Paying Taxes on a Fellowship Stipend?

[avocadoze]

Hi everyone,

 

I have a fellowship to earn my MA in Strategic Public Relations at USC Annenberg, which includes a $20,000 stipend distributed August-May. This equates to 10 payments of $2,000/month.

 

My letter says that my stipend is subject to being taxed, and that I should consult with a tax person. I plan on doing this, but I am wondering if you all have any experience or knowledge on this.

 

My income for this year (January-August) will be between $7,000 and $8,000, so my total income for the year will be no more than $18,000. 

 

Also, if there are other threads in here about this topic, please direct me to them! I have found some relating to international students, but nothing otherwise. 

Thank you, and good luck with your endeavors!

[Eigen]

Here's the most recent thread:

 

 

Paying taxes on a fellowship works basically like paying taxes on cash wages/tips, with one minor change: you don't pay tax on any amount of the fellowship used for educational purposes (tuition, fees, required books). Fellowship stipend used for educational expenses is non-taxable. 

 

The rest of it, you report via "SCH" off to the side of your earned wages. 

 

As for amounts, you can use any of the online tax calculators to estimate the damage- put in your income, married/single, and it will estimate, roughly, how much you owe minus standard deductions. 

[Emily Roberts]

I second what Eigen said. You need to report your stipend net of qualified fees as income on your taxes, and will be taxed on a portion of it. Fellowship pay is reported in line 7 of the 1040 with "SCH" designated next to it. (See IRS Publication 970 Chapter 1.)

 

If you don't have the option of having taxes withheld from your paycheck, you should look into paying estimated tax. You may not have to in your first semester, but are likely to need to starting next spring if your fellowship and lack of withholding continue through all of 2016. The IRS has a great page with all the info you will need on estimated tax (mostly you will use Form 1040-ES). Basically, you have to project your income and withholding for the whole year and determine if you need to pay estimated tax, and then file quarterly if you do.

Edited April 24, 2015 by GradStudentFinances

[Eigen]

On quarterly taxes:

 

I end up owing around 1500-2000 per year. The penalties for that degree of underpayment are quite small- if you'd prefer to budget and not have to file quarterly, you'll probably be fine.

[avocadoze]

Wonderful, thank you so much!

[MBDT]

Check to see if your institution reports fellowship funds to the IRS. If they don't... there's no record of it. At my current institution, none of the graduate students I know report this information on their taxes. Of course, do so at your own risk. :-) 

Edited May 2, 2015 by MBDT

[Eigen]

Also be aware that the risk is getting hit with the combined back payments + interest for all the years you didn't report, as well as a tax evasion charge.

 

About half the grad students at my institution don't file, the rest of us don't feel it's worth the risk, since our payments while not reported are in many publicly accessible databases.

[fd.711]

Check to see if your institution reports fellowship funds to the IRS. If they don't... there's no record of it. At my current institution, none of the graduate students I know report this information on their taxes. Of course, do so at your own risk. :-)

I mean...you're not wrong (the IRS doesn't know about stipends reported on a 1098T per se*), but if you deliberately under-report income that you know is taxable, the technical term for what you're doing is "tax fraud."

 

So, you know...don't do that. The IRS may not catch it if you don't--especially considering that they're notoriously understaffed at the moment and thus unlikely to waste time going after your small-fry income--but the penalties if you ARE caught can be harsh, and it's just not worth the risk. (Not to mention dishonest, for whatever that's worth.)

 

*You can verify this by accessing your wage and income transcript on the IRS' website.

[GeoDUDE!]

Besides being against the law, it is also morally reprehensible to not report your full income.  

[Horb]

I honestly would recommend asking a tax professional. My school said my entire stipend was tax free. I did not receive an W-4. I assumed, when I went to get my taxes done, that my income would be taxed and was told, again, that it would not be; however, the IRS website seems to indicate it would be. I left it up to a tax professional. I honestly do not understand why schools do not hand out W-4 forms for this. To be honest, I do not make enough to be taxed on it anyways after all my deductibles.

