Life After Taxes

[Guest Budget Girl]

* I posted this in the Bank section, but just wanted to have it here too, since it does concern us "official grads."

Hey, I was just attempting to figure out my budget for next year when it hit me: taxes are going to lop off a big chunk of my stipend. Does anyone know how much I can reasonably expect to salvage from a stipend of 18,000/year in IL? My friend told me to take away around 2-3K - does this sound right?

[Guest Frenchhopeful]

I'm not 100% sure but when you say $18K, are you talking about just your stipend? Because your overall financial aid package may be closer to $40K (tuition & fee waiver + stipend together). I've read that we'll be taxed on the $40K, not the $18K stipend.

You should really talk to a financial planner/ tax specialist to budget this out. However, generally speaking, if you are single working employee and your income is between $30K-$75K, you are in the 25% tax bracket which means you should cut out 1/4. Therefore w/income of $40K you should put aside $10K for taxes.

I don't know if you will get deductions for being a full time student. I am not an expert, therefore please consult a professional and do not rely on people's posts. You do not want any unfriendly surprises come tax season next year.

Good luck.

[Guest non expert opinion]

I'm not 100% sure but when you say $18K, are you talking about just your stipend? Because your overall financial aid package may be closer to $40K (tuition & fee waiver + stipend together). I've read that we'll be taxed on the $40K, not the $18K stipend.

You should really talk to a financial planner/ tax specialist to budget this out. However, generally speaking, if you are single working employee and your income is between $30K-$75K, you are in the 25% tax bracket which means you should cut out 1/4. Therefore w/income of $40K you should put aside $10K for taxes.

I don't know if you will get deductions for being a full time student. I am not an expert, therefore please consult a professional and do not rely on people's posts. You do not want any unfriendly surprises come tax season next year.

Good luck.

[Debating]

That is generally true (that you pay tax on the lump sum), but through my undergrad experience, scholarships for tuition and fees are non-taxable. That leaves the stipend plus any board/room/insurance waivers you might get as taxable income.

Again, this is from personal experience.

[cashmonger]

Check out IRS Publication 970 at this link: http://www.irs.gov/publications/p970/ch01.html It covers more than you ever wanted to know about fellowships. The short version is that amounts for tuition and fees (like your fee waiver) are not taxable, but the amounts you use to live on (like your stipend) are.

As for figuring out how much you'll likely lose do this:

Add up your stipend and any other income for the year.

Subtract $8000 for the standard deduction.

The first 7300 of what's left will be taxed at 10%

Anything above 7300 will be taxed at 15%

So, with 18,000, you'd pay about 1140 in federal taxes. Of course, if you live in a state with income taxes you'll have that on top of it and if you live in NY you'll have city tax too.

Finally, grad students generally do not have to pay FICA (Social Security and Medicaid tax), but you should check with your university. It you do have to pay it, it's a little over 7% before the deductions -- so hope you don't.

I hope that helps.

Oh - and if you scroll down to the bottom of that publication, is says:

"Tuition reductions for graduate education are considered “qualified

[Guest Passerby]

This is for educational purposes only and is not Tax advice. I am not a CPA.

Just like it is being said, once you find out exactly what your taxable income is (less the amount eligible under education expense IRS criteria), you will be taxed on the remainder. I agree that you should see a tax specialist and should add that if you run a search on the IRS.gov weabsite, they explain a bit about what the eligible taxing situation. Once that amount is found, I would like to clear one thing up regarding the common taxing misconceptions about tax brackets.

First of all, before you are taxed they find out how many deductions and exemptions(how many kids you have, married/single etc.) you are able to have. If you have very few or no exemptions, that is ok because there is a standard deduction that you would then qualify for. This deduction is different for state and federal.

If you are single and a dependent (under 25) you may get a 5,000 deduction from your income before you apply the federal tax (approximately 8,000 if single and older). Your state tax from your home state may apply to your state tax instead of the illinois tax if you are not a resident in that state.

In some states like Michigan and Indiana the state tax is a flat tax, meaning no brackets, of about 4% applied to your income less the deduction(s).

Second of all, many people think that the percent rate of your federal tax bracket means that all of your money is taxed at that rate, that is actually incorrect. Everyone is taxed 10% on the first few thousand dollars you make and then taxed at a higher rate on the next few thousand, and at a higher rate on the next few thousand,,,etc(that's why it's called a "Marginal tax bracket". so that if you get to the 25% bracket, only the money that falls in that bracket are taxed at that rate. To prove this to yourself, look up the federal tax bracket chart and you will find that it doesn't say tax a certain percent on all of your money...when you find the column for your bracket it will say a certain dollar amound plus the new percent times the dollars made within that bracket. If you add the full amount that you'd pay at any tax bracket and divide it by your taxable income, you'd find that you're actually being taxed at a total percent that is less....unless if you make so many millions that the lower percents on your first few hundred thousand isn't enough to bring your total average tax down.

What this means for you:

IF the 18,000 is the only income that is considered income. If you are single and not considered a dependent, you would have to pay taxes on about 10,000 federally and (if your standard state deduction is 4,000) pay state taxes on 14,000.

IF you are eligible to be a dependent, then you get less of a tax break....pay fed taxes on about 13,000 and state taxes on 14,000.

