• Skip to content
  • Skip to footer

Personal Finance for PhDs

Live a financially balanced life - no Real Job required

Main navigation

  • About Emily Roberts
  • Blog
  • Podcast
  • Speaking
  • Products

Figure Out Your Taxes

How to Prepare Your Grad Student Tax Return (Tax Year 2018)

January 24, 2019 by Emily 3 Comments

It’s common for funded graduate students to be a bit intimidated by preparing their own tax returns, particularly if they are inexperienced in doing so. The sources of PhD student funding, namely fellowship stipends and the scholarships that pay tuition and fees, are rather unusual, so most people and even most professional tax preparers don’t have any experience with them. The strategies that apply for undergraduate-level taxes are pretty different from those that apply for graduate-level taxes. But learning how to prepare your grad student tax return isn’t actually difficult, nor are the resulting steps complicated. There’s no reason to be intimidated! This post covers the essential points you need to know to prepare your grad student tax return, whether you do it manually, with tax software, or with the help of another person.

grad student tax return 2018

 

This post is for tax year 2018. This post only covers federal tax due for domestic graduate students in the United States; you may have additional state and local tax due. I am detailing only the aspects of preparing your grad student tax return that are specific to higher education; I am not covering more general tax information that applies to the population at large.

Download Your Tax "Cheat Sheet"

Essential information to help funded US domestic graduate students with their federal tax returns

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Preliminary Remarks

This post is a step-by-step guide on how to prepare your grad student tax return. I want to clear up some confusion right up front so that you can work your way through the guide without becoming sidetracked.

All of your income is potentially taxable. The purpose of your tax return is to show that you don’t have to pay tax on all of it. What graduate students don’t often realize is that they have income sources aside from the one(s) that hit their bank accounts or are reported on official tax documents, and they need to deal with those incomes on their tax returns.

You have your stipend/salary that serves as your take-home pay, and this is potentially taxable, even if you don’t receive an official tax form about it and you didn’t have any taxes withheld. In fact, I’ll say you’re very likely to end up owing tax on it unless it’s quite low and/or you have a lot of tax deductions/credits.

You also have another kind of income if you are funded: the money that pays your tuition and fees. Your university might refer to this as scholarship, tuition waivers, tuition remissions, etc. Even if this money never passes through your personal bank account, it does pass through your name via your student account, and it also is potentially taxable. There is a very high chance you can use an education tax benefit to reduce your taxable income and/or reduce your tax due, but you have to sit down and do the arithmetic on it, not just assume that you won’t owe any tax on it. (In fact, doing the arithmetic may very well help you pay even less tax than if you ignored it!) This guide shows you exactly how to do that.

Further reading:

  • Weird Tax Situations for Fully Funded Graduate Students
  • Weird Tax Situations for Fellowship Recipients
  • Grad Student Tax Lie #1: You Don’t Have to Pay Income Tax
  • Grad Student Tax Lie #4: You Don’t Owe Any Tax Because You Didn’t Receive Any Official Tax Forms
  • Grad Student Tax Lie #5: If Nothing Was Withheld, You Don’t Owe Any Tax

Collect All Your Income Sources

The first step to prepare your grad student tax return, and any tax return, is to collect all your income sources. These income sources include wages as well as non-wage income such as interest and investment income and self-employment income, but does not include loan disbursements.

With respect to your grad student status, you have income sources that are unusual and may be officially reported to you or not (so check for all of them):

  1. Your TA/RA pay will be reported to you on a W-2.
  2. Your fellowship stipend or training grant income may be reported to you on a 1098-T in Box 5, on a 1099-MISC in Box 3, on a courtesy letter, or not at all. If your university does not send you any documentation of your fellowship income for 2018, you have to sum all the payments you received to figure out what it was.
  3. Your scholarship/grant income (i.e., the money that paid your tuition and fees), may be reported to you on a 1098-T in Box 5 or not at all. If you did not receive a 1098-T from your university, you should look at the transactions in your student account (e.g., Bursar’s account, Cashier’s account) to see the money posted there on your behalf.

Your university may not use the exact terminology that I did, but the tax forms and documentation (or lack thereof) will help you differentiate among the three types.

Further reading:

  • The Five Numbers Required for a Complete Grad Student Tax Return
  • What Is a 1098-T?
  • What Is a 1099-MISC?
  • What Is a Courtesy Letter?
  • Grad Student Tax Lie #2: You Received a 1099-MISC; You Are Self-Employed

At this stage, you may be thinking that the total of all this income is way too high. There’s no way you want to pay tax on all this income! Stick with me: We are going to reduce either your taxable income or your tax due in a subsequent step. But for now, work with all of your incomes.

Categorize Your Income

Your grad student income (assistantship pay, fellowships, and scholarships/grants) falls into two broad categories: compensatory and non-compensatory income. Compensatory income is easy to define, as you will receive a W-2 for it. (This rule is with respect to your three sources of grad student income only; other types of income could be compensatory but not associated with a W-2, such as self-employment income.) Non-compensatory income is best defined as any grad student-related income that is not compensatory (reported somewhere other than a W-2 or not reported). According to the IRS, it is “various types of educational assistance you may receive if you are studying, teaching, or researching in the United States… scholarships, fellowship grants, need-based education grants, qualified tuition reductions” (Publication 970 p. 5), but the way the IRS uses those terms doesn’t completely match how we use the terms in academia.

Decide Which Education Tax Benefit(s) to Use on Your Grad Student Tax Return

For tax year 2018, there are two relevant education tax benefits that you can access to reduce your tax burden: making non-compensatory pay tax-free and the Lifetime Learning Credit. You use your qualified education expenses (QEEs) to take a deduction (by either making your non-compensatory pay tax-free) or take a credit  (by taking the Lifetime Learning Credit). A tax deduction reduces your taxable income, while a tax credit reduces your tax due directly. You can apply either one or both of these benefits, but you have to use different QEE dollars.

Qualified Education Expenses

The definition of a QEE changes slightly for each tax benefit.

Even though the same term, such as qualified education expenses, is used to label a basic component of many of the education benefits, the same expenses aren’t necessarily allowed for each benefit. Publication 970 p. 4

Tuition at an eligible education institution is a QEE for both tax benefits (although to make non-compensatory pay tax-free you have to be a degree candidate). “Required fees” are QEEs for making non-compensatory pay tax-free. The Lifetime Learning Credit uses the wording “the fees and expenses [that] must be paid to the institution for enrollment or attendance” to define a QEE. Other fees and expenses beyond tuition may be QEEs; you should refer to the definition of a QEE with respect to each benefit.

If you received a 1098-T from your university, Box 1 will contain the sum of the QEEs that were processed by the office at your university that prepared the form. You may have additional QEEs not reported on a 1098-T.

Between 2017 and 2018, the IRS updated the 1098-T, and some universities had to change their accounting system. If Box 3 on your 1098-T is checked in 2018, it is possible that some of your QEEs are double-counted in both 2017 and 2018. So instead of running with the value in your 1098-T Box 1, you should figure out if any of the QEEs included were already used in 2017.

Further reading: What Is a 1098-T?

Whether you received a 1098-T or not, you should examine the transactions in your student account to make the final determination about the qualified education expenses that were processed by that office.