Edited May 5, 2015 by Horb

[Emily Roberts]

There's a difference between income being reportable/taxable on your taxes and whether or not you actually end up paying tax. I'm hoping in your case, Horb, that your school administrators just knew from experience that you earned too little to owe any tax, but they still should have told you that you needed to file a tax return. I'm glad you looked into it yourself and hired a competent professional.

 

I also did my own research on grad student taxes to know how to treat them properly. After I figured it out, I heard story after story of tax professionals treating fellowship income incorrectly (like in )! A lot of them either assume it's not taxable or it's self-employment without doing the proper research. Frankly, I'm sure most of them don't have many grad student clients so this type of income is probably very unfamiliar.

 

My university did offer us the option of tax withholding on non-compensatory (training grant, fellowship) income, but TBH the 1099-MISC you receive when you do that comes with its own issues (being confused with self-employment). The universities seem to have no good option for telling you about your non-compensatory income, so some use a 1099-MISC, some use a 1098-T, some send a courtesy letter, and some give no information.

[Horb]

 I filed a tax return because I had income from summer job and a job I had during the latter half of the year, so I did pay taxes. I think that factored into the over tax scheme, though I think next year I will feel more confident since I'll be off fellowship and have mandatory reported income instead of trying to figure out what gets exempted because it was for tax-free school supplies and what not.

[perpetuavix]

I actually know someone who was audited because she failed to report stipend money, three years after the fact. The IRS has a pretty substantial window to audit your taxes, so even if you've been fine for a year or two, that doesn't mean it won't catch up with you later. It doesn't seem like it's worth the risk at all. 

[Horb]

I don't know if many people do it to just "chance" it. I feel like there is a lot of misinformation that people are given and then they go to fill out their tax return and it is not a simple process. I'm all for paying taxes, but I think it needs to be made a lot easier for people to figure out what can be deducted and what cannot and what counts as tax-able and what does not. Or schools just need to be forced to hand out forms. I filled my return out to the best of my ability as I'm sure others do, but if you can't afford a professional, then I can imagine it gets confusing.

[Eigen]

TBH, while it's a bit complex compared to having a W2, it's really not that complicated. 

 

There's even a whole IRS booklet devoted to scholarships and fellowships, with specific examples. 

 

I think going through professionals makes it more complicated than not, half the time- filling out a 1040A or 1040 EZ by hand is pretty quick. 

 

The only difference with a scholarship is that amounts spent on tuition, fees & books are not taxable. Other than that, you report it as income. 

 

What's so complicated about that?

[Horb]

Well, the rules on what books can count and can't count is one thing. The rule that if your program requires a computer, it is tax free, but if you need a computer for your program but it does not mention anywhere such a requirement, then it is not tax-free (as I learned from the IRS website). Also, they require specific types of receipts if you get audited, so me printing my amazon receipts do not count. There's tons of other stuff, such as what schools tell you vs. professionals vs. contradictory IRS website stuff. Also, quarterly taxes could be more clear. It is all based on estimates and I can only imagine what happens if you estimate incorrectly or something happens that makes your original estimate incorrect. 

[Eigen]

Quarterly taxes are the same as for any other self-employed individual, and there are plenty of resources to help with that. 

 

In the scheme of things, the purchase of books (and even a computer) will have a minimal impact on owed taxes, even if audited. 

 

Not paying taxes on the stipend at all, however, will have a significant effect. 

 

It doesn't really matter what your school tells you, or what a professional tells you (unless they're willing to eat the penalty in case of audit), what matters is what the official IRS rules are. And they're happy to clarify and walk you through it if you call their helpline. Bottom line, IRS makes the rules, and anyone contradicting the IRS statements is flat out wrong.

 

The test for tax-exemption is simple: If it is required to enroll in the program, it is required. Hence, tuition and fees count. If it's not required of everyone enrolled in the program, it's not tax exempt. As I mentioned above though, this is a minor issue in the scheme of things, and filing one way or the other will probably not cause a major issue in the future. 

