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The Tax and Retirement Effects of Receiving Fellowship Funding

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In this episode, Emily interviews Dr. Jamie Lahvic about her experience being funded by fellowship during grad school at Harvard and her postdoc at the University of California, Berkeley. Regarding the tax complications of being on fellowship and the lack of retirement benefits, Jamie and Emily outline the issues, discuss possible solutions, and suggest advocacy avenues for instigating change. Listen through the end of the interview for the Big Questions regarding the true nature of fellowships and employment.

Links Mentioned in the Episode

S14E3: Image The Tax and Retirement Effects of Receiving Fellowship Funding

Teaser

00:00 Jamie: Because I often felt, you know, in addition to like the confusion and the frustration and wondering what to do, that I don’t know, it felt like an emotional hit. I felt unvalued when I’m put into this weird little category where my earnings don’t make sense and I can’t open an account and I can’t figure out how to pay taxes. And I went on this really kind of rollercoaster from feeling like, “Oh, I’m a valued scientist and worker in this field,” down to like, “Oh, nobody really cares about me or the type of work that I’m doing.”

Introduction

00:38 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. This is Season 14, Episode 3, and today my guest is Dr. Jamie Lahvic. We discuss Jamie’s experience being funded by fellowship during grad school at Harvard and her postdoc at the University of California, Berkeley. Regarding the tax complications of being on fellowship and the lack of retirement benefits, Jamie and I outline the issues, discuss possible solutions, and suggest advocacy avenues for instigating change. Listen through the end of the interview for the Big Questions regarding the true nature of fellowships and employment.

01:43 Emily: If there are any prospective PhD students listening—and I hope there are—I want to point you to a new workshop I’ve been publishing in installments throughout this academic year, Set Yourself Up for Financial Success in Graduate School. Now that we’re in admissions season, the modules are getting really exciting and immediately actionable. The two most recent modules are titled “Decipher and Compare Your Offer Letters” and “How to Negotiate Your Stipend and/or Benefits.” One from last fall that you might want to check out as you’re evaluating the cities your offers are in is “Stipends vs. Cost of Living.” I sincerely want you to go into grad school with your eyes wide open regarding the financial realities and in the strongest financial position possible for the program you choose. I hope you will check out the workshop and enroll in the modules that will help you accomplish that. Go to pfforphds.com/setyourselfup/ for more information. You can find the show notes for this episode at PFforPhDs.com/s14e3/. Without further ado, here’s my interview with Dr. Jamie Lahvic.

Will You Please Introduce Yourself Further?

03:01 Emily: I have joining me on the podcast today, Dr. Jamie Lahvic. Super delighted to have Jamie here. We actually met at a conference last summer. I’m recording this in November, 2022. So, we met at the Graduate Career Consortium Annual Meeting, which was in July, 2022. We ran into each other during like a break or something, and we just started chatting and we had this electric conversation about funding, about fellowships, about benefits, about systemic issues that need to be addressed. And I just wanted to capture some of that magical conversation here on the podcast. So, Jamie, I’m super delighted to have you on. Will you please introduce yourself to the audience?

03:42 Jamie: Sure! My name is Jamie Lahvic. I am currently working as a Program Officer at the National Institute on Aging, where I focus on some policies as well as programs related to graduate students, postdocs, and early career faculty. But today I’m kind of excited to talk about my own personal experiences as a graduate student and then a postdoc. So, I went to grad school at Harvard Medical School studying biomedical sciences and then I moved on to UC Berkeley to do a postdoc in cancer biology. And I wrapped up that postdoc in 2021.

04:18 Emily: I’m really excited to see all these different perspectives from you being at a private university, a public university, now in government. Like, this is awesome! And I’m of course going to share some of my own limited experience as well. But we’ve both had some observations about these issues about the finances and the benefits and so forth that are offered to graduate students and postdocs as employees or as fellows. So, I want to, for the listeners just to introduce them. I have a framework, this is not necessarily the way that everybody talks about this, but in my mind there are sort of two broad classifications that graduate students and postdocs can fall into. One is as an employee. The way you know that you’re an employee especially if you’re a citizen or resident, is if you receive a W-2 <laugh> at tax time, that’s like really indicative that you’re an employee.

05:04 Emily: So, you have this employer/employee relationship with the university and that may cause different benefits and so forth to be offered to you. The other classification, a little harder to name, a lot of people use the term fellowship, but not only things called fellowships could fall into this classification. So, I broadly call it awarded income when your income comes from an award that you received. Could be certain types of grants, could be a fellowship, could be some other things. So, that’s the language we’ll be using. We’ll just say fellowship for shorthand, but that basically just means non-employee or at least under the, you know, the timing and circumstances of receiving that award, you’re a non-employee.

Switching Between Grad Student Funding Sources

05:37 Emily: Okay. With that clarification out of the way, let’s talk about, you know, your personal experiences, my personal experiences with being an employee and/or being a fellow during grad school and postdoc. So, we’ll probably take this like topically. What would you like to share? What you know surprised you about maybe switching between these two types of funding? What issues did they bring up? Go ahead.