You may have additional QEEs not reported on your 1098-T or in your student account, such as required course-related expenses (keep your receipts!).

Make Non-Compensatory Pay Tax-Free

The non-compensatory pay that you receive can directly cancel against your QEEs to become tax-free. For example, if the tuition that you are charged and the scholarship or tuition reduction that pays it are exactly the same amount, they net to zero and you won’t be taxed on that portion of your non-compensatory pay. In fact, you don’t even have to show the IRS this calculation; you only have to report the portion of your non-compensatory pay that exceeds your QEEs.

The definition of a QEE to make non-compensatory pay tax-free is (excerpted from Publication 970 Chapter 1):

Further reading: Grad Student Tax Lie #3: You Can Deduct Tuition, Even If You Didn’t Pay It

Download Your Tax "Cheat Sheet"

Essential information to help funded US domestic graduate students with their federal tax returns

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Lifetime Learning Credit

The Lifetime Learning Credit reduces your tax burden and may be beneficial to apply if 1) your QEEs exceed your non-compensatory pay and/or 2) a 20% credit is more valuable to you than a deduction.

The Lifetime Learning Credit is a 20% credit; that means that if you use $1,000 in QEE expenses for the Lifetime Learning Credit, your tax due will be reduced by $200. There is a $10,000 limit on QEEs that can be used for the Lifetime Learning Credit, so the maximum benefit is $2,000 even if you have additional QEEs.

The modified adjust gross income phase-out for this deduction begins at $56,000 for a single person and $112,000 for a married couple filing jointly.

The definition of a QEE for the Lifetime Learning Credit is (excerpted from Publication 970 Chapter 3):

If you take the Lifetime Learning Credit, you must fill out and file Form 8863.

How to Decide Which Tax Benefit to Prioritize on Your Grad Student Tax Return

Do you remember how on multiple choice tests you are instructed to choose the “best” answer, not necessary the (one and only) “correct” answer? There are multiple acceptable ways to prepare your grad student tax return. At the end of the day, you can figure out the “best” answer – the one that results in the lowest tax burden for you – but it may very well take calculating your tax due with each of the different approaches. I do think it’s worth delving into the details of this decision, because may be possible to reduce your tax liability by as much as $800!

This section assumes that you are eligible for both of the education tax benefits (based on your income, the status of your educational institution, your student status, etc.); if you are ineligible for one or the other, that makes the decision all the easier. Please note that if you elect to apply the Lifetime Learning Credit when you could have made a scholarship tax-free using a matched QEE, that scholarship (by its terms) has to be eligible to be applied to a non-QEE. If a scholarship, for example, is earmarked only for paying a QEE such as tuition, then you must use your tuition QEE to make it tax-free; the scholarship cannot be included in taxable income and the QEE used for the Lifetime Learning Credit.

Essentially, you will choose which education tax benefit to apply first, tax-free scholarships and fellowships or the Lifetime Learning Credit. The one you apply first should be whichever minimizes your tax liability.

The following method will give you a first-pass indication of which benefit is better for you:

As tax-free scholarships and fellowships is a tax deduction, it is “worth” the amount of your QEEs or non-compensatory income (whichever is lower) multiplied by the sum of your federal, state, and local marginal income tax brackets.

As the Lifetime Learning Credit is a credit, it is worth its face value, which is 20% of the QEEs you apply to it up to $10,000.

Ask yourself if the sum of your marginal tax brackets is more or less than 20%.

If the sum is greater than 20%, that indicates you should apply your QEEs first to make as much of your non-compensatory pay tax-free as possible. If you have any remaining QEEs, apply them to the Lifetime Learning Credit (up to $10,000 of QEEs).

If the sum is less than 20%, that indicates you should apply your QEEs first to the Lifetime Learning Credit (up to $10,000 of QEEs). If you have any remaining QEEs, use them to make as much of your non-compensatory pay tax-free as possible.

When in doubt, calculate your tax due under both methods (or use software). In some situations, the above rule of thumb will not indicate the correct method to minimize your tax burden. For example, with the Lifetime Learning Credit-first method, you report a higher income than you would have if you used the tax-free scholarships and fellowships method, which might make you ineligible for certain tax benefits on other parts of your return, e.g., the Earned Income Credit. It’s imperative to calculate not just your total federal tax due under each method but your state and local tax due as well. Not all states treat scholarships and fellowships as ordinary income, for example.

The Numbers You Need for Your Tax Return

Once you have decided how you would like to use your QEEs, you should bring a few numbers with you to enter into your federal tax return:

  • your total amount of compensatory pay (W-2 pay with respect to your grad student income)
  • your net non-compensatory pay (after applying your QEEs to reduce it), and
  • the amount of your Lifetime Learning Credit (maximum $2,000) from Form 8863.

Fill Out Your Grad Student Tax Return

With respect to your (net) grad student income, Lifetime Learning Credit, and tax already paid, how to report them on your tax return is very straightforward. Of course, you will fill out the rest of your tax return by following the form instructions; this section only relates to the grad student aspects of your return.

Report Your Income

Your compensatory pay and net non-compensatory pay will be summed and reported as a single figure in the wages line of your tax return. (Add to this figure any other wages as well according to the form instructions.)

On Form 1040, you will write your income in Line 1. If your grad student income includes any non-compensatory income, write “SCH” in the line next to the number. You may also include the amount of the net non-compensatory pay. The purpose of this note is to alert the IRS that there is no W-2 associated with all or part of the income reported on that line.

Further reading: Where to Report Your Grad Student Income on Your Tax Return

Report Your Lifetime Learning Credit

Report your Lifetime Learning Credit on Line 50 of Form 1040 Schedule 3; you will also file Form 8863. The amount of this credit will directly reduce your tax due.

Report Your Tax Already Paid

If you received a W-2 and/or 1099-MISC for part or all of your grad student income, you will enter the amount of federal tax that was withheld from your income in Line 16 of Form 1040.

Further reading: Grad Student Tax Lie #5: If Nothing Was Withheld, You Don’t Owe Any Tax

If you paid quarterly estimated tax on your fellowship income, report the total of the estimated tax payments you made in Line 66 of Form 1040 Schedule 5.

Download Your Tax "Cheat Sheet"

Essential information to help funded US domestic graduate students with their federal tax returns

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Notes on Other Education Tax Benefits

I have omitted from detailed discussion one education tax benefit that you may be familiar with from past experience preparing your tax return.

American Opportunity Credit

The American Opportunity Credit is typically used during the undergraduate years only. It can be claimed in only 4 tax years and not in any tax year after the one in which you finish your first four years of postsecondary education. Therefore, if you graduated from college in 2018 (in four years) and you (or your parents) claimed the American Opportunity Credit in no more than 3 previous tax years (e.g., freshman spring/sophomore fall, sophomore spring/junior fall, and junior spring/senior fall but not freshman fall), you may be eligible to claim it in 2018. If you claim the American Opportunity Credit, you cannot use the Lifetime Learning Credit. If you are considered a dependent on your parents’ tax return in 2018, you cannot claim the credit.

Conclusion

The most challenging aspect of this process is simply knowing the various aspects that you have to consider. The most complicated aspect is deciding how to use your QEEs, but you can always take the default option of prioritizing making your non-compensatory pay tax-free if you don’t want to do the extra calculations. (Your tax software or professional tax preparer should make the determination for you, but you have to give it/him/her good information to work with to do so properly.)