 

As for estimates on quarterly taxes, I'm not sure what the mystery is. You know your income for the year, you estimate taxes. If you overestimate, the IRS owes you money when you file for the year. If you underestimate, then you owe them. It's the exact same thing as the estimates you provide to an employer for paycheck withholdings- you're just responsible for mailing in the checks, rather than your employer mailing them in.

 

As to your earlier question of why schools don't hand out W-4s: They can't, as they aren't your employer. W-4s are for estimations of withholding for the employer to send to the IRS instead of the employee. For fellowships, the school does not employ the fellow- they simply handle passing the money through from the originator (grant, etc) to the student. You, as the student, are considered self-employed with that income, and as a self-employed individual, you estimate your taxes yourself. 

 

The presence or absence of a W-4 says nothing about whether or not the income is taxable or not- it just says your school is not acting as your employer.

[Horb]

I disagree, but it isn't worth arguing over. People have different experiences and different factors affecting their tax return.

[Pitangus]

I honestly would recommend asking a tax professional. My school said my entire stipend was tax free. I did not receive an W-4. I assumed, when I went to get my taxes done, that my income would be taxed and was told, again, that it would not be; however, the IRS website seems to indicate it would be. I left it up to a tax professional. I honestly do not understand why schools do not hand out W-4 forms for this. To be honest, I do not make enough to be taxed on it anyways after all my deductibles.

 

Administrators at my university have apparently told NSF fellows that they don't need to pay taxes on their stipends. So I do think it is often the case of miscommunication and/or people receiving misinformation. That said, if these students have then heard otherwise (for example, from other grad students after they mention that they don't pay taxes on their stipends) and have still not pursued it further because they'd rather not pay taxes, then that's on them.

 

Like Eigen, I relied on the IRS's own literature when it came to paying taxes on my fellowships. Fortunately my tax return is simple beyond figuring out the fellowship situation.

 

As for quarterly taxes, I let TurboTax calculate them for me, and I did end up underestimating for 2014 because the estimates were based on my 2013 income, which was less due to using a different fellowship for the 2012-2013 academic year. I just paid the rest when I filed my return; the difference wasn't big enough to incur a penalty. I could have just calculated my 2014 estimated taxes by hand, and probably should have since I knew how much my fellowships were ahead of time, but honestly I just found it convenient to use the pre-printed vouchers from TurboTax. Same goes for using TurboTax in the first place: I could go through Form 1040 etc. myself if I had to, but I like to go through the TurboTax program first and then check the actual return it makes. Again, my tax return is simple enough that it's not a big hassle. 

[Horb]

Yeah, I had three jobs in addition to a half year fellowship, so for me it was a bit confusing. I also had a lot of deductions to figure out. The thing I recall with quarterly taxes was that it said something like, if you think $1,000 is going to be withheld from other jobs, then you don't need to pay quarterly (there was something like this) and my estimates put me right around there and I didn't want to get penalized later on. 

 

And I still think it is a little confusing as to what items may be counted as being for education. For me, every dollar I can deduct up to the maximum counts, but I also want to prove it and know I'm doing it right. 

[TakeruK]

I agree with Pitangus--the only person responsible for doing your taxes correctly is yourself. Even if your University tells you incorrect information, if you make a mistake on your taxes then it is still your fault. Although perhaps you might be able to have a case against your University. This is why many schools (including my own) will provide absolutely no information. They just give us the tax form and direct us to tax software (international students get free access to a TurboTax-like program).

 

I think Eigen and the IRS makes it extremely clear what items are allowed to be counted for education. Basically, only expenses that are required for you to be a student in the program count. So, for example, required textbooks for courses count (but "optional" or "recommended" textbooks do not). If you must buy a specific notebook in order to complete a lab course (i.e. your work is not graded unless you do it on this notebook), then that notebook cost will count as a deduction. However, if you are just buying notebooks for use in taking notes, then they do not count as a deduction. Similarly, pens, pencils, erasers, computers, printer paper do NOT count as a deduction, even though you technically need something to write with to do your work. But since unless it is an explicit requirement that you get that specific item, it is not a deduction. 