05:59 Jamie: Sure. Yeah, so as a graduate student, I was never an employee. I was always either paid a student stipend coming straight from the university or then a fellowship stipend once I got an NIH fellowship. So there, it still was a really complicated process. I remember being very surprised first year as a graduate student to try to figure out how to pay taxes, how to pay estimated taxes every year. And it seemed to become more complicated every year, especially because once I got my fellowship, some of my money would come from the fellowship, some of it would come from the university. Those would come in separate paychecks. And then later on once I was teaching I would get a third paycheck to cover the teaching that I was doing. And throughout all of that, I never received a W-2. Every now and then I would receive a 1099 for the teaching, but they were kind of inconsistent in whether they would send that. So come tax time, I kind of never knew what I should even do. So, that was a big struggle.

07:01 Emily: Yeah. Let’s talk about the tax issue for a minute longer, because I mean, you probably know this is like part of the bread and butter of my business now because so many graduate students and postdocs are running into confusion around the tax issues. And basically, I mean we will link in the show notes some episodes I’ve done on this in the past, but it basically boils down to like when you’re an employee, your employer has certain responsibilities in terms of telling you how much money you’ve been paid and how much money they withheld on your behalf and so forth. And once you get into this weird non-employee status, they simply don’t have those legal responsibilities in the way that they do for employees. And so, universities take like all these different approaches. And you’re saying even within Harvard, different pools of money were being reported in different ways.

07:46 Emily: And so, yeah, of course, that gets confusing for the recipient when the vast majority of our like, I mean already the U.S. tax system is so complicated to navigate, but if you step outside of the simple like employee world, it gets even harder to find, you know, the support and the resources that you need. That’s part of why I do what I do. But yeah, tell me a little bit more about how you dealt with these like challenges or complications of not having income tax withheld, for example, or like the reporting inconsistencies?

Team Effort for Taxes

08:15 Jamie: Yeah, I think a lot of the students kind of banded together to help each other. I remember we had one really proactive student who would post in our year’s Facebook group four times a year saying, “Remember, pay your estimated taxes.” And I was like so grateful to get that reminder because I was so caught up in, you know, rotations and qualifying exams and whatnot. I just couldn’t think about remembering to do this. So, just having somebody send a reminder was amazing. And then we did a lot of talking to each other to try to fill out the forms correctly. I think I was a few years into graduate school when I found your website and some of your tips, and I remember that being just amazing and just feeling like that’s something that was, you know, it’s complicated but once it’s laid out it is relatively simple. It is the type of information that the university could have given us that they never really did because they wanted to stay away from giving tax advice and they’re not a certified public accountant, and that type of thing. So, it felt like the students were on our own to try and figure it out.

09:17 Emily: Yeah, I think that again, while the universities don’t have again this legal requirement to issue tax forms that make sense, or whatever, I do think it’s really helpful when they try to address this as much as they’re able to. And I mean, I hear a lot of pushback when I work with uni–not a lot. Some places I hear pushback like, “Oh we really can’t, you know, give tax advice and so forth.” And I try to kind of make the point like, “Well, you on your own or me, like we could talk about this without it being advice.” Like we can just talk generally about how estimated tax works and what these different reporting things that are going on are. And that’s what I do like with my quarterly estimated tax workshop. Again, we’ll link it in the show notes. And so, a lot of times universities contract with me to provide that because they feel like that shifts some liability off of them and onto me and they’re more comfortable with that.

10:07 Emily: But again, just giving a little bit of education and some reminders and tips and so forth is not, to me, giving advice, because really it is ultimately up to the individual to figure this out. Like I’m not sitting down with anyone filling out their forms, like they’re still doing that on their own. I’m just providing guidance on how to do so. So, I guess this is kind of turning into an ad but like if the listener <laugh>, if you listeners are on fellowship and you want your university to help you, tell them about what I offer, because they may feel more comfortable working with me then doing this, you know, with an internal employee who, you know, might expose them to some liability.

Added Hardship of Inconsistent Tax Reporting

10:41 Emily: Okay. Estimated tax and reporting stuff, all a difficulty of being on fellowship. Anything more you’d like to add about that? Or should we move on to a new talking point?

10:52 Jamie: I just thought it, you know, in addition to kind of the confusion, it can sometimes cause real hardship. Like for me for instance, I didn’t receive a 1099 for my final chunk of teaching that I did in my like final year as a graduate student. And so, in between doing that teaching and like the spring and into summer semester, I got a postdoc. I moved across the country, I had started a whole new tax, you know, qualification as an employee there. And then when it came time to do taxes, I honestly completely forgot about the money I had gotten paid in the previous spring. Because I never received any kind of 1099, any kind of documentation, and I just didn’t pay taxes on it. And I think I like woke up in the middle of the night sometime like three months later and went like, “Oh my god, I made like thousands of dollars <laugh> that I didn’t pay any taxes on.” And then like on my own, I had to then figure out how to adjust my taxes. I had to pay a penalty for the amount that I, you know, had failed to pay previously. And at the time, like I had just spent all of this money to move cross country. I was making a postdoc salary. Like I really didn’t need to be paying any extra penalties on my taxes for that type of thing.