Further reading: How to Work with a Tax Preparer When You Have Fellowship and/or Scholarship Income

Best of luck to you as you prepare your grad student tax return this year! If you need additional support, download my tax “cheat sheet” and/or register for my workshop (includes live Q&As!). And please consider sharing this post with your peers through social media or a list-serv!

We at Personal Finance for PhDs are not professional tax preparers; this post is for informational purposes only and does not constitute tax advice.

Loading…

The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients

March 26, 2018 by Emily 7 Comments

If you’re reading this article, you’ve already done the hard part: You know (or suspect) that you’re supposed to pay quarterly estimated tax on your fellowship using Form 1040-ES. Whether you’re a graduate student, a postdoc, or some other kind of fellow or trainee, if you’re not having tax withheld from your income, it’s pretty likely that you have the responsibility of paying quarterly estimated tax. The main obstacle to PhD students and postdocs paying quarterly estimated tax is simply awareness! The process itself is not complicated or difficult, as I’ll show you in this complete guide to quarterly estimated tax for fellows.

complete guide quarterly estimated tax

If you’re still unsure that you owe income tax at all on your fellowship income – or you want to help your peers understand this issue as well – I have plenty of articles on that topic in particular.

Further reading:

  • Weird Tax Situations for Fellowship Recipients
  • Grad Student Tax Lie #1: You Don’t Have to Pay Income Tax
  • Grad Student Tax Lie #4: You Don’t Owe Any Taxes Because You Didn’t Receive Any OfficialTax Forms
  • Grad Student Tax Lie #5: If Nothing Was Withheld, You Don’t Owe Any Tax

This article is for US citizens and resident aliens, and I’ve made the assumption that you are not, in addition to being a fellow, a farmer, fisherman, or business owner/self-employed, that you do not have any household employees, and that your adjusted gross income is less than $150k. (There are additional factors at play for these groups with respect to calculated estimated tax due.)

What Is Estimated Tax

The IRS expects to receive tax payments from you throughout the year, not just in the spring when you file your tax return.

To that end, employers offer automatic tax withholding to their employees. The employee files Form W-4 with the employer. This form helps the employee perform a high-level calculation about the amount of income tax the employee will owe for the year, which tells the employer approximately how much income tax to withhold from each paycheck. (Non-student employees will also have FICA tax withheld.)

Non-employees are almost never extended the courtesy of automatic income tax withholding by their university/institution/funding agency. (Income tax withholding for fellowship/training grant recipients is offered in rare cases – Duke University is one – so it is worth inquiring about, but don’t be surprised if the answer is no.) Instead, the onus is on the individual to manually make tax payments.

By the time a person/household files a tax return in the spring of each year, the IRS expects the tax paid throughout the year to be in excess of or only slightly less than the actual amount owed. Approximately 3 in 4 Americans receive a tax refund (the amount of tax paid throughout the year minus the actual amount owed) after filing their tax returns. The rest, presumably, owe some additional tax when they file their tax returns. If the amount of additional tax due (above the amount paid throughout the year) is too high, the IRS will penalize the taxpayer.

To help taxpayers avoid underpaying tax throughout the year and being penalized, the IRS has set up a method of making manual tax payments four times per year: quarterly estimated tax payments. Anyone whose primary income isn’t subject to automatic withholding (e.g., fellowship recipients, self-employed people) or who has significant income in addition to their employee income (e.g., investment income) should look into making quarterly estimated tax payments.

Who Has to Pay Estimated Tax

In general, you should expect to pay income tax in the year you receive your fellowship unless:

  • your income is particularly low (e.g., you had an income for only part of the year or your fellowship went toward qualified education expenses instead of your personal living expenses) or
  • your tax deductions and credits are particularly high.

Your tax due for the year might be large enough that you are required to make quarterly estimated tax payments or small enough that you can skip the quarterly payments and pay all the tax due at once with your annual tax return.

The dividing line is $1,000 of tax due at the end of the year in addition to the tax you had withheld and your refundable credits. If you expect to owe more than $1,000 in additional tax for the year, you should make quarterly tax payments, unless you fall into one of the exception categories discussed in the next section. If you expect to owe less than $1,000 in additional tax, you don’t have to make those quarterly payments and will just pay everything you owe with your annual tax return.

For individuals who receive only fellowship income not subject to tax withholding throughout the calendar year, the calculation is straightforward: How much income tax will you owe for the year, greater or less than $1,000?

For individuals/households with fellowship income not subject to withholding plus employee income subject to withholding (e.g., one person with part-year fellowship income and part-year employee income, one spouse with fellowship income and one spouse with employee income), both the total amount of tax owed across all incomes and the amount withheld must be taken into consideration. If you will owe more than $1,000 in additional tax at the end of the year, you should file quarterly estimated tax.

Who Doesn’t Have to Pay Estimated Tax

Some people who owe more than $1,000 in additional tax at the end of the year are not required to make quarterly estimated tax payments.

  1. If you had zero tax liability in the previous tax year, you are not required to make quarterly estimated tax payments in the current tax year. For example, if last year you were a undergrad or grad student with no income/a low enough income that you didn’t owe any income tax, you’re not required to make quarterly estimated tax payments this year.
  2. If the sum of your tax withholding throughout the year and refundable credits equals or exceeds 90% of the tax you expect to owe this year, you are not required to make quarterly estimated tax payments. For example, if your spouse earns the lion’s share of your household income and has a generous amount of tax withheld automatically, your household’s overall tax withholding might be sufficient to exempt you from making quarterly estimated tax payments on your fellowship.
  3. If the sum of your tax withholding throughout the year and refundable credits equals or exceeds 100% of the tax you owed last year, you are not required to make quarterly estimated tax payments. For example, if last year you finished undergrad and started grad school with a stipend, your tax owed for the year was likely quite small. If you have assistantship pay with tax withholding for part of this year and then switch to a fellowship with no withholding, your tax withholding from your assistantship might cover 100% of your tax owed from last year, and you wouldn’t be required to make quarterly estimated tax payments.

The best way to estimate your tax due this year along with your withholding and refundable credits and determine whether you are required to pay quarterly estimated tax is to fill out Form 1040-ES.

Fill Out the Estimated Tax Worksheet in Form 1040-ES

Form 1040-ES, specifically the Estimated Tax Worksheet (p. 8), guides you through 1) estimating the amount of tax you will owe for the year, 2) determining if you are required to make quarterly estimated tax payments, and 3) calculating the amount of your required estimated tax payment.

I’ll point out a simple approach to filling out the Estimated Tax Worksheet for individual taxpayers/households with only fellowship and employee income. If you additionally have self-employment income or other types of income, your approach will be more nuanced.

If your fellowship income is disbursed frequently throughout the year (e.g., once per month for the entire year), this simple method will work for you. If your fellowship income is disbursed infrequently (e.g., 2-3 times per year) or throughout only part of the year (e.g., only the fall term after switching funding sources), keep reading for an alternative method.

