my own paystubs, it seems like our schools take about 14% out of our monthly paystubs. So, if you are computing e.g. how much money you will have each month, pretend that you will have to pay 14% of your stipend in income tax, but you will get a small part of it back each year.

 

Extra detail note: The US tax year is Jan 1 to Dec 31, so if you are starting a program in e.g Sept 2014, the school will deduct taxes from Sept-Dec 2014 pay stubs. However, your total 2014 tax year income will be only 1/3 of your full stipend, which means you might not even make enough to get taxed at all. So when you file your 2014 taxes (in 2015), you will likely get all of that money back for the first few months. 

[fuzzylogician]

What TakeruK said, basically. I will just add that some countries have tax treaties with the US that include larger deductions than the standard ones every international student gets. That's also something to look into. Normally the tax software that international students use to file their taxes will be able to tell you this and make the adjustments automatically, but it's good to know what to expect. If your fellowship is fully tax exempt (mine is, for example), you may be able to fill some form at the university so they won't deduct any taxes from your pay check. 

 

Also keep in mind you'll have to pay state tax and (perhaps, in some cities) city tax. It's much less than the federal tax, but it's also something to know about.

[Usmivka]

I actually think the BU training grants for that program were tax-free for a time (I know someone who got a similar departmental training grant at BU).

 

However, the IRS updated its wording on fellowships not so long ago to make it clear(er) that unless you receive one of two named fellowships (the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program), you are obligated to pay taxes on all stipend income beyond what you use for qualified academic expenses (details at http://www.irs.gov/publications/p970/ch01.html#en_US_2013_publink1000177991). I know there is a lot of wording in there about how you are required to pay taxes on payment for services, but that doesn't mean that you aren't taxed on non-compensatory grants--there is superceding language that states that anything that is not a qualified education expense is taxable, and those expenses are clearly defined. You might argue that there are still some fellowships in the gray area, but honestly the ~$4000 a year in federal and state taxes I might save just isn't worth the time and hassle of an audit to me, even if I'm in the right in claiming tax-exempt status--grad students are favorite targets of tax auditors in Massachusetts, and nearly a third of the students in my program have been audited.

 

So in the great majority of cases, if you use your stipend to pay for books or student fees, that portion is tax free, but anything you use for room, board, savings, etc. is taxable at the federal level. Some states levy taxes as well, and their rules may differ slightly (for example in MA, your room and board is tax free but only if you are living in university owned housing and do not live in state enough of the year to be required to file as a legal resident [130+ days?], while in WA there is no state income tax at all).

 

Also, unlike what Takeruk described in the note above, schools will not always deduct taxes from your paycheck on certain kinds of grants. I believe yours is one of those that will not have taxes deducted, like many training with an ultimate federal funding source. This means you are personally responsible for filing estimated taxes every three months, and may be fined if you fail to do so. It's a pain in the ass.

Edited January 17, 2014 by Usmivka

[noidea]

Thank you very much for replies.

 

Academic programs manager e-mailed me saying that when I'm receiving the first year's stipend as a fellow, I "shouldn't" be taxed (since it's non service). I guess I will not learn what will happen until I get a paycheck, I will expect a worst-case deduction and be prepared accordingly   

[Usmivka]

Thank you very much for replies.

 

Academic programs manager e-mailed me saying that when I'm receiving the first year's stipend as a fellow, I "shouldn't" be taxed (since it's non service). I guess I will not learn what will happen until I get a paycheck, I will expect a worst-case deduction and be prepared accordingly   

Your employer/university is legally barred from giving tax advise like "shouldn't be taxable," so while I agree that sounds hopeful, it is not definitive or even useful if you get audited.

 

Also, whether they do or do not take a withholding for you doesn't mean anything about your tax obligations--just whether they are required to withhold from your paycheck. As a non-compensatory fellowship, they don't have to treat you as an employee for payroll purposes, which means they don't have to go to the bother of payroll deductions for you and the paperwork that entails. In this case they are just shifting the burden to file quarterly taxes to you. Whether you do or do not owe taxes is not necessarily directly related to the paperwork aspect.

 

You might want to talk to a tax preparer that is knowledgable about graduate stipends your first year here.

Edited January 19, 2014 by Usmivka

[Usmivka]

One last update since this got me digging around and I remembered a conversation I had with a manager at the IRS after a very long hold last year:

 

For US residents reading this thread, TAMU has a really nice summary (http://www.tamus.edu/offices/budget-acct/tax/taxmanual/scholarfellow/), which defines the myriad terms being thrown about here. The net out, is that "non-compensatory fellowships" as a definition only relates to the requirement for the university to report your earnings to the IRS (they don't have to). This has no bearing on the "qualified" vs "non-qualified" criteria for your income. The IRS has a handy table that tells you what is and isn't qualified. But in short, if it isn't tuition or books, it is almost certainly taxed, except for two specific "service" fellowships written into section 117 of the tax code (the NHSCSP and the AFHPSFAP).

 

Functionally, what these rules mean is that the university won't report your income, but you are still obligated to pay taxes. Obviously many people don't, since how would you get found out if you don't self-report? This is where the widespread, random audits of grad students in MA begin to make more sense. Many grad students here are on non-compensatory fellowships, but still owe taxes (and as evidenced in repeated threads on this forum over the years, there is plenty of confusion about this). There is a good chance an audit dragnet of this sort will pull in folks that might not otherwise report their income and pay taxes. But if you are in a state that doesn't have income tax, I imagine the chances of the feds catching tax-dodgers in this category are pretty low.

 

The rules for international students are a little different, in that for any fellowship, 14% is supposed to be withheld by the university. The majority can be reclaimed as a refund since you don't have to pay FICA taxes (social security, medicare). So the university is required by existing tax law to report your income and withold from it. Not all do, again because of this widespread confusion about how non-compensatory fellowships get treated and a sort of gray zone where these overlap with tax withholding requirements for international students.

Edited January 19, 2014 by Usmivka

[TakeruK]

That really explains a lot and clears up some confusion I had about how things worked as well! Thanks Usmivka!

[noidea]

Exactly, thank you!