Potential Changes at the University Level

12:04 Emily: Absolutely. I mean, good for you for doing the amended return and everything, because I know some people will just kind of let it go after that point. But you really don’t want to let it go like multiple years and then have the IRS, I mean I know it’s rare, but it can happen that they can come after you, and then it’s an even bigger problem. So, good that you took care of it. But I think kind of what we’re saying here is just like communication, <laugh> communication is helpful around this topic. So, we’ve talked about this problem, various problems related to taxes. What are some things that could change at the university level, state level, federal level, whatever it is, to alleviate these problems?

12:41 Jamie: I mean at the university level, my understanding is that even if you’re not an employee, the university can still give you a 1099 for the money that you’ve made, and that universities, as far as I know, kind of choose whether or not to go through that step and send out those 1099s. So, I think that’s a major thing that just having a very clear document makes filing your taxes easier. You know, that’s something that like TurboTax and similar basic tax filing software knows how to work with. So, I think that would make a huge difference for a lot of students.

13:12 Emily: So, I actually did experience this during graduate school, so I’ve had a couple periods of my life where I was on fellowship. But when I was at Duke, Duke actually did manage to withhold income tax on behalf of at least me. I don’t know if every type of fellowship it was available, but at least for me, about half my years I was on this like non-employee kind of income. So, they were able to withhold on my behalf, and they did issue a 1099-MISC (Miscellaneous) at year’s end. So, that helps with like the problem you just identified of like, you know, a year and a half goes by and you’ve forgotten about some chunk of your income. Yes, that does help with that problem. The issue that it causes <laugh> is that the 1099 is most widely recognized as a self-employment income kind of document.

13:59 Emily: And so, then there’s, I feel like there’s even more burden on the recipient to properly communicate what this is with their tax software or their tax preparer. So, if they know to do that and they know that they’re not supposed to pay self-employment tax on this income, then it can work out. As a reporting document, it’s okay, but I would say, you know, nine times out of 10, people don’t know that it’s not self-employment income or maybe they know that, but they don’t know how to communicate that. And they don’t check that, they don’t understand how it’s going to affect their return. Anyway, so it can cause an even bigger mess. So like, I hesitate to say that that is the best solution. I mean really to me, I would say the 1098-T is the best form that we have as of now.

Reflections on an Adjusted 1098-T and Streamlined Tax Reporting

14:50 Emily: Although I would love it if there was just an adjusted 1098-T or a different kind of form that really could fully reflect the fellowship like situation. Because again, the 1098-T, while it’s used by many universities, they’re not required to issue one if you have more of this box five grant income than you do box one, like the educational expenses and charges. So, if they would just issue it all the time, I think that would be helpful. But even going beyond that, like this is now like a federal level kind of thing. Like if there were a different form or the 1098-T itself were somehow different, that would be even more clear.

15:26 Jamie: Totally. Yeah. Yeah, and I know anecdotally, I eventually switched over from like the TurboTax software to I think FreeTaxUSA that has a great little box to check that said you know, is this income, are you like, are you a graduate student or postoc rather than an undergraduate? Because I think it’s typically with that 1098-T where they’re trying to like not take out taxes on the portion that you’ve used to cover scholarly expenses, which applies to like an undergraduate who’s receiving, you know, tuition reimbursement, but not to a graduate student. So, I could imagine at the federal level, you could create a little box like that on the 1098-T, right? To check here if this is a graduate or postdoctoral level fellowship, right? Or check here if this money is not being used to cover tuition and scholarly expenses. It would be nice.

16:20 Emily: I think this is both like maybe a reporting option at the federal level, but also it comes down to the university level and how, like which department is the one that’s like processing these paychecks. And you are, like saying how you did about your various different incomes from Harvard, that indicates to me that like maybe payroll was issuing some of this, maybe financial aid was issuing some of this. And like having these different siloed departments separated from one another communication-wise means that things are not streamlined and you get different types of forms and maybe for you, maybe you were on different pay schedules for, you know, different sources. Yeah. So, having like a single department that handles like all, you know, income for graduate students and postdocs, whether it is payroll income for employees, whether it is, you know, non-employee income, that might help. I don’t know, maybe that’ll cause other problems too, but like right now, again, the universities are not really set up to handle this in a streamlined, or at least, I don’t want to say broadly. Some universities are not set up to handle this in a streamlined manner. Maybe others have it a little more figured out. I don’t know.

