Lori Meadows
Whether or not grad students have to pay taxes on their fellowships depends on a few factors. The Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) consider fellowship payments as taxable income. However, if the fellowship is used for qualified expenses, it is generally not taxable. Qualified expenses include tuition, required fees, books, supplies, and equipment. Any amount used for incidental expenses, such as room and board, or optional equipment, is considered taxable income. Additionally, students from countries with a tax treaty with the US that includes a scholarship/fellowship article may be exempt from paying taxes on their fellowships.
| Characteristics | Values |
|---|---|
| Are fellowships considered taxable income? | Yes, fellowships are considered taxable income by the IRS. |
| Are there any exemptions? | Yes, if the fellowship is used for "qualified expenses" such as tuition and required fees, books, supplies, and equipment, it may be exempt from tax. |
| What are considered "qualified expenses"? | Expenses that are required for enrollment or attendance at the educational institution, such as fees, tuition, books, and supplies. |
| What if the fellowship is used for non-qualified expenses? | If the fellowship is used for non-qualified expenses, such as room and board, travel, or optional equipment, it is considered taxable income. |
| Are there any special considerations for international students? | Students from countries with a tax treaty with the US may be exempt or may receive a reduction in tax withholding if they meet certain requirements. |
| Are there any penalties for incorrect filing or underpayment of taxes? | Yes, penalties may be assessed for incorrect filing or underpayment of taxes. It is important to keep receipts in case of an audit. |
| What forms are required for tax filing? | Form 1040 or 1040-SR for US citizens or residents, and Form 1040-NR for international students. |
| Where can students find more information? | IRS Publication 970: Tax Benefits for Education, or by calling 1-800-829-3676. |
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What You'll Learn
- Fellowships are considered taxable income by the IRS and FTB
- Portions of a fellowship may be exempt from tax
- Foreign students may be exempt from paying taxes on their fellowship if their country has a tax treaty with the US
- Students should keep receipts in case they are audited in the future
- Salary received for services, such as teaching or research, are not considered true scholarship
Fellowships are considered taxable income by the IRS and FTB
The Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) consider fellowship grants taxable income. However, certain conditions must be met for the amounts received to be tax-free. Firstly, the recipient must be a degree candidate at an educational institution with a regular faculty, curriculum, and enrolled student body. Secondly, the funds must be used for tuition, enrolment fees, attendance fees, or course-related expenses such as books, supplies, and equipment. Amounts used for incidental expenses like room and board, travel, and optional equipment are not considered qualified expenses and are therefore taxable.
It's important to note that fellowship grants are generally considered taxable income when they are used for living expenses or incidental expenses, often referred to as stipends. Stipends are payments for which no services are rendered or required. For example, if a fellowship grant is used to pay rent, it is considered a non-qualified expense, and taxes are owed on that portion.
While a portion of fellowship grants may be taxable, there are also opportunities for tax exemptions. For instance, fee awards, non-resident tuition awards, and teaching or research assistant fee remissions are considered "qualified scholarships" and are typically not subject to tax. Additionally, students can exclude from their stipend payments the amount they spend in a calendar year on required course expenses. However, salary received for services, such as teaching or research assistant positions, is not considered a "true scholarship" and is therefore taxable.
Furthermore, students from countries with a tax treaty with the United States may be eligible for tax exemption or reduction on their fellowship grants. To claim this benefit, students must complete the necessary forms with their university's tax department, and the university will report stipend payments and any federal tax withheld on Form 1042-S to both the student and the IRS. Ultimately, it is the responsibility of the student to report these payments and remit any taxes due on their personal income tax return using Form 1040-NR and corresponding state forms.
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Portions of a fellowship may be exempt from tax
The Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) consider graduate fellowships as taxable income. However, portions of a fellowship may be exempt from tax under certain conditions.
Fellowship payments that are not wage payments for services rendered are considered "true scholarships" and are not subject to tax. This includes fee awards, nonresident-tuition awards, and teaching or research assistant fee remissions. Any amounts received as a candidate for a degree at an educational institution that are used for tuition, fees, books, supplies, and equipment required for courses are also tax-free. These "qualified expenses" are defined by the IRS and do not need to be reported by the student or the university.
Additionally, students or scholars from countries with a tax treaty with the US that includes a scholarship/fellowship article may claim exemption or a reduction of tax withholding if they meet the treaty requirements. For example, amounts received under specific programs like the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program are exempt from gross income.
It is important to note that any portion of a fellowship used for incidental expenses, such as room and board, or optional equipment, is generally considered taxable income. Students should keep receipts in case of an audit and consult with qualified individuals for specific tax advice, as tax laws can be complex and vary based on individual circumstances.