If your state rate is at 4% in this dependent case, then you'd pay the state $560.

to federal, you'd pay 10% on the first 7,550 and 15% on the rest = $2118

giving a total liability of $2678 leaving you with $15,322. and 2678/18000 = 14.9%total tax

to get a general idea of your specific circumstances you will need to find out if you are considered a dependent (in the IRS meaning of the word), the federal and state deductions for your circumstances (single/married/kids/EarnedIncomeCredits/Student Loan interest amounts) state tax rate or brackets, and federal. Additionally, how the IRS will treat your stipend award (as stated on the irs website). There is a free tax estimator run by turbotax online that is fairly accurate if you feed in good information. I highly recommend you get a tax expert before the school year begins. Additionally though, especially as a graduate student who is most likely interested in research, it can be personally satisfying to find out how the government is exactly taking your money. For years i was sending in my federal form without realizing my overpayment due to ignorance regarding exemptions and deductions. I, of course, didn't see a tax expert and didn't do my research either.

[Panda77]

hey passerby,

thanks for your great post! I have another question if you happen to pass by again

Does it work in the same way for internationals too? I read somewhere (can't remember where for the life of mine!) that you might be entitled to a refund (of all or a part of what you paid in taxes) at the end of the year if you are an international is that true? I guess that referred more of federal than state taxes, but I really don't know.

Also, you suggested to see a tax expert as soon as possible. I know my university offers a "we'll help you with your taxes" service (especially for internationals if I remember correctly) do you think that would do?

[Debating]

Internationals get a much lower standard deduction (3200 instead of 8000 for federal) so expect to pay higher taxes, unless your country has a tax treaty with the U.S. You may get a refund regardless of your citizenship status if you get more money withheld on your checks for taxes than you owe.

Also, expect to fill out a lot of forms (I totalled 4 for federal only this year). Some of them are fairly complicated (one came with 67 pg of instructions) so talking to a tax expert is a must. The workshop on campus may help but only if they have experience with foreign nationals...

[Guest ElGuesto]

You may not have to pay any federal income tax if you TA for the money and teaching is a requirement in your program.

[Guest Returned]

from what i know, it is taxable income but since your 18K is under the minimum amount (which i think is around 25 grand) that the IRS says you need to make in a year to have to pay taxes, you don't have to pay taxes on the stipend. it is taxable, you have to file and report the income, but i will be getting a 16K fellowship, and a girl who receives the same fellowship at my school says she has spoken with two accountants who have told her she doesn't have to pay any taxes on them. my reasoning may be wrong on exactly why you don't pay, as in it might not be considered the exact same as income you work for (esp if you don't have to do anything to receive the stipend), but i would say try to ask an accountant if you're really worrried about it, just to double check.

[FooMan]

from what i know, it is taxable income but since your 18K is under the minimum amount (which i think is around 25 grand) that the IRS says you need to make in a year to have to pay taxes, you don't have to pay taxes on the stipend.

Really? I grossed 18k'sh this year (all from stipend) and had to pay taxes.

[Minnesotan]

Definitely a fellow humanities student. You know those econ nerds are getting $2k rebates on the same pay scale.

Just another case of the truly important disciplines getting the shaft! lol

[FooMan]

Definitely a fellow humanities student. You know those econ nerds are getting $2k rebates on the same pay scale.

Actually, I'm in computer science. : )

[ocop]

Really? I grossed 18k'sh this year (all from stipend) and had to pay taxes.

You're right. Federal deduction for a single dependent is 5,600, ~10-11k for single, independent.

[madcalicojack]

I'm not 100% sure but when you say $18K, are you talking about just your stipend? Because your overall financial aid package may be closer to $40K (tuition & fee waiver + stipend together). I've read that we'll be taxed on the $40K, not the $18K stipend.

Good luck.

I believe this is incorrect. When you pay your own tuition and fees, you can deduct them on your taxes, so I doubt your tuition and fee waivers are taxable. You may have to report them as income, but they should show up in your deductions so you won't end up paying taxes on them. If you must report it as income, it is probably worth your time to itemize your deductions to make sure you aren't paying taxes on that "income".

Isn't it telling that a bunch of grad students are confused about the d@#$ tax code?

http://www.fairtax.org !!!

[rising_star]

I believe this is incorrect. When you pay your own tuition and fees, you can deduct them on your taxes, so I doubt your tuition and fee waivers are taxable. You may have to report them as income, but they should show up in your deductions so you won't end up paying taxes on them. If you must report it as income, it is probably worth your time to itemize your deductions to make sure you aren't paying taxes on that "income".

Isn't it telling that a bunch of grad students are confused about the d@#$ tax code?

http://www.fairtax.org !!!

You won't get taxed on the tuition and fee waiver. The amount you pay for tuition is deductible and some of the fees are deductible but not all. You receive a tax statement from the University at the end of the year that specifies this. Honestly, if you're making $18K and have a tuition waiver, the amount deductible is likely less than the standard deduction so itemizing may not be to your benefit.

Scholarships/fellowships work differently. If it's a scholarship and you receive more than the money needed for tuition, then the rest is taxable income. For instance, you receive a $20K scholarship and your tuition is $10K. The other $10K that you use for living expenses and whatever else is considered taxable income. Since most scholarships don't withhold taxes, you actually owe money to the IRS at the end of the year.