17:23 Jamie: I know actually when I got paid at UC Berkeley, it was more like that. So there, I was eventually on a fellowship as well, but I received one paycheck per month. And it was kind of interesting because, you know, I would receive my lump monthly salary or stipend from the fellowship, but only a little portion of that would get taxed. So, there would be like a little tiny bit of tax taken out, and then the rest of it was untaxed. But it at least came to me on like one single paycheck where it was very clear how much tax had been withheld, and then I could run the numbers when it came time to pay the estimated taxes on the rest.

17:59 Emily: So, it sounds like you were still receiving a pay stub. Even though a portion of this is employee. Yeah, that’s perfect. I mean, I kind of always tell people who are employees like, “Okay, look at your last pay stub, even before you receive your tax forms. Look at your last pay stub.” Maybe you have to access it through your payroll system or whatever, but you can find out how much tax was withheld. But again, those pay stubs are not generated usually if you’re a non-employee. But it sounds like Berkeley has this figured out, so I’m really happy to hear that. I would, yeah, I would love to be able to come up with like, I don’t know best practices, like which universities are using the best practices. So like, Duke has something figured out over here, Berkeley has something figured out over here. Like, I don’t know, maybe there’s a way to again, promulgate these best practices among these different universities and financial whatever, backend stuff.

18:44 Jamie: Yeah, and you know, I think great groups to kind of connect to for that are unions. Within the UC system, we have a strong postdoc union. And I think they had done a lot of pushing, you know, both on how much you get paid, but also a lot of these minute policies about how you get paid. And so I wouldn’t be surprised if the more streamlined system came about because of pressure from the union. And I’d be interested to know what other, you know, grad student unions and postdoc unions are where they’re having successes.

19:13 Emily: Yeah, I’m super glad to hear that. Exactly. Like sort of giving a voice to these, well, you might not know, but the downstream effect of this like decision that you’ve made, the way you’ve set up the system is it’s causing these problems.

Commercial

19:28 Emily: Emily here for a brief interlude! Tax season is in full swing, and the best place to go for information tailored to you as a grad student, postdoc, or postbac is PFforPhDs.com/tax/. From that page I have linked to all of my tax resources, many of which I have updated for tax year 2022. On that page you will find free podcast episodes, videos, and articles on all kinds of tax topics relevant to PhDs. There are also opportunities to join the Personal Finance for PhDs mailing list to receive PDF summaries and spreadsheets that you can work with. The absolute most comprehensive and highest quality resources, however, are my asynchronous tax workshops. I’m offering four tax return preparation workshops for tax year 2022, one each for grad students who are US citizens or residents, postdocs who are U.S. citizens or residents, postbacs who are U.S. citizens or residents, and grad students and postdocs who are nonresidents. Those tax return preparation workshops are in addition to my estimated tax workshop for grad student, postdoc, and postbac fellows who are U.S. citizens or residents.

20:43 Emily: My preferred method for enrolling you in one of these workshops is to find a sponsor at your university or institute. Typically, that sponsor is a graduate school, graduate student association, postdoc office, postdoc association, or an individual school or department. I would very much appreciate you recommending one or more of these workshops to a potential sponsor. If that doesn’t work out, I do sell these workshops to individuals, but I think it’s always worth trying to get it into your hands for free or a subsidized cost. Again, you can find all of these free and paid resources, including a page you can send to a potential workshop sponsor, linked from PFforPhDs.com/tax/. Now back to the interview.

Advocacy Avenues for Grad Students and Postdocs

21:28 Emily: The last kind of question in this area, and you just mentioned one of the advocacy avenues: unions. Can you think of any other advocacy avenues that graduate students and postdocs might be able to use to make these kinds of changes that we’re talking about?

21:45 Jamie: I mean, even outside of a formal union, I’ve seen a lot of success from graduate students and postdocs just banding together and working together on these things. Whether that is kind of peer-to-peer advice and providing resources, or working together as a group to request something from your department, from your university. You know, I have so many memories of like trying to do my taxes, trying to fill in the forms, and getting like frustrated and upset and not knowing what to do. And I think like you have peers who can help you through some of those things and at least to help you feel supported.

22:25 Emily: Now, I don’t know exactly what avenue this is, but I have noticed over the years that I’ve been studying federal taxes for, you know, as in how they affect graduate students and postdocs, that there have been changes. The 1098-T has gone through actually a big remodel in the last few years. The Kiddie Tax went through a slight change with the Tax Cuts and Jobs Act. So, there have been other changes that have been made that makes me realize that changes possible. Now, I don’t know what the avenue is for letting someone know, <laugh> that you want a change to happen. Maybe it’s contacting your representative or your senator or whatever. We can talk about some of the advocacy around like retirement stuff that happened a few years ago in a moment, but the change can happen. I’m just not clear exactly how you communicate, you know, this advocacy at the federal level.

23:09 Jamie: Yeah, that’s a good question. I mean, I know I’ve been on like the IRS website looking for like from their resources, like what is their advice for people in these situations. And what I found was only a few lines, right? Like not a lot of detail. So, I would love to see, you know, coming directly from the IRS some more clear advice around these types of situations. And I do know that government agencies put out things like RFIs, requests for information, and they do have various sort of feedback channels, so trying to find those for the IRS or for your state tax departments could be one way to go about it.

