Tax Change Impact - Tuition Waivers Taxed!

[muskratsam]

Not sure if this is being discussed elsewhere, let me know.  The impact of the new tax plan is looking pretty ugly.  One provision in it taxes the tuition waivers that grad students get as regular income.   That is huge for me -- I figure my federal taxes will go up 250% next year (ran a calculator with the same stipend amounts with this year's tax rate, then a calculator under the new plan with the same stipends plus the amount of tuition waivers treated as income).  It is untenable. 

[cowgirlsdontcry]

Tuition waivers are already taxable over $5,250 per year. I just looked it up. However, currently any tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. 

• It is provided by an eligible educational institution.

• You are a graduate student who performs teaching or research activities for the educational institution.

You must include in income any other tuition reductions for graduate education that you receive.  Please see IRS PUB 970 for more.

What I read about the new tax bill online is that Steven Bloom said "institutions wouldn't be able to waive tuition costs without imposing new taxable income on grad students." This is all speculation about a proposed bill at this point. We shouldn't get tied up in knots yet. These things always get changed and the proposed changes to higher ed are impossible, because universities depend on the cheap labor of GTAs. I will worry about this when and if it happens. Too many variables to factor in.

[TakeruK]

Yes, while nothing is certain yet, now is the right time to start calling your representatives to tell them to oppose this bill and tell them your personal story of how it will affect you personally. Unlike academic arguments which are often constructed as unbiased, dispassionate and impersonal ideas, the best way to engage with your politician is to tell personal anecdotes! At the same time, if you are already a graduate student put pressure on your school to oppose this bill because it's something that hurts them as much as it will hurt you.

Definitely not a reason to panic yet. But a good time to start doing something!

[muskratsam]

"These things always get changed" -- sometimes they do, sometimes they don't.  It is important for us to speak up to try to help get it changed.  I figure it is people like us contacting our representatives and senators with our specific stories that might be able to keep this from happening.  I did that last night.  First I made a spreadsheet that showed what my taxes would be expected to be with just my TA stipend and summer earnings (used an online calculator with current tax law, so it uses current rates).  Then I ran an online calculator for the new law (there are quite a few online if you Google), but added my TA tuition remission in as W-2 income.  I also assumed that in the current scenario I'd get the Lifetime Learning Credit for my fees, and I wouldn't under the new law.  

It looks like my federal taxes would go up 288%. (actually, to be specific, my federal taxes would be 288% of what they would be under the current law -- so I guess increase is 188% -- still crazy).     Then I went to the website of my federal rep and state senators, and used the contact function to describe exactly how much my taxes would be impacted by the new law, with no additional compensation to pay for the higher tax bill.  Or you can call them, but be sure to give them the percentage if you've calculated it of how much your federal taxes would go up.

If lots of us do this, it could help.  A lot of us live on a shoestring already throughout most of our 20s -- this is nuts.

 

Edited November 4, 2017 by muskratsam

[Sela]

I signed up to Grad Cafe just so I can respond to this thread. I'm no longer a PhD student. I finished my studies 4 years ago, so it's not going to impact me directly. But since I was a PhD student living from a stipend not long ago, and I know I wouldn't have made it if I had to pay the extra tax, it feels very close to home for me.

First, let me be clear: this is not a speculation. The current draft for HR.1 specifically retracts section 117(b) of the IRS tax code. I've read the draft text myself. It's there in the draft. It is true that a draft can still change, but there are some reasons I'm really not optimistic about this:

1. They have been working on this draft for a long time before they posted it. It's not an early draft.

2. They plan to rush this bill through the house and senate so it would pass before the end of the year. The republicans really feel like they need a "win" right now, and for them passing the tax reform is just the kind of "win" they need.

3. In order to pass this as a reconciliation bill in the senate without getting filibustered, it must not increase the deficit by more than 1.5 trillion dollars. Right now, they need to remove more deductions to get to this target. Which makes it less likely they would change this.