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Foreign students may be exempt from paying taxes on their fellowship if their country has a tax treaty with the US
Generally, graduate students who are also U.S. citizens or residents receiving fellowship grants are subject to withholding tax on such income. However, foreign students on fellowships may be exempt from paying taxes if their country of residence has an income tax treaty with the United States. This is because most tax treaties contain a "saving clause," which permits an exemption from taxes on fellowship grants even after the recipient has become a U.S. resident.
To claim this exemption, the foreign student must notify the payor of their foreign status and file the appropriate forms. If the student receives a fellowship grant and wages from the same institution, both of which are tax-exempt under a tax treaty, they can claim treaty exemptions on both incomes by submitting Form 8233. Otherwise, they should submit Form W-8 BEN, which is the Certificate of Foreign Status of the Beneficial Owner for United States Tax Withholding and Reporting.
It is important to note that tax treaties between the U.S. and foreign countries may have time limits beyond which a treaty exemption may not be claimed. Therefore, foreign students, scholars, teachers, researchers, and exchange visitors should consult the applicable tax treaty article to ensure they are still eligible for the exemption.
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Students should keep receipts in case they are audited in the future
Graduate students may or may not have to pay taxes on their fellowships. The Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) consider graduate fellowships taxable income. However, there are certain conditions under which fellowships are tax-free. These include being a candidate for a degree at an educational institution with a regular faculty, curriculum, and enrolled student body, and using the fellowship to pay for tuition, fees, books, supplies, and equipment required for courses. Additionally, fellowship amounts received as payments for teaching, research, or other required services may be tax-free.
Given the potential complexity of tax regulations and the possibility of audits, it is advisable for students to maintain proper records and receipts. While the IRS typically audits tax returns from the past three years, they may go back up to six years in rare cases. Here are some reasons why students should keep their receipts in case of future audits:
- Reconstructing expenses: If students do not have receipts, they may need to reconstruct their expenses. This can be challenging and time-consuming, and the IRS may disallow certain expenses if adequate alternative evidence is not provided.
- Supporting deductions: Receipts are critical for backing up the information on tax returns. Certain expenses, such as travel/entertainment, charitable contributions, mileage records, and gambling losses, typically require receipts or other detailed records.
- Avoiding penalties: Lack of proper records and receipts can result in IRS negligence penalties. Providing valid explanations or appealing decisions may be necessary without receipts, adding complexity to the audit process.
- Accuracy and compliance: Maintaining receipts helps ensure that students can accurately report their expenses and comply with tax regulations. It allows them to substantiate their expenses and provide evidence to support their claims.
- Peace of mind: Keeping receipts provides peace of mind in the event of an audit. Students can confidently respond to the auditor's requests for information and reduce the stress associated with scrambling for documentation.
- Professional assistance: Students can seek professional help from tax experts or attorneys who are experienced in dealing with audits. These professionals can guide students in recreating their expenses and providing the IRS with acceptable alternative records.
In summary, graduate students should maintain proper records and receipts to navigate potential tax obligations on their fellowships and be prepared for possible audits in the future. While it is possible to survive an audit without receipts, having them can streamline the process, reduce penalties, and ensure compliance with tax regulations.
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Salary received for services, such as teaching or research, are not considered true scholarship
In the US, the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) consider graduate fellowships to be taxable income. However, a portion of the fellowship may be exempt from tax. For instance, fee awards, non-resident tuition awards, and teaching or research assistant fee remissions are considered "qualified scholarships" and are not subject to tax.
It is important to note that the tax treatment of fellowship income can vary depending on the specific circumstances and the individual's tax status. For example, students or scholars from countries with a tax treaty with the US that includes a scholarship/fellowship article may be exempt from tax withholding if certain requirements are met. Additionally, some fellowship payments may be excluded from tax if they are used for qualified expenses, such as tuition fees, required books, and course-related expenses.
To ensure compliance with tax regulations, it is advisable for graduate students to consult with a qualified tax professional or seek guidance from their university's tax department. They should also keep receipts in case of an audit and be aware of any penalties for incorrect filing and underpayment of taxes.
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Frequently asked questions
It depends. If the fellowship is used for "qualified expenses", it is generally not taxable. Qualified expenses include tuition and required fees, books, supplies, and equipment. However, if the fellowship is used for expenses other than qualified expenses, it is typically considered taxable income.
Qualified expenses are defined by the Internal Revenue Service (IRS) and include tuition and required fees, books, supplies, and equipment.
Yes, students or scholars from countries with a tax treaty with the US that includes a scholarship/fellowship article may be exempt or have reduced tax withholding if they meet certain requirements. Additionally, specific programs, such as the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship, are exempt from taxation.
If filing Form 1040 or Form 1040-SR, include the taxable portion in the total income reported on Line 1a. If the taxable amount is not on Form W-2, enter it on Line 8 (with Schedule 1). For Form 1040-NR, report the taxable amount on Line 8 as well. Consult the IRS website or a tax professional for detailed instructions.
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