(No) Access to University Retirement Accounts

23:48 Emily: Okay. Future project for me. Okay, well I just alluded to retirement accounts, so let’s talk about that next. What’s been your experience with being offered or not being offered access to university retirement accounts?

24:01 Jamie: Sure. So, as a graduate student, I didn’t have any option for any kind of retirement account. And my understanding was that from legal sort of tax reporting purposes, I wasn’t able to open an official retirement account. So, in graduate school I was making like just enough money to save up a little bit and I did start buying like some mutual funds with that. And then as a postdoc, I did have a retirement account offered. However, I started out by like not really contributing very much to it at all because I was living in this really high cost-of-living area with not a lot of income. And then I actually found out as I was going through the fellowship application process that I was going to be losing that retirement contribution once I got a fellowship coming in. So then I sort of, at the last minute just before my fellowship came in, I like maxed out all my contributions as best as I could for like the last few months and tried to top it off. But then the fellowship came in and those accounts kind of sat stagnant for the rest of my postdoc. So, that was a frustrating thing to see. And it’s definitely been really nice now for a little more than a year I’ve been in, you know, a real job with very solid you know, federal government retirement accounts. So, that’s been nice to watch those finally like properly growing.

25:26 Emily: Yeah, it’s been my observation that if you’re not an employee, you do not have access to the 403(b) or 457. I actually don’t know why this is the case, but I’ve never seen an exception to it. Like yeah, I guess it has to do with like the rules behind what kinds of money can be contributed to a 401(k) or a 403(b), 457, these kinds of accounts. What I mentioned earlier, and you probably know this is, at the end of 2019 with the SECURE Act, there was a definitional change. So, 2019 and prior, fellowship-type income not reported on a W-2 was not permitted to be contributed to an IRA, an individual retirement arrangement. But that definition of what kind of money is allowed to be contributed to an IRA was changed by the SECURE Act.

26:18 Emily: And so 2020 and forward, you can contribute fellowship income not reported on a W-2, if you’re a graduate student or postdoc, to an individual retirement arrangement. I don’t know why a similar definition change could not occur for 403(b)s, 457s, et cetera. I just know that I’ve never seen it. I’ve never seen a non-employee be offered access to that particular benefit. Furthermore, at the graduate student level, it’s just very, very rare. Not totally unheard of, but rare, that a graduate student employee is offered access to those accounts. It does happen from time to time, but usually not. I’ve had a couple podcast episodes, and we’ll link in the show notes, where people have talked about as a graduate student contributing to those types of accounts. But again, it’s not common.

27:00 Jamie: I didn’t know actually about that change to the SECURE Act. Like I was still a postdoc in 2020 and I had had that IRA that I had opened like just before my fellowship started. But yeah, I definitely wasn’t contributing to it in 2020 and 2021. I had no idea that that was a possibility.

27:17 Emily: Yeah, I don’t think it was, I mean I talked about it a lot, but just like generally speaking, people make that assumption, right? That graduate students and postdocs are usually not able to contribute to a retirement account. So, why would we even have the conversation about whether they’re allowed to or not? Thankfully, someone was having the conversation because there was a change, right? Because I mean I remember that Senator Elizabeth Warren was a sponsor of this bill. There were other co-sponsors. It came up multiple times in the Senate and the House and it just never passed, multiple years, until it was rolled into the SECURE Act. There were a lot of other changes going on with how retirement accounts were being treated. So, it was kind of rolled into that and I’ll link in the show notes a couple of episodes we did right around that. But again, people make these rules. So, if people at the federal level decided that graduate student and postdoc non-employee income was legitimate in whatever, you know, little tax benefit they’re trying to offer, then it could become legitimate and maybe universities also would follow suit and start to offer that benefit. I actually don’t know why graduate students would be excluded from 403(b)s and 457s. Does it cost the university anything? Like a little more administrative burden to extend those benefits? I honestly don’t know why they wouldn’t for those students who can.

28:34 Jamie: Yeah, especially if it’s not a question of matching, if it’s just a question of contributing your own earnings into this account, right?

28:41 Emily: We can dream, Jamie, that there would ever be a match <laugh>. That’s a couple more steps down the road. No, some postdocs do receive matches or actually, I don’t know about you for being a postdoc in the UC system, but the UC system has a defined contribution level for their employees. I don’t know if it applies to postdocs, but in any case you might get that as an employee and then lose it if you, you know, then switch over to fellowship at a non-employee.

29:06 Jamie: Yeah, I believe in the UC system, I never got any kind of match, but I did have access to that 403(b) as well as I think a DCP.

29:15 Emily: Yeah.

