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Fellowship Income Can Trigger the Kiddie Tax

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The Kiddie Tax is an alternate, higher rate of calculating tax due that applies to young people. While it was intended to ensure that wealthy parents paid their full share of tax on their investments, it also sometimes applies to graduate students whose income comes primarily from a fellowship or training grant.

Kiddie Tax fellowship graduate student

If you have found this article through search, it’s likely that your (software or human) tax preparer has determined that you owe the Kiddie Tax. This article will help you understand what the Kiddie Tax is, who it applies to, how it is calculated, and how to avoid it in the future.

What is the Kiddie Tax?

Back in the early 1980s, finding tax shelters (i.e., legal ways to avoid paying tax) was all the rage because tax rates were much higher than they are today. The top marginal tax rate was reduced to 50% in 1981 and finally to 28% in 1988 with the last major tax reform prior to the Tax Cuts and Jobs Act (source).

One of the tax shelters was for parents to put income-generating assets in their minor children’s names. The children were (presumably) in much lower tax brackets for investment income than their parents, so overall the family paid less in tax for those assets (source).

In 1986, the “Kiddie Tax” was enacted to close this loophole. Under the Kiddie Tax, a child or young adult’s unearned income is taxed at a higher rate than it would be if they were older (with all other factors being the same).

How Does the Kiddie Tax Affect PhD Students?

The way the Kiddie Tax is written and structured makes sense for the purpose of preventing wealthy parents from sheltering their income using their children. However, it has an off-label effect on PhD students.

The Kiddie Tax applies to all children through age 17, some children through age 18, and some students through age 23. It applies to “unearned income,” which includes not only investment income but also income from fellowships, scholarships, and training grants.

This means that a graduate student under the age of 23 whose income is from a fellowship may be taxed not at the ordinary income rates that they will be at age 24+ but rather at their parents’ marginal tax rate (if it is higher than their own).

(The Tax Cuts and Jobs Act, passed at the end of 2017, changed the alternate tax rate to be the one used for estates and trusts rather than the parents’ marginal tax rate, which it had been historically. This negatively affected college students from low-income backgrounds, who are often funded by scholarships and grants. At the end of 2019, the Kiddie Tax rate was changed back to the marginal tax rate of the parents, which was also retroactively applied for 2018. If you paid the Kiddie Tax in 2018, an amended return may be warranted.)

The PhD students most in danger of the Kiddie Tax applying to them in a way that will massively increase their tax due are those who received fellowship (awarded) income for an entire calendar year, e.g., January of the first year through December of the second year.

Who Has to Pay the Kiddie Tax?

The Kiddie Tax does not apply to every graduate student on fellowship, though it applies to many.

The instructions for Form 8615 lay out who has to file the form and (potentially) pay the Kiddie Tax. There are five qualifications for being subject to the Kiddie Tax, all of which must apply. If any one of the following is not true for you, you aren’t subject to the Kiddie tax.

1) You had more than $2,200 of unearned income.

Taxable fellowship and scholarship income counts as “unearned income.”

The definition of “unearned income” from p. 1 of the instructions for Form 8615 is:

For Form 8615, “unearned income” includes all taxable income other than earned income. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.

2) You are required to file a tax return.

The Form 1040 instructions (p. 8-11) answer the question of who has to file a return for 2019.

Chart A (p. 9) is for most people under age 65. It states that you must file a return if you are single and your gross income is at least $12,200.

Chart B (p. 10) is for dependents. You are required to file a tax return if you are single and:

  • Your unearned income was over $1,100.

  • Your earned income was over $12,200.

  • Your gross income was more than the larger of

    • $1,100, or

    • Your earned income (up to $11,850) plus $350

For the purpose of Chart B only, taxable scholarships and fellowships are “earned income” while “unearned income” includes taxable interest, ordinary dividends, and capital gains distributions.

If your gross income was less than $11,850 and your unearned income (taxable interest, ordinary dividends, and capital gains distributions) was less than $350, you do not need to file a tax return and are not subject to the Kiddie Tax.