The important numbers a fellowship recipient needs to plug in to Form 1040-ES to fill it out are:

  • Line 1: Your expected Adjusted Gross Income (AGI), which is your total income for the year less your above-the-line deductions (e.g., deductible portion of student loan interest paid, the Tuition and Fees Deduction). Your AGI includes your fellowship income, taxable scholarship income (if applicable), and any wages you (and your spouse) received, e.g., from an assistantship.
  • Line 2: Your deductions. If you plan to itemize your deductions, you should enter the total of those itemized deductions in line 2a; otherwise, enter the amount of your standard deduction (single $12,000, married filing jointly $24,000).
  • Line 7: The sum of your credits if you plan to take any. Examples of credits include the Lifetime Learning Credit, the Child Tax Credit, and the Child and Dependent Care Credit.
  • Line 11b: The sum of your refundable credits if you plan to take any, such as the Earned Income Credit.
  • Line 12b: Your total tax liability for the prior year.
  • Line 13: Income tax you expect to be withheld throughout the year. This can generally be extrapolated from your most recent pay stub.

If you come to the worksheet with this set of numbers, all you need to complete it is to follow the arithmetic steps instructed in the form and to look up your tax due using the Tax Rate Schedule on p. 7.

Once you fill out the worksheet, line 11c will tell you the total amount of tax that it is estimated you will have to pay for the year. The rest of the form helps you determine the minimum amount of quarterly estimated tax you have to pay to avoid a penalty, which might be $0. Both of these numbers are key for your tax planning for the year; don’t just make the minimum payments necessary and forget that you might owe additional tax along with you tax return in the spring.

Method for Irregular Income

If you receive your income unevenly throughout the year, the IRS has a method for calculating a different amount of estimated tax due in each quarter, the Annualized Income Installment Method (see Publication 505).

Essentially, you calculate your tax due for each quarter based on your cumulative income up to that point of the year. Ultimately, you can pay the lesser of the estimated tax calculated through this worksheet or the quarterly estimated tax calculated from the previous method. (This is helpful if your income is higher later in the year than earlier; you don’t have to pay the extra tax until you actually receive the income.)

If you receive your fellowship income irregularly throughout the year – particularly if you are paid more later in the year than earlier – and want to be very exact about the amount of estimated tax you pay each quarter, you should fill out the Annualized Income Installment Method Worksheet after you complete the Estimated Tax Worksheet.

However, the Annualized Income Installment Method is a very complicated and fiddly worksheet, so if you don’t mind just making the regular quarterly payments, perhaps with guesstimate adjustments, that’s going to be faster and easier. For example, if you have tax withholding in place for much of the year through your assistantship but switch to fellowship funding for just the fall semester, your estimated tax payments all need to be made in the last one or two quarters, not the earlier part when you were having tax withheld.

Paying Your Quarterly Estimated Tax

If you are required to pay quarterly estimated tax, you have many options for doing so, such as by mail, over the phone, and through the IRS2Go app. The easiest method is most likely through the website IRS.gov/payments, where you can choose to make a direct transfer from your checking account for free or to pay using a debit or credit card for a fee.

The due dates for your 2018 quarterly estimated tax are:

  • April 17, 2018
  • June 15, 2018
  • Sept 17, 2018
  • Jan 15, 2019

Please note that these dates are not at 3-month intervals.

Penalties for Underpaying Tax throughout the Year

There are penalties for failing to make estimated tax payments when you are required to do so or underpaying your estimated tax. The penalty is calculated separately for each quarter, so you may be penalized for underpaying in an earlier quarter even if you made up for it in a later quarter. The details about the penalties can be found in Publication 505.

State Quarterly Estimated Tax

Your state and/or local government may also require you to make estimated tax payments.

Set Up a System of Self-Withholding

If you are going to owe any income tax for the year and do not have automatic income tax withholding set up, you should intentionally prepare for your tax bill, whether or not that tax is due with your annual tax return or quarterly.

My recommendation is to set up a separate savings account labeled “Income Tax” or similar. With every paycheck you receive, transfer into your savings account the amount of money from it that you expect to pay in income tax. For example, if you receive monthly fellowship paychecks, you should set aside 1/12th of the amount you calculated in Line 11c (rounding up). When you pay tax quarterly or annually, draw the payment from that dedicated savings account.

How to Avoid Paying Estimated Tax Using Your Spouse’s Withholding

If you are married filing jointly with one spouse receiving a fellowship not subject to withholding and one spouse subject to automatic withholding, it is possible to set up the withholding on the employee income so that you don’t have to pay quarterly estimated tax on the fellowship.

The idea is that you will increase the automatic withholding on the employee’s income so that it covers what you owe in tax for the year as a couple. This involves filing a new W-4 with your spouse’s employer.

There are two types of approaches you can take to increase your spouse’s withholding using Form W-4. The first is to recalculate the appropriate number of allowances to take using the Personal Allowances Worksheet, the Deductions, Adjustments, and Additional Income Worksheet, and possibly the Two-Earner/Multiple Jobs Worksheet. The second is to maintain the number of allowances as they had been (assuming they were accurate) and enter an additional amount of money on Form W-4 Line 6 to have withheld from each paycheck (Form 1040-ES Line 11c divided by the number of paychecks your spouse receives per year).

Do you have any additional question on quarterly estimated tax for fellowship recipients?

Loading…

What Method Should You Use to Prepare Your Tax Return?

March 5, 2018 by Emily Leave a Comment

I hope that this is news to no one in the US: Grad student stipends are taxable and so is postdoc income, even if you don’t have taxes withheld or receive an official tax form! You may feel that it’s adding insult to injury to have to pay tax on a lower income, and it is possible that you will not owe any tax if your income is low enough and/or you have enough credits and deductions, but you should still prepare a tax return every year. You need to start from the assumption that all of your income is taxable and use your tax return to reduce your tax burden as much as you can. (This post focuses on US federal taxes for citizens/residents, though international students and postdocs paid in the US will benefit as well.)

A version of this post first appeared on GradHacker.

tax return method

Further reading:

  • Do I Have to Pay Income Tax?
  • Grad Student Tax Lie #4: You Don’t Owe Any Taxes Because You Didn’t Receive Any Official Tax Forms
  • Grad Student Tax Lie #5: If Nothing Was Withheld, You Don’t Owe Any Tax

Early-career PhDs can turn to one of four sources to prepare their tax returns: themselves, tax software, a relative or friend, or a professional tax preparer. There are pros and cons to each method, and the ultimate choice of which method(s) to use will depend on the complexity of your tax situation, the resources available to you, and your willingness to learn about this important subject.

Further reading: How Do I Prepare My Taxes during Filing Season?

Free Tax Webinar for Grad Students and Postdocs

Free tax webinar 2017 pfforphds recording

Emily Roberts presented a tax webinar for funded grad students and postdocs (US domestic) on March 9, 2018.

Register for the webinar to receive a replay!

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

One very important point to know about your tax return is that you are ultimately responsible for its accuracy. That means that whatever method you use, you must check your tax return through to make sure everything is correct. If you have no knowledge of taxes or have been misled by common tax lies told to graduate students, that will be very difficult; identifying all your income sources properly will be challenging and incompetence on the part of your tax preparer may slip by you.

Further reading: Grad Students, Don’t Believe these Tax Lies!

Your tax return is also only as good as the data you provide to it (GIGO!). If you overlook a part of your income, for instance because you received no official tax form for it, it doesn’t matter what method you use – your tax return will be inaccurate. This is particularly a problem for grad students. Take the time before you even choose your method to assess what sources of income you had and what forms you have or have not received for them. You can learn all about how to handle your various sources of grad student and postdoc income in my free tax webinar this week, which will be helpful no matter which method you ultimately use to prepare your tax return.