“Non-Employee” Fellowship Income Legitimacy

29:16 Jamie: But yeah, I think it’s interesting that you describe it as like the legitimacy of being an employee and the legitimacy of that income. Because I often felt, you know, in addition to like the confusion and the frustration and wondering what to do that, I don’t know, it felt like an emotional hit. I felt unvalued when I’m put into this weird little category where my earnings don’t make sense and I can’t open an account and I can’t figure out how to pay taxes. I remember having like some really sharp juxtapositions between attending a professional conference and like giving a talk and talking to PIs in my field and having people really excited about the work that I was doing and then coming home a week or two later and trying to figure out some of my financial life and it being so confusing and seeing that there was just no support set up for it. And I went on this really kind of roller coaster from feeling like, “Oh, I’m a valued scientist and worker in this field,” down to like, “Oh, nobody really cares about me or the type of work that I’m doing.” So, I think it can have an emotional hit as well.

30:24 Emily: I’m so glad that you shared that. I think this is how we started our conversation at GCC actually, that fellowships and similar kinds of awards are supposed to be so prestigious.

30:35 Jamie: Exactly.

30:36 Emily: It’s supposed to be such an honor. It’s supposed to be based on your merit that you’ve received this. And yet the downstream effects are, well now you’ve been unclassified as an employee and your benefits are reduced. And I don’t know, maybe at some point in the past, the money made up for it. Like maybe you could make more as a fellow, which could make up for some of these issues. But I don’t know that that’s so much the case now. I was actually just seeing on Twitter today that like, you know, fellowship awards on certain grants are set at such a level that they’re below the minimums the universities have to pay their own graduate students and postdocs. So it’s like, well if you’re not even making more and the university has to make up some deficit in the award that you’re receiving, like what is the point of this when it has these negative implications later on?

31:27 Jamie: Yeah, absolutely. I mean I think the point for, well you know, it’s a point for your PI, right? It saves them some money out of their budget, and otherwise it’s a line on your resume. You got this prestigious award, congrats. Here’s some prestige. Right?

Inherent Value of a Fellowship

31:44 Emily: This almost reminds me of like, I don’t know, I’m thinking like crypto, like a currency. Like it only has value because we’ve decided it has value, it doesn’t have inherent value. If it came with more money that would be inherent value, but would it still be actually worth it? How much money would it take to make up for some of these deficits that we’re talking about?

32:04 Jamie: That’s a good question, yeah.

32:05 Emily: Right. So like, not only is it maybe the retirement stuff that we mentioned. Now on the tax front, you’re not necessarily paying more in taxes, it’s just more difficult. But I will say there are certain tax benefits I know at the federal level that you’re not eligible for if you have only this non-employee kind of income. So for example, the earned income tax credit, which is supposed to be for low-income individuals, usually with children, multiple children who are not making enough money, they have to have “earned income.” And under that definition, as of now, 2022, fellowship income is not considered earned income. So, you can’t get the earned income tax credit. You also can’t get the child and dependent care tax credit, which was so valuable in 2021. It was massively increased in 2021. You can’t get it if, let’s say even if you’re married to someone else, let’s say I ran into this situation literally I had a question from this married couple, both postdoc fellows, could not take this tax benefit because they did not have earned income under the definition. Now, graduate students can take it because students have an exception. But postdocs, everybody forgets about the postdocs!

33:08 Jamie: Everybody forgets the postdocs, it’s true!

33:11 Emily: Postdocs don’t have this exception <Laugh>. Everybody forgets that postdocs exist and yet for some, in some career paths, you can spend just as much time as a postdoc as you will as a graduate student, maybe even if not more. It’s a very important life stage. There’s family formation going on, and yet they’re excluded from some of these benefits. And like we were just saying, it comes back to is this fellowship income considered earned income? And that term earned income is used all over the tax code or the way the tax code is interpreted. Now, it used to be used for retirement account contributions, then the term was changed, taxable compensation, then the definition of taxable compensation was changed to include fellowship income. So, why can’t this term earned income be changed to include this type of income? I think this brings up a bigger, even bigger, bigger question though, which is like what is earned income?

Earned Income: Great Expectations

34:04 Emily: What is the responsibility that you have when you receive this non-employee income? What’s the responsibility that your employer has to you or your non-employer has to you? What’s the responsibility you have to your non-employer? So, if you’re an employee, you’re expected to work and produce certain outputs, whether it’s teaching, research, whatever. If you’re receiving a fellowship, it’s much less clear what the outputs are supposed to be. You have to have outputs to continue to be on the fellowship. But what are they exactly? And I think that lack of definition is what’s going into this earned income, not, you know, fellowship income not being considered earned income.

34:39 Jamie: Yeah, no, I think you’re right about that and I think that’s how this ties into kind of bigger labor questions, right? About our graduate students. Should they be classified as employees? Are they workers or are they students? And these are, you know, big things that have big implications across the U.S. and especially for universities on not just tax status but on a lot of things about how academics do their work and how academics get paid.