Alternatively, you can use the IRS’s Interactive Tax Assistant to determine whether you are required to file a return: Do I Need to File a Tax Return?

3) You are a student under age 24

To be subject to the Kiddie Tax, you must be (Form 8615 p. 1):

  1. Under age 18 at the end of 2019,

  2. Age 18 at the end of 2019 and didn’t have earned income that was more than half of your support, or

  3. A full-time student at least age 19 and under age 24 at the end of 2019 and didn’t have earned income that was more than half of your support.

Full-Time Student Status

Form 8615 refers to Publication 501 for the definition of ‘full-time student’ (p. 12):

To qualify as a student, your child must be, during some part of each of any 5 calendar months of the year:

  1. A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school, or
  2. A student taking a full-time, on-farm training course given by a school described in (1), or by a state, county, or local government agency.

The 5 calendar months don’t have to be consecutive.

Full-time student. A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.

You do not have to be a student throughout the calendar year to be defined as a student and subject to the Kiddie Tax. You are considered a student if you are a full-time student in (part of) 5 calendar months, which do not have to be consecutive.

Support Test

Defining support and who/what provided it is the trickiest part of determining whether you are subject to the Kiddie Tax. First, you must determine your support, and then calculate whether your earned income amounted to more than half of your support.

The Form 8615 instructions defines support as (p. 1):

Support. Your support includes all amounts spent to provide you with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your support, count support provided by you, your parents, and others. However, a scholarship you received isn’t considered support if you’re a full-time student. For details, see Pub. 501, Dependents, Standard Deduction, and Filing Information.

Publication 501 includes the Worksheet for Determining Support (p. 15), which you must go through in detail. Your support is the amount of money that is used to pay all your living, education, medical, and travel expenses. The education expenses include the tuition, fees, etc. for your graduate degree.

If you do not have earned income totaling at least half of your own support, you may be subject to the Kiddie Tax. Scholarships and fellowships do not count as earned income for this purpose.

The support test being calculated this way creates a very high bar for funded graduate students as tuition can easily rival or exceed living expenses.

4) At least one of your parents was alive at the end of the year

If your parents (including adoptive and step-parents) are deceased, the Kiddie Tax does not apply to you.

5) You don’t file a joint return

If you are single, the Kiddie Tax may apply to you. If you are married filing jointly, the Kiddie Tax does not apply to you.

If you meet all five of these criteria, you need to fill out Form 8615, as the Kiddie Tax may apply to you.

How Is the Kiddie Tax Calculated?

Form 8615 calculates your Kiddie Tax. Part I calculates your net unearned income, and Part II calculates your tax.

You should carefully fill out each line and read the instructions to find the correct definitions. I have highlighted some points about each line specific to fellowship recipients, but you still need to read the full instructions.

Line 1

Line 1 asks for your “unearned income” as defined above. If you had no earned income (i.e., you were 100% on fellowship for the calendar year and had no other income sources), you can use the value from your Form 1040 Line 1. If you had both earned and unearned income, you need to fill out the Unearned Income Worksheet (p. 2 of the form instructions), which subtracts your earned income from your total income.

Line 2

If you took the standard deduction, enter $2,200. If you itemized your deductions on Schedule A, there is a different formula to use in the instructions.

Line 3

Line 3 = Line 1 – Line 2

If the value in Line 3 is 0 or negative, you do not have to pay the Kiddie Tax. (Translation: If you took the standard deduction and your unearned income is less than $2,100, you do not have to pay the Kiddie Tax.)

Line 4

Enter in Line 4 your taxable income from Form 1040 Line 11b (your gross income minus all relevant deductions).

Line 5

Enter in Line 5 the smaller of the values in Line 3 and Line 4.