4. And most importantly: PhD students are relatively small and insignificant group. They don't have a strong lobby protecting their interests, and compared to the group trying to push back against cancelling the deductions for state and local taxes, they're last in line. Case in point: check news stories about the tax reform. How many headlines have you seen about this story?

 

And the impact is huge. As someone here mentioned, tuition reduction is qualified if this is a qualified institution, and the graduate student performs teaching or research activities for the educational institution. But this is the situation for most PhD students who receive full funding from the university. I checked the numbers based on the stipend I got, and it looks like if it would pass, it would've reduced my post-tax monthly stipend from 1800$ a month to 1150$ a month.

But all is not lost. I'm not writing this to discourage you but to encourage you to take action. Just like someone in the white house twitted not long ago: DO SOMETHING. Call your senator. Post about it in your social network. Create memes. Get other grad students and grad candidate to act. Get more people to be aware of this issue. Don't just assume this would change because someone else is going to take care of this for you. Otherwise, this is going to impact not just your pockets, but also higher ed and research in general.

 

[dr. t]

If this does pass, is there anything about this that can be done at the institutional level? What sorts of reasons would institutions have to resist responding to the change, ie. why wouldn't they drop tuition to $1 or something?

Edited November 5, 2017 by telkanuru

[Sela]

The biggest problem with reducing the tuition that usually the university receives funding for their PhD students from external sources. Typically, the adviser gets research grants from various sources (for example the NSF), and this money is used to fund the PhD students among other things. The adviser uses his/her research funds to pay for the student's  tuition and stipend, and this way the university receives some of the grant money and use it to maintain the facilities, pay for the staff etc. Without paying for the tuition, the university might not be able to get money from the grant.

 

[MathCat]

2 hours ago, Sela said:

The biggest problem with reducing the tuition that usually the university receives funding for their PhD students from external sources. Typically, the adviser gets research grants from various sources (for example the NSF), and this money is used to fund the PhD students among other things. The adviser uses his/her research funds to pay for the student's  tuition and stipend, and this way the university receives some of the grant money and use it to maintain the facilities, pay for the staff etc. Without paying for the tuition, the university might not be able to get money from the grant.

 

This depends a lot on field. In my field, almost everyone is supported through TAships, not their advisor's research grants.

[Sela]

Yes,  in some fields such as math it may be true. There aren't that many grants available for math research, but there is high demand for math teaching in any university. So it makes sense that TAship is the main source of funding. But this doesn't really solve the problem. The tuition should be the same for all students within the same academic unit, and even if they could've find a way to change the internal accounting practices for TAships, as long as there is a mixture of TAship and grant-based assistanships within an academic unit,  it wouldn't be practical to change tuition to 1$. And even if it would be technically possible to do this, the IRS might label it as a tax evading maneuver. 

 

[TakeruK]

On 11/4/2017 at 8:27 AM, muskratsam said:

Then I went to the website of my federal rep and state senators, and used the contact function to describe exactly how much my taxes would be impacted by the new law, with no additional compensation to pay for the higher tax bill.  Or you can call them, but be sure to give them the percentage if you've calculated it of how much your federal taxes would go up.

If lots of us do this, it could help.  A lot of us live on a shoestring already throughout most of our 20s -- this is nuts.

 

In addition to doing this, please please also call their offices. I have talked to many people who work in science policy and specifically staffers in these politician offices. Calling and showing up at their office is the most effective way to be counted. Your phone call can be short, just call them and say that you're a constituent and you want to oppose (whatever tax bill number this is). It would have made grad school impossible for you because your expenses are currently X and they would be Y if this change happens. 

Then do this again every single day. Each time you call, the office will mark down a tally of how many people called on what topic. Each day, there is a report made for the senator/congressperson that X people called about each thing. This is how they measure which topics are important to them. If your issue only gets a few calls a day, it's not going to gain much traction. A lot of my friends have been making calling in part of their daily routine (they do it during their walk into work for example). They encourage each other to make 5 calls per day etc. 