Further reading: How to Prepare Your Grad Student Tax Return

Download Your Tax "Cheat Sheet"

Essential information to help funded US domestic graduate students with their federal tax returns

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Prepare Your Tax Return Manually

Believe it or not, often the quickest and easiest way to prepare your tax return is to just do it yourself, manually. This is particularly true if you have a simple tax situation, as many young people do. It will probably take an investment of several hours to understand the tax code at a high level and how your income and expenses fit into it the first time you prepare your own tax return. However, subsequent simple or slightly more complicated tax returns should be very quick! (Tip: Instead of using paper and ink, prepare your tax return with the IRS’s Free Fillable Forms.)

Pros:

  • If you learn about the tax code well enough to prepare a simple return (and really, all it takes is the ability to follow instructions and do arithmetic), you will go through your life with far more knowledge about income taxes than the average citizen. Taxes do not have to be mystifying.
  • Only costs your time.

Cons:

  • You don’t know what you don’t know. Without a knowledgeable source keeping an eye on your return, you may miss details such as a credit or deduction that you are eligible for.
  • You may make a mistake, either because of your lack of knowledge and experience or simply a math error.

Prepare Your Tax Return Using Tax Software

I’d bet that the majority of early-career PhDs use tax software (e.g., TurboTax, TaxACT, H&R Block) to prepare their returns. It’s a low-cost way of generating a meticulously prepared return. (Tip: The IRS provides free tax software to individuals who earned less than $66,000 in 2017.)

This is the trickiest method to use if you don’t understand your various sources of income well because without tax forms associated with some of the you may accidentally omit or misrepresent them. Software also tends to misinterpret some forms grad students commonly receive, such as categorizing grad students who receive 1099-MISCs as self-employed. Graduate students and postdocs will probably struggle the most with understanding how to enter their non-compensatory pay (fellowships and scholarships), depending on the documentation they receive.

Further reading: Grad Student Tax Lie #2: You Received a 1099-MISC; You Are Self-Employed

Pros:

  • Often free, and if not still relatively low-cost.
  • Generally thorough and trustworthy if you enter your data correctly.

Cons:

  • Can be more time-consuming to answer the software’s thorough questioning than just skipping to the relevant data entry points if you have a simple situation.
  • The software is not designed with grad student income in mind, so it can be difficult or confusing to enter non-compensatory pay, depending on the forms or lack of forms your university sends you.
  • Perhaps not sufficient for complicated tax situations.

Get a Relative or Friend to Prepare Your Tax Return

It’s fairly common for parents or relatives to (help) prepare children’s tax returns while they are dependents, and it may be tempting to continue that trend into grad school (or beyond!). However, this method suffers from the combined downsides of all the other methods while removing your direct oversight of the situation.

Pros:

  • Likely free and a low time investment.
  • He/she is probably more generally knowledgeable about the tax code than you are.

Cons:

  • While your parents may be competent in preparing their own tax returns as employees or business owners and yours as a college student, they have likely never been exposed to the unusual income reporting strategies employed by universities with respect to their grad students and postdocs.
  • You still have to know enough about the tax code to check their work.

Outsource Your Tax Return to a Professional Tax Preparer

I have to admit a bit of bias against using a professional tax preparer as a grad student, unless your life is so complicated that you need one and you have been assured that they know how to handle grad student income. For postdocs and early-career PhDs who receive compensatory pay, professional tax preparers should be quite competent, and probably more needed as your financial life gains complexity. As a person who speaks and writes about personal finance professionally, I have heard many, many horror stories of professional tax preparers bungling grad student income tax returns, causing the grad student to radically over- or underpay their taxes and forcing them to file amended returns once they catch the mistake – and those are just from the grad students who did catch the mistake (or who described the situation well enough for me to catch it)! I’m sure there are also many cases where everything went perfectly with the return, but I don’t tend to hear about those. The point is that grad students are not a common client type for professional tax preparers, so they are not necessarily knowledgeable about the special situation and may not notice the nuances or take the time to learn about them. Again, the responsibility is still on your shoulders to ensure the correctness of the return.

Further reading: How to Work with a Tax Preparer when You Have Fellowship and/or Scholarship Income

Pros:

  • Thorough, and possibly the best option for complicated tax situations.
  • Low time investment.

Cons:

  • Most expensive option unless you use some sort of free clinic.
  • As they are usually unfamiliar with grad student taxes (unless you screened for this), you still have to know enough about the tax code to check their work.

Free Tax Webinar for Grad Students and Postdocs

Free tax webinar 2017 pfforphds recording

Emily Roberts presented a tax webinar for funded grad students and postdocs (US domestic) on March 9, 2018.

Register for the webinar to receive a replay!

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Conclusion

Everyone should know what information should be included in their tax returns, roughly how to calculate their taxable income, and where their income should be reported on a 1040 (or equivalent). This is the basic amount of information needed to generate and check a tax return with respect to your income. I’ll add on here that to be an informed citizen you should also know the difference between a deduction and credit and how marginal tax brackets work.

Further reading: Marginal Tax Brackets, Deductions, and Credits Explained Graphically

If you have a simple life (e.g., not itemizing deductions, not self-employed), it may be worthwhile to invest the time necessary to prepare your return manually this year, because learning that much will be a real time-saver in years to come. Alternatively, you can use tax software in an early year to help you learn about the tax code, and once you’ve grasped the concepts, use them in future years to prepare your return manually.

If you have a complicated life (e.g., itemizing deductions, marriage and children, home ownership, self-employment, investment income, traditional retirement accounts), it’s probably not worth your time to prepare your return yourself with confidence that you haven’t missed anything (unless you enjoy doing it yourself), so paying for tax software or a tax preparer is likely the better choice.

Whatever you do, don’t wait until April 16 to start preparing your taxes using any of these methods!

Further reading: How to Prepare Your Grad Student Tax Return

My Choice

My method of choice during grad school and since has been to prepare my tax return manually and using tax software each year. First, I draft my return myself, which necessitates learning a little something new about the tax code. Second, I use tax software to prepare my return, which alerts me to anything I overlooked that I could incorporate into my manual return. Third, I submit the manual return I prepared – I have more confidence in the correctness of that version!

How to Work with a Tax Preparer when You Have Fellowship and/or Scholarship Income

January 29, 2018 by Emily 1 Comment

When preparing your tax returns each year, you have three basic options: do it yourself (manually), use tax software, and employ a tax preparer (e.g., certified public accountant (CPA), enrolled agent, human worker at H&R Block). The least common approach for a grad student or postdoc is to hire a human professional tax preparer, but it is warranted in certain circumstances. If you do work with a tax preparer, it’s vital to make sure they properly account for the peculiarities of grad student (and sometimes postdoc) income, namely fellowship and scholarship income.

Please note that this article is relevant for the 2017 tax year only. With the tax overhaul starting in 2018, fellowship/scholarship income may be calculated slightly differently. I will update this article for tax year 2018 later in the 2018 calendar year.

Should I Use a Professional Tax Preparer?