Line 7

To calculate your tax, you have to use the Line 7 Tax Computation Worksheet on p. 4 of the instructions or the Tentative Tax Based on the Tax Rate of Your Parent Worksheet on p. 5. The first worksheet applies the tax rates for estates and trusts to your unearned income; it is likely more advantageous to you to elect to use the second worksheet, but you will need to know your parents’ and siblings’ incomes for the calculation.

How to Avoid the Kiddie Tax

Once a tax year ends, you run out of opportunities to avoid the Kiddie Tax. To avoid the Kiddie Tax in the current or a future tax year, make sure that at least one of the five above points on who the Kiddie Tax doesn’t apply to is true for you. For example, you could:

  1. Delay your matriculation into grad school
  2. Configure your income and expenses such that you pass the support test, e.g.,
    • Request that you are paid by an assistantship instead of a fellowship for part or all of the calendar year
    • Earn a significant side income
  3. Get married and file a joint return.
  4. Find every applicable qualified education expense to make more of your fellowship income tax-free (e.g., your student health insurance premium if paid by scholarship)

How to Minimize the Kiddie Tax

If you are subject to the Kiddie Tax, the best thing to do is minimize your unearned income and taxable income. If you have any influence with your parents and they are willing and able to minimize their taxable income, please ask them to do the same.

You can minimize your unearned (awarded) income by making as much of it tax-free as possible using your qualified education expenses. This is largely accomplished more or less automatically, but please be thorough in tracking down and documenting every possible qualified education expense, such as course-related expenses and certain fees. Box 1 of your Form 1098-T is likely not the full sum of your qualified education expenses for this purpose.

You can minimize your taxable income by taking additional above-the-line deductions or adjustments to income, such as contributing to a traditional IRA (through April 15 of the subsequent year) or paying student loan interest (during the tax year).

Remarks

The fact that fellowship income triggers the Kiddie Tax is unconscionable and potentially highly financially damaging to an already vulnerable population, graduate students funded by fellowship or awarded income. Despite their lack of earned income, these graduate students are typically financially independent from their parents, so their parents’ income, even if high, is immaterial to their lives. This aspect of our tax code desperately needs reform; however, I am not hopeful that it will be reformed in the near future as it has withstood two recent tax code updates.

How to Financially Manage Your NSF Graduate Research Fellowship

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Congratulations on being awarded the National Science Foundation (NSF) Graduate Research Fellowship (GRF) (or a similar remunerative, competitive, national fellowship)! Whether you’re a prospective grad student or a current first- or second-year PhD student, this fellowship is a great boon to your research, your CV, and almost certainly your finances. However, you may not yet realize that your finances will become a bit tricky once you start receiving your fellowship. With the help of this article, you can avoid the pitfalls associated with fellowship income and fully capitalize on the benefits.

NSF GRFP stipend

The NSF GRFP’s Negotiation Power

I’m sure you didn’t miss this headline info about the NSF GRFP: The fellowship pays you a stipend of $34,000 plus $12,000 of educational expenses to your institution for three years. Awesome! At the majority of universities in the US, that stipend amount is well above what you would be paid if you didn’t receive the fellowship, so you’ve effectively achieved a raise for the next three years.

But the good news doesn’t stop there: Your university/department might confer even more benefits upon you for winning independent funding. If the administration isn’t forthcoming about these additional benefits, it is appropriate to inquire about them.

Independence

Your new outside funding may give you a degree of independence in your research that you wouldn’t otherwise enjoy. This is highly dependent on your field, department, and advisor, but the fellowship may enable you to take your doctoral research in a direction that you advisor couldn’t or wouldn’t have supported without it. Perhaps you could take a risk on a side project, establish a new collaboration, or take extra time to rotate through a lab to gain new skills.