Here's one article about it: https://lifehacker.com/the-best-ways-to-contact-your-congress-people-from-a-f-1788990839

I'm not in the US anymore so I don't know all the little details (bill numbers etc.) When I was down there, I was not a citizen so I couldn't call anyways. But I hope you and my US colleagues are able to get the message out.

[TakeruK]

11 hours ago, MathCat said:

This depends a lot on field. In my field, almost everyone is supported through TAships, not their advisor's research grants.

However, even in these cases, aren't some Math people supported by NSF fellowships and such? These awards have tuition funding that would be lost to the school.

In regards to other comments about removing tuition or reducing tuition, there's a ton of behind-the-scenes money transferring to fund grad students. For example, even in a dept that funds students by TAships, the dept still likely have to pay some $$ to the university for tuition of their students. In return, the university provides $$ to the dept that run courses in order to hire TAs and pay for their tuition waiver. This system keeps things in check: a dept can't just give 100 TAs/tuition waivers out unless they are earning it by running enough survey/undergrad classes (resulting in undergrads paying tuition to the school that they can use to pay the depts).

At other places, like my PhD school, tuition is paid for by the dept or the advisor and it is linked to the stipend. So it works kind of like overhead. If you pay your students too low, you get charged a huge tuition to discourage paying students below the university minimum. But the more you pay your student, the higher tuition you have to pay as well. On paper, tuition was like $45k per year but the profs say the real amount paid is something in between $10k and $45k (no one ever gave an exact amount). Tuition was still charged at the full cost, it's just that the grad school "discounted" it for the advisor or department if they meet conditions. Having a higher on-paper tuition value also allows the dept and advisor to request more money for tuition payment from grants, donors, and external funding sources, I believe.

[muskratsam]

FYI, the Lifetime Learning tax credit is also being eliminated in this plan.  So, for example, I think now I could get a direct credit (reduction) of my federal taxes of 20% of the fees I pay to my university (about $1,200 per academic year).  So now I can reduce my tax bill directly by about $240/year.  That will also go away.  But I think the tuition taxation is bigger dollars, and a bigger deal.  However, I think the Lifetime Learning tax credit affects a lot more people than just PhD students.  Just another thing to bring up when contacting your member in the House and your senators.

[muskratsam]

The House of Representatives' own calculation shows that this tuition waiver tax will bring in 65 BILLION dollars (from grad students!) from 2018 through 2027.  I know everyone is busy... but please speak up on this to your representative and senators.  Talk to your fellow grad students.  If you have a good relationship with your PI, bring it up to them as a concern.  Ask your parents to complain, too (mine were happy to).

Edited November 7, 2017 by muskratsam
Punctuation

[MathCat]

On 11/5/2017 at 9:22 AM, TakeruK said:

However, even in these cases, aren't some Math people supported by NSF fellowships and such? These awards have tuition funding that would be lost to the school.

In regards to other comments about removing tuition or reducing tuition, there's a ton of behind-the-scenes money transferring to fund grad students. For example, even in a dept that funds students by TAships, the dept still likely have to pay some $$ to the university for tuition of their students. In return, the university provides $$ to the dept that run courses in order to hire TAs and pay for their tuition waiver. This system keeps things in check: a dept can't just give 100 TAs/tuition waivers out unless they are earning it by running enough survey/undergrad classes (resulting in undergrads paying tuition to the school that they can use to pay the depts).

At other places, like my PhD school, tuition is paid for by the dept or the advisor and it is linked to the stipend. So it works kind of like overhead. If you pay your students too low, you get charged a huge tuition to discourage paying students below the university minimum. But the more you pay your student, the higher tuition you have to pay as well. On paper, tuition was like $45k per year but the profs say the real amount paid is something in between $10k and $45k (no one ever gave an exact amount). Tuition was still charged at the full cost, it's just that the grad school "discounted" it for the advisor or department if they meet conditions. Having a higher on-paper tuition value also allows the dept and advisor to request more money for tuition payment from grants, donors, and external funding sources, I believe.