My anecdotal observation is that grad students and postdocs most commonly use tax software to prepare their returns. I am actually a proponent of trainees with simple financial lives preparing their tax returns manually as I think there is less room for error and less effort required.

It is a good idea for you to consider using a professional tax preparer if you have a complicated financial life, need tax planning advice, and/or don’t want to spend time preparing your return manually or with software. Of course, a professional tax preparer comes with the highest price tag of all of the options, so the cost has to be worthwhile to you.

Indications that you have a complicated financial life that perhaps warrants using a professional tax preparer are:

  • You plan to itemize your deductions
  • You or your spouse owns a business
  • You have significant non-wage income (aside from fellowships), e.g., taxable investment income
  • You had a major life event this year, e.g., getting married, having a child, buying a home, receiving an inheritance

I do not think that a person whose only tax complexity is fellowship or scholarship income needs to use a tax preparer. This person would be better off preparing her return manually or with software. Fellowship and scholarship income at the graduate and postdoc level can appear confusing to tax software or professionals who are unfamiliar with it or only understand it with respect to college students. But in reality, incorporating into your tax return is very straightforward and a professional tax preparer is not necessary. As the recipient of the fellowship or scholarship income, you should know how to calculate and report your taxable fellowship/scholarship income whether you prepare your return manually or not. It is your responsibility to make sure your tax return is correct, and checking the work of the tax software or preparer that you engage goes a long way to ensuring that it is.

Interview Questions Your Potential Tax Preparer

If you decide to use a professional tax preparer, you should interview the people you are considering hiring. I would not walk into a tax preparation agency and have my tax return prepared by the first available worker. Naturally, you will vet the tax preparer regarding all the financial complexities that caused you to seek her out.

Further reading: 11 Questions to Ask When Hiring a Tax Preparer

In addition, incorporate a form of this set of questions regarding fellowship/scholarship income (as they apply to your situation):

  1. Have you ever prepared or do you regularly prepare tax returns for graduate students with scholarship income / graduate students or postdocs receiving fellowships?
  2. Are you familiar with how to calculate and report scholarship and fellowship income in excess of qualified education expenses?
  3. (If 2 is yes) Will you please briefly explain how you do that?
  4. (If 2 is no) Are you willing to learn about this issue prior to working on my return?

Yes, I am suggesting that you quiz your tax preparer, especially if he claims he regularly prepares these types of returns. I think the answer to question 3 should sound something like this:

I add up all the amounts of fellowship and scholarship income. Often these are found on a 1098-T or courtesy letter, but I will also ask you to tell me about income not found there. Then, I determine if it is most advantageous to use your qualified education expenses [grad students only] from your 1098-T to make your scholarship/fellowship income tax-free or if it is better to use the Lifetime Learning Credit or Tuition and Fees Deduction. Your net taxable scholarship and fellowship income goes on the 1040 in the Wages line/Line 7, and if I used the Lifetime Learning Credit or Tuition and Fees Deduction I’ll prepare the appropriate forms.

I don’t think you need to eliminate from consideration a tax preparer who is not currently versed in how to handle scholarship/fellowship income, but in that case you need to believe that she is sincere in her promise to learn about it before diving into your return. I do think it’s dealbreaker if she gives a wildly incorrect answer (e.g., “scholarship/fellowship income isn’t taxable”) and expresses no uncertainty or willingness to devote time to understanding the issue when corrected.

A special note for those whose fellowship income is reported on a 1099-MISC: While rare, a few universities report fellowship stipends on Form 1099-MISC in Box 3. This can be confusing for tax preparers and software because Form 1099-MISC is more typically used for self-employment income (in Box 7). However, the use of the 1099-MISC does not mean that you as a grad student or postdoc are self-employed. Once you point this out to your tax preparer, he should confirm that he will treat it as scholarship/fellowship income as above.

Reference on Scholarship/Fellowship Income

If your tax preparer is not already familiar with how to handle excess fellowship/scholarship income, point her to Publication 970 Chapters 1, 3, and 6 (Chapter 1 being the most salient).

Free Workshop: Make Your Quarterly Estimated Tax Payment

Pfforphds dranddr

A free 60-minute group workshop for US fellowship recipients (graduate students, postdocs, fellows, trainees) in the first two weeks of September 2018.

The session will include a presentation, walking through the form together, and an opportunity for questions.

It's basically an appointment to pay your estimated tax (with my support)! Come with all your info and leave with this task ACCOMPLISHED!

Sign up for the mailing list to receive more details.

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Check Their Work!

You should perform a super simple check when your tax preparer sends you your tax return to make sure the reporting of your fellowship/scholarship income went well. Your net scholarship/fellowship income should be added into the rest of your household wage income in Line 7 of your 1040, and “SCH” should be written next to it (possibly with that net scholarship/fellowship amount).

What I mean by net scholarship/fellowship income is your total scholarship/fellowship income less the qualified education expenses that your preparer used to make your scholarship/fellowship income tax-free. (For postdocs, the gross and net amount should be the same as you were not a student.)

For example: Let’s say you had a $25,000 fellowship and $25,000 of scholarship income that went toward paying $24,000 of qualified education expenses (tuition and required fees). The last $1,000 of scholarship income went to a non-required fee such as your health insurance premium. Your net scholarship/fellowship income would be $26,000. (That is, unless your tax preparer decided to report a higher net scholarship/fellowship income in favor of taking the Lifetime Learning Credit. The addition to your net scholarship/fellowship income should equal the amount claimed for the Lifetime Learning Credit.)

Further reading: Grad Student Tax Lie #6: You Don’t Have to Pay Tax on the Scholarship that Pays Your Health Insurance Premium

Download Your Tax "Cheat Sheet"

Essential information to help funded US domestic graduate students with their federal tax returns

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Parting Thoughts

I’m actually quite passionate about the issue of the use of professional tax preparers and scholarship/fellowship income.

In my position as a personal finance blogger-turned-speaker, I’ve heard at least a dozen personal anecdotes from graduate students who used professional tax preparers or services like H&R Block or VITA and caught major errors in how their scholarship and/or fellowship income was calculated and reported.

In many cases, the miscalculated amount of tax due was radically higher (e.g., paying self-employment tax, paying tax on income that should have been made tax-free) or radically lower (e.g., no tax form means no income to report) than the true amount of tax due. These mistakes, frequently caught years later, sometimes cost the student dearly in time and money spent to correct them. I shudder to think of all the mistakes that were not caught by the student, especially regarding overpayment.

I don’t share my observations with you to deter you from using a professional tax preparer, but only to caution you that the interview process and double-checking their work is very important. You can’t afford to be ignorant about how scholarship/fellowship income should be calculated and reported, even if you decide to outsource the tax return preparation process.

New Fellow? Pay Your Quarterly Estimated Tax for the First Time This Week!

January 15, 2018 by Emily Leave a Comment

Did you start receiving a fellowship this academic year as a graduate student or postdoc? First, congratulations! Second, I must clear up a pernicious misconception about fellowships in the US: you do owe federal income tax (and probably state, too) on your fellowship income. If income tax is not being withheld from your stipend/salary (and the majority of universities do not offer withholding on this type of income), you may be responsible for making quarterly estimated tax payments throughout the year. The next payment is due tomorrow, January 16, 2018! This post will guide you through how to determine whether you owe quarterly estimated tax and how to pay it if so.