Additional Funding

At many universities, there is a standard offer of additional funding for winning a multi-year, lucrative fellowship like the NSF. This offer could come in one or more forms, such as:

  • A guarantee of funding for additional years
  • A one-time bonus
  • A stipend supplement above $34,000 while you have the fellowship
  • A stipend supplement after the fellowship concludes (e.g., up to $34,000/year for your remaining time in graduate school)

Not all departments offer additional funding to NSF GRFP recipients, but it’s worth inquiring about with your advisor, the administration, and current NSF fellows at your university. Stipend supplements during the time that you receive the NSF GRF are more common in high cost-of-living cities where the departmental base stipend is near $34,000/year to begin with. For example, searching “NSF” in the PhD Stipends database reveals stipend supplements awarded during the NSF GRFP years to students at the University of California at Berkeley, Northwestern University, and Columbia University, while a student at the University of California at San Diego writes that he/she received no funding incentive for winning the NSF GRF.

For Prospective Graduate Students

You’ll never have more negotiation power than you do as a prospective graduate student with an outside fellowship in hand. Unfortunately, you don’t have a lot of time to negotiate as the NSF GRFP awards list comes out approximately two weeks before grad school decision day, April 15.

Further reading: Vote with Your Feet, Prospective Graduate Students

As quickly as possible, you need to clarify if the offers from the universities you are still considering are going to be sweetened at all now that you have your fellowship. If the financial package from your preferred university isn’t up to par with your other offers (after considering cost of living differences), you can tactfully ask if a bonus, stipend supplement, or guarantee of future funding is possible.

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Budgeting with Your Fellowship Income

There are two vital questions you need to ask of your department before you can begin creating a budget for your NSF GRF stipend.

  1. After the fellowship ends, what will my stipend be?
  2. How frequently is my fellowship disbursed?

Accelerate Progress on Financial Goals

In my ideal personal finance-oriented world, an NSF fellow would live on (less than) the base stipend from his department and put all the excess income received toward growing his wealth. There are a few advantages to that approach:

  • Your lifestyle roughly matches that of your peers in your department.
  • You can relatively quickly achieve financial goals such as saving or debt repayment.
  • If your income is set to drop once the fellowship ends, you avoid acclimation to the higher, temporary income and don’t have to make major lifestyle sacrifices once the three years are up.

Some financial goals you could work on during the time you receive the additional fellowship funds are:

  • Eliminating any troublesome debt (e.g., credit card balances, medical debt, car loan)
  • Saving up cash for short-term needs and expenses (e.g., emergency fund, targeted savings accounts)
  • Investing for long- and mid-term goals (e.g., retirement, house down payment)
  • Pay down student loans

Further reading:

This strategy is easiest to implement for graduate students who start the NSF GRF after one or more years in grad school. Just put all of your ‘raise’ toward financial goals and don’t change anything about your lifestyle! Prospective grad students will have to be more conscious about setting up their grad student lifestyle on a lower income than they will start out with.

Preparing for the Post-Fellowship Income Drop

If you choose to upgrade your lifestyle with your fellowship stipend, be careful to maintain any long-term financial contracts at a level that will be sustainable for you after your income drops (if it will). The two key areas to watch out for are housing and transportation expenses. While it is possible to reduce your spending in either of these areas during grad school, it is a painful process, so it is preferable to lock in your spending in those areas at a level that you can maintain long-term.

Budgeting with an Irregular Income

Sometimes, fellowships are disbursed to the recipient at a frequency other than monthly, e.g., once per term. This schedule can cause issues for budgeting, which is usually framed as turning over each month.

One of the advantages of an infrequent disbursement schedule is that you are paid at the beginning of the period rather than the end, so the money you need throughout the period is already available to you. However, you may not be able/inclined to use typical budgeting software functions and prefer to set up your own budgeting system.

One of the most useful budgeting concepts for people with irregular incomes is that of fixed vs. variable expenses. At the beginning of your budgeting period, project the fixed expenses that will be paid during the period, such as your rent/mortgage, debt payments, certain utilities, subscriptions, etc. Then allocate your remaining income to your variable expenses at a frequency that is convenient for you. For example, you can estimate the variable utility bills that you may pay monthly during the period, plan to spend no more than a certain amount of money each week on groceries, and give yourself a lump sum of money for entertainment for the entire period to be spent as opportunities arise. In this way, allocate your fellowship disbursement so that you are sure that your expenses won’t exceed your income (leaving some buffer for unexpected expenses).