35:08 Emily: I’m so thankful for this conversation because it’s really like stretching me to think about these like bigger issues exactly as you were just saying. Whether we’re on fellowship or whether we’re employees, is there actually a difference there? Why are these differences encoded at the university level, at the federal level, state level, if they don’t have much meaning to us at the functional day-to-day, month-to-month, year-to-year. I know I mentioned earlier about half my time as a graduate student was spent as an employee, half as a non-employee. Functionally, what is the difference between what I was doing one year versus another year? It felt all pretty much the same to me.

35:45 Jamie: Yeah, and I think I remember it being sold to me as if you receive a fellowship, you have more independence from your PI because you’re bringing in your own money so you can be more independent in, you know, what experiments you do or how you drive your project. But in actual experience of my own or talking to other people, their level of independence was really just dependent on their PI and how that PI ran their lab. And I didn’t know anyone who was able to be more empowered because they had the fellowship or were able to push back on PI demands because of the fellowship.

36:22 Emily: I did see people who received fellowships be able to switch labs when possibly that wouldn’t have been the case otherwise. They were more attractive to that PI like accepting them. And they could, you know, take some time to get up to speed or whatever, again, without some maybe output expectations of being on a different kind of grant or whatnot. But I think you’re right, you know, we’re both kind of speaking coming from like the biological sciences kind of research. There’s so much overhead, there’s so much cost to that. How much money is the student really bringing in versus how much is their research overall costing the PI and the university? And so, if that ratio is not that great in the student’s favor, I don’t think there’s much independence that they can advocate for. Now, if your cost of doing research is like pretty much only your salary if you don’t have those kinds of overhead from doing like wet lab experiments and so forth, then maybe there’s a better argument here about independence from the PI. And I think in the humanities fields, some of them, at any rate, my understanding from talking with people is that like they have a lot more independence anyway in their research questions. And so a fellowship could be even more in that direction. But, yeah, I do think this is very, very field dependent.

37:32 Jamie: Yeah, I think that makes a lot of sense.

Future of Research

37:35 Emily: Well, this conversation has been so invigorating. Is there anything else that you want to share about your experiences or your observations or advocacy avenues that we can encourage listeners to take?

37:46 Jamie: I mean, I always love to tell people to check out the organization Future of Research. I used to serve on their board of directors and it’s a really great non-profit that kind of helps students and postdocs come together and crowdsource information and advocacy plans and push the field of research forward from the point of view of these early-career folks.

38:08 Emily: Excellent. And we will link in the show notes an interview that I did with Dr. Gary McDowell, the former director of Future of Research where we talked about post-doc salaries and post-doc work environments and how to, you know, choose a supportive PI and these kinds of questions. That’s excellent. Well, Jamie, I’m so glad that we got this interview out on the podcast that it didn’t just have to stay in the halls of the GFF conference, but that’s where great ideas are born with these like mixings and so forth and it was great to meet you in person and yeah, to be able to record this for the podcast listeners. So, thank you so much for coming on!

38:44 Jamie: Thanks, it was wonderful talking to you!

Outtro

38:51 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

Why Is My Fellowship Tax Bill So High?!

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Hi! I’m Dr. Emily Roberts, the founder of Personal Finance for PhDs. I’m a financial educator specializing in graduate students, postdocs, and PhDs in their first Real Jobs. My website is P F f o r P h D s dot com. The contents of this video are for education purposes only and should not be considered tax, legal, or financial advice for any individual. This video answers the question: why is my fellowship tax bill so high?

Introduction

I’m assuming that you found this video because your tax software or tax preparer has delivered some really, really unwelcome news, which is that you owe a large amount of tax this year, perhaps $1,000, $2,000, $3,000 or even more. And you are panicked because that is a huge amount of money for a graduate student or postdoc to come up with!

This is unfortunately a very common occurrence for graduate students and postdocs whose stipends or salaries are paid from fellowships or training grants and not reported on a Form W-2.

Specifically, this video is for postbacs, graduate students, and postdocs who are US citizens, permanent residents, and residents for tax purposes who are attending a university or training program in the US. Furthermore, all or part of your income is not reported on a Form W-2. I’m going to refer to you as a “fellow” in this video, although that might not be exactly the term that your university uses.

In this video, I will explain why graduate student and postdoc fellows often face these large tax bills. I’m going to focus on federal tax alone. In the companion video, What to Do When Facing a Huge Fellowship Tax Bill, linked in the description below, I step through what you should do if you are facing a high fellowship tax bill.

In all likelihood, the reason that you have a high tax bill due is that your fellowship is taxed as ordinary income but you were not having income tax withheld from your paychecks. I’m going to break that statement down now so that you can fully understand it.

Links Mentioned

Point #1: Your fellowship is taxed as ordinary income.

Point #1: Your fellowship is taxed as ordinary income. What this means is that the federal government taxes fellowship income that you receive as your stipend or salary at the same rate that it taxes employee income.

I’m hand-waving a little bit here and making some assumptions, but this is roughly correct. I’ll point you to a resource in a moment to help you get this exactly right if you’re interested.