 

Personally, the only deduction I can make is the tuition and fees deduction. I spend about $100 per year for the first 2 years on textbooks. However, my first tax year in the US was only 3 months long so I paid no taxes. My second tax year, I was mostly paid through a Canadian fellowship so my US income was under the tax treaty limit so I paid no taxes to the IRS that year. My third year I had a little tax owing but I didn't buy any textbooks since I no longer take courses.

[Horb]

I agree that only the person filing is responsible. It clearly states so in the part at the end of the tax return you have to sign. For me, I think the confusion this year was merging multiple jobs, fellowships, deductions (I spent about $500 per semester on books), the fact that I'm a dependent, despite living on my own, and having to figure out if I was considered a self-employed individual for quarterly taxes, as the first IRS page I looked at did not clarify what you file stipend money under. Others, it seems, had a much smoother experience, so I look forward to that next year

[TakeruK]

I agree that only the person filing is responsible. It clearly states so in the part at the end of the tax return you have to sign. For me, I think the confusion this year was merging multiple jobs, fellowships, deductions (I spent about $500 per semester on books), the fact that I'm a dependent, despite living on my own, and having to figure out if I was considered a self-employed individual for quarterly taxes, as the first IRS page I looked at did not clarify what you file stipend money under. Others, it seems, had a much smoother experience, so I look forward to that next year

 

Hooray! I can sympathize. As a non-resident in the US, I cannot file electronically and as a Canadian living outside of Canada, I cannot file that electronically either. Also, the free tax software for federal taxes that my school provides does not do state taxes, and I cannot use California's electronic forms or calculators to fill out my state taxes. And, being married means I can't do some of the simplified form, however, I always have to file as "married, filing separately" as I am not a US resident so I do not qualify for some of the deductions. But, my spouse can claim me as a dependent in Canada (since grad student income is not taxable there), but we have to properly claim her US income too. 

 

Anyways, figuring it all out the first time wasn't fun, but this year was a lot easier. The state taxes were the worst because I had to read all of the instructions (which referred to paragraphs in various different documents)--it took me about 5 hours to properly figure out what to do last year. It only took 20 minutes this year though!

[Eigen]

Just FYI, you can also choose to just not pay quarterly taxes. I don't. My non-fellowship income is taxed, and my wife's income is taxed, so the amount I end up paying interest on at the end of the year is pretty small. 

 

On around ~3k in taxes owed in April this last year, I think the interest was going to be $30-$60 or something?

 

Worth it to me to not have to pay that quarterly. 

 

It's just a balancing game based on what comes due at the end of the year, with the goal to be under $1k owed OR 100% of the tax you owed last year payed. So you can just make sure that your withholdings + estimated payments equal what you owed last year, and you should be fine even if you underpay for this year.

 

First year is definitely the hardest. TBH, looking at programs/professional preparers only made it harder, as most are not set up for the very, very few people that have fellowships as opposed to TAs/RAs.

 

One year Turbotax told me that I was going to owe around $9k, because it kept counting my tuition waiver as income, and nothing I could do would change it.

[TakeruK]

I personally would recommend using both software and checking it yourself to make sure you are not missing anything. For international students especially, there are software designed for us (e.g. Glacier Tax Prep) and it can find the right tax treaty. One year, I earned around $9,000 in US income but I didn't know about the Canada-US tax treaty where if my total US income is under $10,000, I pay zero taxes (but $10,001 means full taxes). The proper way to learn about the tax treaty yourself would have been to read the complicated tax law (in all its legalese), so the tax software was able to catch that for me and save me about $500 in taxes (I can only claim the personal deduction, so my taxable income would have been around $5000 if I did not know about this treaty).