Income Tax Implications of the NSF GRFP

Your NSF GRFP stipend is subject to federal income tax. (It is usually subject to state and local income tax as well, but there are some exceptions.)

Further reading:

However, the taxation of fellowship stipends is handled completely differently by universities than assistantship pay.

Tax Reporting

While assistantship pay is reported on a W-2, fellowship stipends are not required to be reported in any particular way.

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A large fraction of universities, possibly the majority, do not report outside fellowship stipends on any official tax form. At most, the fellow might receive a courtesy letter, which is an informal letter stating the amount of the fellowship stipend received during the calendar year.

Some universities report fellowship stipends on Form 1098-T in Box 5 (along with other scholarship and grant income).

A small minority of universities report fellowship stipends on Form 1099-MISC in Box 3.

Whatever reporting mechanism used or not used, the important information to bring to your tax return preparation process is the amount of fellowship stipend paid to you during the calendar year. From that point, the fellowship stipend income is treated the same as any other fellowship/scholarship/grant income, and (possibly after some adjustments) it will ultimately be taxed as ordinary income.

Further reading:

Quarterly Estimated Tax

While you are required to pay federal and usually state income tax on your fellowship stipend, the vast majority of universities do not offer automatic income tax withholding on your fellowship stipend as they normally do for employee pay. (You should inquire whether automatic withholding is an option and use it if so, but the remainder of this section assumes it is not offered.)

This means that you will receive 100% of your gross fellowship stipend instead of your stipend net of income tax as you would assistantship pay. However, the IRS still expects to receive income tax payments throughout the year, so you will have to look into filing quarterly estimated tax.

Further reading: The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients

As a default position, you should assume you are responsible for paying quarterly estimated tax. It’s possible that you won’t be required to in the year you switch on or off of the fellowship or if you’re married to someone with a high income and high withholding, but even in those cases it’s prudent to check.

The way you calculate your quarterly estimated tax due (and figure out if it’s required of you) is by filling out Form 1040-ES. That form will give you the amount of the payment you are supposed to make four times per year and an estimate of your total tax due for the year. You can make the payment online at IRS.gov/payments or through a host of other mechanisms.

Whether or not you are required to file quarterly estimated tax, it’s a great idea to set up a personal system that simulates automatic tax withholding. Open a separate savings account labeled “Income Tax” and transfer in the fraction of each paycheck you receive that you ultimately expect to pay in tax each time you are paid. Then, draw from that savings account when you make your quarterly or yearly tax payments.

Investing Implications of the NSF GRFP

The upside of receiving the NSF GRF is that your income is most likely higher than it would have been, which means you have an increased ability to achieve financial goals during graduate school such as debt repayment, saving, and/or investing.

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Through 2019, fellowship income, like that of the GRFP, was not eligible to be contributed to an Individual Retirement Arrangement (IRA). However, starting with tax year 2020, fellowship income is eligible to be contributed to an IRA, eliminating the only major downside of receiving fellowship income.

Further listening: Fellowship Income Is Now Eligible to Be Contributed to an IRA!

An IRA is a tax-advantaged retirement savings vehicle. It’s a great idea to use an IRA (or other tax-advantaged retirement vehicle such as a 401(k) or 403(b)) for your retirement savings as it helps you maximize your long-term rate of return by protecting your investments from taxes. As a graduate student, you almost certainly don’t have access to the university 403(b), so the IRA is basically the only game in town for tax-advantaged retirement savings.

The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients

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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 and listening:

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 (in 2019: single $12,200, married filing jointly $24,400).
  • 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 or the Additional Child Tax 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 2019 quarterly estimated tax are:

  • April 15, 2019
  • June 17, 2019
  • Sept 16, 2019
  • Jan 15, 2020

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).