Yes, some people are supported by fellowships, but it is a pretty small portion at most schools. Things would be different at the very top institutions I imagine. The school would lose money from those, I'm not disagreeing with that.

In my department, the annual TA wage is about $19,000 if you don't get summer funding - though I'm not aware of anyone who can't get summer funding if they need it (either through grading, TAing or being funded by their advisor). With average summer funding the annual wage would be about $25,000 gross. The cost of living here is very high (e.g. rent on a ~500sq ft apartment near the university starts at approx. $1600, with 2 bedrooms being over $2000 generally - and these aren't extravagant places. The cost does not decrease much as you go further from the university, either.). This wage is livable but very tight right now. Students literally couldn't afford to have their tuition taxed, especially out-of-state or international students, whose tuition waiver is worth about $36,000. So, if the dept. wants to retain their graduate students, and hence their TAs, they would either need to significantly increase the wage, or do something to reduce the value of the tuition waiver. I'm not even sure that a public school can do anything about the latter.

[TakeruK]

1 hour ago, MathCat said:

So, if the dept. wants to retain their graduate students, and hence their TAs, they would either need to significantly increase the wage, or do something to reduce the value of the tuition waiver. I'm not even sure that a public school can do anything about the latter.

Although I am no longer a student so this doesn't directly affect me any more, it does affect a lot of my friends and I think it will be overall bad for academia! I am hoping your point here is what will motivate schools to oppose this bill directly.

[davidbowie]

Hello. I'm American but am working on a PhD in Canada (Ontario). I'm wondering if anyone knows if and how this might affect Americans abroad. I know that funding is different in Canada but I am still a little insecure about all of this. 

My annual funding is $54,000 but from that I pay about $15,000 a year in tuition. Whatever is leftover is my living stipend. Since I pay my own tuition I'm hoping this might not affect me. But I pay my tuition with scholarship money, after all.

For what its worth, I am aware that any scholarship money above and beyond tuition or school expenses is taxable in the US, regardless of where you are studying. (How lucky is it for us Americans and that our government gets to collect taxes on foreign income, including scholarship money).

This is a really frustrating situation for everyone but thanks so much for any help or insight.

[TakeruK]

8 hours ago, davidbowie said:

My annual funding is $54,000 but from that I pay about $15,000 a year in tuition. Whatever is leftover is my living stipend. Since I pay my own tuition I'm hoping this might not affect me. But I pay my tuition with scholarship money, after all.

For what its worth, I am aware that any scholarship money above and beyond tuition or school expenses is taxable in the US, regardless of where you are studying. (How lucky is it for us Americans and that our government gets to collect taxes on foreign income, including scholarship money).

This is a really frustrating situation for everyone but thanks so much for any help or insight.

Is the entire $54,000 scholarship money or is it a mix of earned income (RA/TA) and scholarships? If it's all scholarship money, then I think the change doesn't affect you. Either way you will be taxed on the amount above your cost of education, which would be $39,000. Similarly, if the scholarship amount is larger than $15,000 then no change to you. Obviously check with tax experts since I'm just some person on the internet lol.

If it's a mix where the scholarship is less than $15,000, then it's tricky because let's say you earn $44,000 from a RA/TA-ship and receive a  $10,000 scholarship. I don't know if you can say that your RA/TA ship is for your education (since in Canada, it would not count as tax-free income). So you might end up paying tax in the US on $44,000. TA and RAships aren't that high in Canada typically (but who knows, maybe you're a special case!) so I think you don't have to worry about it as much. Hope that's the case!