Do You Receive Your Gross Income?

The IRS expects to receive income tax payments throughout the year, not just each April. Employees almost always have income tax withheld from their paychecks; instead of receiving their gross (full) income, their employer sends approximately the amount of tax the employee owes from each paycheck to the IRS and the employee receives the rest (net income).

Fellowship recipients (when the term is used conventionally; perhaps not universally) have non-compensatory pay and are not considered employees of their universities. Most universities do not offer income tax withholding on fellowship stipends/salaries. Taxpayers who do not have income tax withheld from their salaries (or who have too little withheld compared to the amount of tax they owe) are sometimes responsible for manually sending money to the IRS. This is called making quarterly estimated tax payments.

If you are a fellowship recipient (e.g., the NSF GRFP), your first step is to confirm that you are in fact not an employee, and your second step is to check whether you are receiving your gross or net income.

Step 1: The easiest way to determine if you are an employee (or rather, confirm that you are not) is to check whether you receive a W-2 for your fellowship income. (If you had an assistantship in this calendar year, you will receive a W-2 for that position, so be sure to check specifically about your fellowship income.) However, if you just started your fellowship in the 2017-2018 academic year, you aren’t due to receive (or not receive) your tax forms until the end of January 2018, and the estimated tax payment is due in mid-January. Your next best option is to inquire into what tax form you will receive for your fellowship stipend/salary. Non-compensatory pay will appear on a 1098-T, 1099-MISC, or courtesy letter or will not be reported in any way. Compensatory pay (indicating that you are an employee) will appear on a W-2. You should try asking your departmental administrative assistant, university fellowship coordinator, Bursar’s Cashier’s office, and/or payroll office. You will most likely be told that they “cannot give tax advice,” but confirming what type of tax form your income generates is not advice.

Step 2: Having confirmed that you are not an employee (if you are, you don’t need this post!), double-check the stipend/salary amount that hits your bank account. If you multiply it by the number of pay periods over which you will receive it, is it equal to the gross fellowship stipend/salary you were told you would receive or is it less? If it is less, did you at any point file a W-4 (e.g., when you had an assistantship)? You may be one of the few students/postdocs who has income tax withheld from a fellowship stipend/salary. As stated earlier, a small minority of universities do offer withholding on fellowship income, and they should use a W-4 to determine the amount of withholding.

If you are not an employee and are not having income tax withheld from your fellowship stipend/salary, you may need to make quarterly estimated tax payments.

Are You Responsible for Paying Quarterly Estimated Tax?

The IRS explains who is responsible for filing quarterly estimated tax on Form 1040-ES p. 1.

Right off the bat, you are not required to pay quarterly estimated tax if in the previous tax year your total income was zero or you did not have to file a tax return (and your return covered all 12 months). For example, if you were a student for all of 2016 and either didn’t have an income or your income was so low that you didn’t have to file a tax return, you aren’t required to make quarterly estimated tax payments.

If that first provision doesn’t apply to you, the IRS has a helpful flow chart on Publication 505 p. 24.

Publication 505 Figure 2-A

At this point, you’re going to have to do a few calculations to determine what amount of additional tax you owe for the year (additional to any withholding you already had). You simply need to fill out the worksheet on Form 1040-ES p. 8 for your household. It looks sort of involved but if you have a simple financial life you won’t actually need to put very many entries into the worksheet. You will need at your fingertips your 2016 tax return (or at least the total amount of tax you paid), your gross income for 2017, the amount of income tax you had withheld in 2017 (if any) and an educated guess as to your 2017 deductions and credits (your 2016 return will be helpful for this).

Once you calculate the amount of tax you owe in total for 2017 (Form 1040-ES line 13c), you can determine whether you are responsible for paying quarterly estimated tax.

First, look up the total amount of tax you paid in 2016. Second, take your total tax due for 2017 and multiply it by 90%. The smaller of these two numbers is the amount of tax you need to pay throughout 2017 to avoid a penalty (Form 1040-ES Line 14c).

Subtract the amount of income tax you had withheld in 2017 (Form 1040-ES Line 15) from the amount you need to pay to avoid a penalty. If the result (Form 1040-ES Line 16) is less than $1,000, you are not required to make a quarterly estimated tax payment. If the result is greater than $1,000, you are required to make a payment.

Please note that just because you are not required to make quarterly estimated tax payments does not mean you will avoid paying tax the whole year, only that the additional tax due does not have to be paid until you file your 2017 tax return this spring. Now that Form 1040-ES has given you some warning, use the next few months to prepare to make that lump sum income tax payment.

How to Pay Quarterly Estimated Tax

If you are required to make a quarterly estimated tax payment, the calculation is pretty simple since this is the last payment due for 2017! You should make a payment for all the additional tax due that you calculated you owe (Form 1040-ES Line 16a). If your calculations were exact, when you file your 2017 tax return in the spring, you won’t receive a refund or owe any additional tax. More likely, filling out your full tax return will bring to light a few adjustments in your calculations, so you may end up receiving a small refund or paying a small amount of additional tax.

The easiest way to make your quarterly estimated tax payment is online at www.IRS.gov/payments (find all your payment options on Form 1040-ES p. 3-4 or Publication 505 p. 32-33).

If you were unaware that you had any income tax liability on your fellowship income and are unprepared to pay what you owe by January 16, 2018, don’t avoid the issue! Give the IRS a call and they may be able to work with you to minimize the penalties you owe (though not the interest).

Calculating your quarterly estimated tax is not very difficult; the most challenging aspect is knowing that you’re supposed to do it! If you are a new fellow and this is your first time making a quarterly estimated tax payment, rest assured that it will be easier going forward. You first quarterly estimated tax payment for 2018 is due on April 17, 2018. You’ll want to freshly fill out the 2018 1040-ES once it’s available, but it should be similar to the form you just worked through.

Loading…

How to Put Your New Postdoc Salary in Context

January 8, 2018 by Emily Leave a Comment

After a long, arduous journey through graduate school, you’ve successfully defended your PhD and are about to take the next step in your research career: a postdoc. One of the best perks of transitioning from being a graduate student to a postdoc is the pay increase. While postdocs aren’t exactly rolling in dough, they are usually paid significantly better than graduate students, and after 5+ years of zero to tiny raises, it’s gratifying to finally receive a higher salary.

However, before you buy that new car or put an offer on a house, take some time to put your new postdoc salary offer in context. There are a few subtle changes common to the grad student-postdoc transition that will decrease your take-home pay and/or discretionary income.

(This post is specific to the US.)

Employee or Fellow?

The very first question to clarify is what exactly your employment status will be with respect to your university/institute. Just like in graduate school, there are two broad ways you can be paid: compensatory or non-compensatory. In academic-speak: Are you an employee or a fellow?

If you see “fellow” in your title or offer letter, have heard “fellowship” from your advisor when discussing funding, or have won an outside individual fellowship, you are a fellow and not an employee of your university. As a fellow, you may receive no benefits from your university or only a few; you are almost certainly not going to receive all the benefits a full employee would. You should contact your university’s postdoc office or your departmental administrative assistant for a full explanation of your benefits.