Note that in Canada, unless they have changed again, for employment income (TA/RA), you will get some form of a T-4 slip (equiv. to W-2). However, you should have the **choice** to consider this as employment income or self-employment income. These choices have different tax implications. This may also influence how your US taxes work.

[muskratsam]

I talked to someone today whose taxes will go from $2,500 a year to over  $10,000 a year under this plan.    Here is a calculator you can use to figure out your new proposed tax liability:

https://www.calcxml.com/calculators/trump-tax-reform-calculator;jsessionid=388BA754C0BF3DBE3AB56F17247E7518?skn=#results 

If you have a stipend and a tuition remission amount, add them together and put them in the W-2 field for your new taxable amount.

 

 

[dr. t]

...mine would go from $8k to $17k (married filing jointly). 

That did not make my day better.

[MathCat]

Mine would go up more than $5000 according to that calculator, and that's not taking into account the lower base deductible amount for non-resident aliens. It's also unclear to me if/how the proposed changes would impact my state taxes, or my taxes in Canada.

[davidbowie]

14 hours ago, TakeruK said:

Is the entire $54,000 scholarship money or is it a mix of earned income (RA/TA) and scholarships? If it's all scholarship money, then I think the change doesn't affect you. Either way you will be taxed on the amount above your cost of education, which would be $39,000. Similarly, if the scholarship amount is larger than $15,000 then no change to you. Obviously check with tax experts since I'm just some person on the internet lol.

If it's a mix where the scholarship is less than $15,000, then it's tricky because let's say you earn $44,000 from a RA/TA-ship and receive a  $10,000 scholarship. I don't know if you can say that your RA/TA ship is for your education (since in Canada, it would not count as tax-free income). So you might end up paying tax in the US on $44,000. TA and RAships aren't that high in Canada typically (but who knows, maybe you're a special case!) so I think you don't have to worry about it as much. Hope that's the case!

Note that in Canada, unless they have changed again, for employment income (TA/RA), you will get some form of a T-4 slip (equiv. to W-2). However, you should have the **choice** to consider this as employment income or self-employment income. These choices have different tax implications. This may also influence how your US taxes work.

Hi TakeruK. Thanks for your input. $54,000 is my base funding for the length of my program and it is exclusively in scholarships and awards. I am not required to work as a TA due to my scholarships since I am not funded by my department. I may have a short-term RA project next semester, and although it would count as income, it would only be $2,000 and at most $3,000...

Thanks again.

[TakeruK]

12 hours ago, MathCat said:

Mine would go up more than $5000 according to that calculator, and that's not taking into account the lower base deductible amount for non-resident aliens. It's also unclear to me if/how the proposed changes would impact my state taxes, or my taxes in Canada.

Everyone is also wondering what this means for state taxes, especially in California, where state taxes are quite high!

The US tax law change should not change your taxes in Canada because the CRA does not care what the US does with deductions etc. However, if your school changes the way they award money, charge tuition, and grants waivers etc. then that could lead to a change in Canadian taxes. Specifically, Canada already taxes tuition fee reimbursements/benefits from your employer (but you do get tax credits for tuition) so if a school switches from "You get a scholarship due to your student status that pays for tuition" to "You get a reimbursement for tuition based on your employment status as TA/RA here" then it could go from untaxed in Canada to taxed in Canada. That said, this change won't help US taxes either so it's not clear why a school would choose to do this. They might do this in conjunction with massive decrease in tuition fees, but if that happens, then at least the tax impact in both countries will be much smaller.

[mibshubby]

Am I missing something???

Let's throw out a few simple numbers.  Tuition is $15,000 and stipend of $25,000. This is the tuition mentioned above and a very nice stipend.  This is also your only income.

Currently, you would be taxed on the stipend.  $25,000 x 15% = $3750

Proposed, you would be taxed on the total.  $40,000 X 12% = 4800

The increase in taxes would come out to $87.50 per month.  Yes, when you have a small fixed income this is a lot but not the $650 per month that someone had calculated above.

[TakeruK]

Your calculation is not quite correct. However, you are right that the impact on each person is very different because of the huge range in stipends and tuition levels.

Let's set up some basic facts first. To keep it simple, we are going to consider the case of a single, resident tax-payer with no special deductions. I'm going to look at your case, and also compare to students at my PhD school (I've since graduated). There is a huge difference depending on your current stipends and tuition at your school.

Important data
Current law:
Total deductions allowed: $10,400 (standard deduction of 6350 + personal exemption of 4050)
Relevant tax brackets: 10% for income up to $9350, 15% for income between 9350 to 37950

Proposed law (Tax Cuts and Jobs Act, TCJA):
Total deductions allowed: $12,000 (standard deduction of 12000, no more personal exemption)
Relevant tax brackets: 12% for income up to 45,000, 25% for income between 45,000 and 200,000

"Effective tax rate on stipend": I use this term to mean how much of your stipend you have to pay in taxes, calculated as tax owing divided by stipend.

Your case (tuition 15,000 plus stipend 25,000):
Current law: Gross taxable income is 25,000. After deductions, your net taxable income is 14,600 (25000-10400). You pay $935 for the first tax bracket (10% of 9350) and $787.50 for the second bracket (15% of 14600-9350). Your total tax owing is $1722.50, or $144/month. Or to put it another way, out of the income you get to take home, you pay an effective tax rate of 7%.

Proposed TCJA: Gross taxable income is 40,000. After deductions, your net taxable income is 28,000 (40000-12000). You are sole in the new first tax bracket, so your total tax owing is 12% of 28,000, which is $3360, or $280/month. Now, your effective tax rate is 13%.

The difference is that you owe twice as much taxes as before.

"My" case (tuition 49,000 plus stipend 33,000): (not really me but for an American single taxpayer currently at my old PhD school)
Current law: Gross taxable income is 33,000. After deductions, net taxable income is 22,600. I'd pay $935 for the first tax bracket (10% of 9350) and $1987.50 for the second bracket (15% of 22600-9350). My total tax owing is $2992.50 or $244/month. Or to put it another way, my effective tax rate on my stipend is 9%.

Proposed TCJA: Gross taxable income is 82,000. After deductions, net taxable income is 70,000. I'd pay $5400 for the first tax bracket (12% of 45000) and $6250 for the second bracket (25% of 70000-45000). My total tax owing would be $11650, or $971/month. This is an effective tax rate of 35% !!

The difference is a 4 times increase in taxes!

Note: For a non-resident taxpayer, you cannot claim the standard deduction, so for most international students, the removal of the personal exemption means an increase of $3000 in taxes owed (now the tax rate is 45%).

 

In my opinion, the real problem is not necessarily taxing the tuition waiver benefit. I think it does make sense to tax employer provided benefits. Canada taxes them. However, Canada also provides a lot of tax credits to offset the cost of school so that for a grad student in Canada, the net effect is that you pay zero tax on income (from whatever source) used to support your studies. But if you're a wealthy professional with an employer-provided benefit to pursue an advanced degree like an MBA, then you would fall in higher tax brackets and would likely have to pay tax on that benefit. I think that's fair though.

The other, more relevant-to-USA part of the problem is that at many places (like my old PhD school), tuition is not a meaningful number. That is, it doesn't really represent the value of the education you're receiving and more importantly, it doesn't even represent any actual funds being paid from one entity to another. It's just a figure used for internal accounting. It's not a number meant to represent value and to tax on a meaningless number is going to be very harmful to a lot of people. A tax on tuition benefits should at least be calculated using real values!

[muskratsam]

Don't forget that currently a student can take a tax credit of 20% of fees paid to their university as part of the Lifetime Leaning credit.  In my case, that is about $1,400 in fees per year.  So I can lower my tax bill directly by $280/year.  That credit is also going away.