If you aren’t labeled a “fellow” you are most likely an employee, but there may be multiple classes of employees at your university so it’s important to determine which one. (Postdocs may not be offered the same benefits as faculty, for example.) Once you know exactly your class of employee, you can read through material provided by Human Resources to determine your benefits, and direct any questions you have to Human Resources or the postdoc office.

When in doubt, ask if you will receive W-2 pay or not. W-2s are use for employee pay, while non-compensatory pay is not reported to the IRS or reported on a 1099-MISC.

Further viewing: Types of Grad Student Pay and Their Implications

Some of the common, though not universal, differences in benefits offered to employees though not fellows are: income tax withholding, 403(b) access, 403(b) match, subsidized health insurance premiums, health insurance premiums paid as a payroll deduction, Health Savings Account/Flexible Spending Account, group disability and/or life insurance access, and official paid time off.

Income and FICA Taxes

If you’re earning more as a postdoc, you’re also going to pay more in federal income tax (given no other changes in your personal life). Your effective tax rate will increase and possibly your marginal tax rate as well. So if your gross pay increases by $1,000 per month, for example, federal income tax may take a $120 or $220 (or somewhere in between) bite out of that increase.

The same broad story would be true for state taxes if you are not moving states, but many postdocs relocate states as well with their new positions. If you don’t want any surprises in your first paycheck, look up how your new state’s tax brackets and rates compare to your old state’s.

One of the biggest tax changes that occurs when going from a grad student to a postdoc is FICA tax (Social Security and Medicaid). As a graduate student, you did not pay FICA tax. Postdoc fellows will also not pay FICA tax (or self-employment tax) on their income as they do not technically receive “wages.” However, postdoc employees will begin to pay FICA tax. On the employee side, the Social Security tax is 6.2% and the Medicare tax is 1.45% on all of your income up to $128,400 (in 2018). If your new postdoc salary is $45,000 per year, for example, you will pay $3,442.50 in FICA tax. That can be a big shock for someone who wasn’t paying any tax in that category previously.

The best way to calculate your new take-home pay after all of these changes is to use a paycheck calculator, of which there are many. (However, due to the recency of the tax law changes, online paycheck calculators may not yet be updated for 2018. As of this writing, the IRS has not yet updated its withholding calculator.)

Further reading: Why Is My Take-Home Pay as a Postdoc Nearly the Same as When I Was a Grad Student?

Health Insurance

While your grad school and postdoc universities almost certainly offer you the option of buying group health insurance, who pays the premium and how might change.

As a graduate student, it is typical to have your health insurance premium paid partially or completely from funds that are not part of your stipend pay, so many graduate students don’t have to factor that cost into their take-home pay.

A postdoc employee will likely pay part or all of his insurance premium through a tax-free payroll deduction. A postdoc fellow’s insurance premium may be paid on her behalf, similar to a graduate student, or come completely from her salary.

This is an important benefit to check into prior to starting your postdoc position as you don’t want any lapse in coverage or to be surprised by the additional expense. The premium for a postdoc’s insurance may be much higher than a graduate student’s, depending on the risk pool each position is put in.

Student Loans

Another big change when you transition out of being a student is that your student loans, if you have any, are no longer eligible for in-school deferment. Beginning to pay off student loans can be a large monthly expense on a postdoc salary, depending on the total amount owed.

Contact your lender(s) to find the minimum payment due and the period over which you will repay your loans. Federal student loans have a standard repayment period of 10 years, but private student loans may take a shorter or longer period of time. Factor this minimum payment due into your planning for how to allocate your salary.

If you want to pay off your debt faster than the standard repayment period, which is an excellent idea for debt at a moderate or high interest rate, plan on paying more than the minimum amount due each month.

If you don’t think your postdoc salary can handle even the minimum payment on your student loans, you have two options to immediately consider.

1) With respect to your federal student loans, you may be eligible for one of the many repayment programs that lower your minimum payment due (even, potentially, to $0) by extending the repayment period and overall amount of money you will repay (income-based repayment, pay as you earn, etc.). Your eligibility for these programs depends on your household income. Carefully consider whether it is in your best interest to use one of these programs, even if you are eligible.

2) There are many lenders currently offering student loan refinancing at competitive interest rates. When you refinance, you are paying off your old loans and taking out new private loans, so make sure you would not be losing any benefits unique to student loans, such as the repayment programs for federal student loans. Be forewarned that these lenders only work with borrowers with excellent credit and low debt-to-income ratios. If you can significantly lower your interest rate, refinancing may be a positive step for your personal finances, both lowering your minimum payment due and reducing the total amount of money you will repay.

Cost of Living

With a change in university naturally comes a change in the local cost of living. As you well know, living expenses vary greatly from city to city. At the lower salary levels of a graduate student or postdoc, this can be a major concern.

There are two quick methods to estimate how the cost of living will change between your grad school city and your postdoc city.

CNN offers a cost of living comparison calculator. Plug in the two cities in question (or as close as you can get to them) and put in either your grad student salary or your postdoc salary. Your greater familiarity with the cost of living in your grad school city combined with this calculator will help you estimate how far your new salary will go in your new city.

MIT’s living wage database also provides insight. Look up the living wage for your grad school university’s county and your postdoc university’s county. The living wage will be closer to your grad student salary than your postdoc salary, but the difference between the two will also help you determine how much of an increase or decrease in cost of living you will experience.

A more involved but also more effective step if you have not yet moved to your new city is to sketch a budget. Using your best estimate of your take-home pay based on the above factors, research how much you are likely to spend on housing, food, transportation, etc. if you kept your perceived lifestyle the same from grad school into your postdoc. Ideally, this exercise will help you decide in which areas of your budget you are able and would like to upgrade your lifestyle, such as living without a roommate.

Personal Experience with the Transition to a Postdoc Position

My husband stayed in his PhD advisor’s lab for an extra year as a postdoc to finish up a few papers before applying for a “real” multi-year postdoc at another institution. My husband received one postdoc offer that he seriously considered before ultimately choosing a position in industry. We performed the calculations above regarding increased taxes and insurance costs to compare the take-home pay of his new postdoc offer directly to the take-home pay from his short-term postdoc and graduate student positions. The take-home pay from the postdoc offer was slightly less than that of his short-term postdoc position and much higher than his pay as a graduate student.

However, when we compared the cost of living in our grad school city, Durham, NC, to the cost of living in Boston, MA, where the new offer was from, we were shocked by the results. In terms of the effective purchasing power from my husband’s take-home pay, the pay for the postdoc position in Boston was “less” than even his grad student pay in Durham. We would not have expected to experience an effective pay decrease moving from a grad student position to a postdoc position, but that is how the numbers worked out. I’m very glad that we took the time to do those estimates before he made a final decision about the offer.

Further reading: An Agonizing Decision

While the gross pay from your new postdoc position may seem great in comparison with your grad student pay, don’t be fooled! You must account for several important changes in taxes, benefits, and cost of living to compare apples to apples.

  • Page 1
  • Page 2
  • Page 3
  • …
  • Page 7
  • Next Page »

Footer

Sign Up for More Awesome Content

Emily roberts

I'll send you my 2,500-word "Five Ways to Improve Your Finances TODAY as a Graduate Student or Postdoc."

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Copyright © 2019 · Atmosphere Pro on Genesis Framework · WordPress · Log in

  • About Emily Roberts
  • Disclaimer
  • Privacy Policy
  • Contact