The general point is that your stipend or salary is subject to income tax in the same way that employee income is. That is to say, part of it tax-free thanks to your deductions, part of it is taxed at 10%, part of it is taxed at 12%, and if you were particularly well-paid, perhaps some is taxed at one or more even higher rates. These are the ordinary income tax rates.

The taxability of your fellowship income may come as a surprise to you, because there are endemic rumors running around universities that fellowship income is not subject to income tax. Sometimes even tax professionals say the same thing, although they are mistaken. Fellowships used to be exempt from tax, but that changed with tax reform in the 1980s.

If you want more discussion about the taxability of fellowships, I encourage you to listen to my previous podcast episode on the subject, titled Do I Owe Income Tax on My Fellowship?, which you can find linked in the description below.

One additional quick note is that you should not pay self-employment tax on your fellowship income. Assuming that you’re not otherwise self-employed, if you see that your tax return includes a Schedule C for your fellowship income and/or there is an amount listed on Schedule 2 Line 4, that means that something has gone dramatically wrong with the tax preparation process. It is vital that you correct that error before filing your return.

I told you a moment ago that I was hand-waving over some details about how fellowship income is taxed. Your taxable income from a fellowship might not be exactly the same as your stipend or salary. It could actually be slightly more or less, depending on your individual circumstances. If you are a graduate student and want to go really in depth with this material or are trying to correct the self-employment mistake I just mentioned, I encourage you to join my paid tax workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), which is linked in the description below.

Point #2: You weren’t having income tax withheld from your stipend or salary.

Point #2: Despite the fact that your fellowship income is taxable, you weren’t having income tax withheld from your stipend or salary. The vast majority of universities and institutes do not withhold income tax on fellowship income.

Universities are required to withhold income tax on behalf of their employees. Employee income is reported on a Form W-2. But you are not an employee with respect to your fellowship income, so the university has no obligation to withhold income tax on that income, and the majority do not.

Here are some common scenarios that graduate students and postdocs face:

1) You were an employee, either at your university or elsewhere, in the first part of the calendar year, but then you switched onto fellowship income with the new academic year. In that case, you had income tax withholding on your income in the earlier part of the year, but it stopped when your funding source changed. Also vice versa, you could have switched from fellowship income to employee income mid-year.

2) You received fellowship income for the entire calendar year, and you had no income tax withholding during the year.

3) You had two concurrent sources of stipend or salary income, one from an employee position and one from a fellowship. You had income tax withheld on the employee portion, but not the fellowship portion. Even though you had withholding through the entire calendar year, it wasn’t enough to cover both sources of income.

I understand that you may be frustrated that your university or institute did not withhold income tax on your behalf. I wish that they all would offer this benefit. The very least they could do would be to give you a heads up that they’re not withholding income tax but that you still may have a tax liability, but I’m guessing because you found your way to this video that they did not. And I’m really sorry that you’re in this situation.

Point #3: Your tax return compares your calculated tax liability for the year with the income tax withholding that the IRS received during the year.

Point #3: Your tax return compares your calculated tax liability for the year with the income tax withholding that the IRS received during the year.

For most households in the US, their income tax withholding exceeds their income tax liability, so after they file their tax returns they receive a tax refund. That’s the excess money that they paid in through the year being refunded to them.

The opposite can also happen. When your tax liability exceeds your income tax withholding, you are expected to pay the balance when you file your tax return.

Conclusion

Now you can see why you’re facing this large income tax bill. You had taxable income, but no tax was withheld or not enough was withheld, and the IRS now expects you to pony up the difference.

After you finish this video, I encourage you to watch the companion video linked below, What to Do When Facing a Huge Fellowship Tax Bill, especially if you are unable to pay the entire bill right away.

If you would like to learn more about income tax on fellowships, I please register for my free email course on the subject, linked below. You can also find it at PFforPhDs.com/fellowshiptax. It is going to explain the previous points in even more detail and point you to lots of additional resources.

Again, I’m very sorry that you’re facing a high fellowship tax bill. I wish things hadn’t played out the way they have, but please know that you will get through this, and ultimately this will be just a small hiccup in your financial journey.

What to Do When Facing a Huge Fellowship Tax Bill

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Hi! I’m Dr. Emily Roberts, the founder of Personal Finance for PhDs. I’m a financial educator specializing in graduate students, postdocs, and PhDs in their first Real Jobs. My website is P F f o r P h D s dot com. The contents of this video are for education purposes only and should not be considered tax, legal, or financial advice for any individual. This video will show you the steps to take when you are facing a high tax bill due to your fellowship income.

Introduction

I’m assuming that you found this video because your tax software or tax preparer has delivered some really, really unwelcome news, which is that you owe a large amount of tax this year, perhaps $1,000, $2,000, $3,000 or even more. And you are panicked because that is a huge amount of money for a graduate student or postdoc to come up with!

This is unfortunately a very common occurrence for graduate students and postdocs whose stipends or salaries are paid from fellowships or training grants and not reported on a Form W-2.

Specifically, this video is for postbacs, graduate students, and postdocs who are US citizens, permanent residents, and residents for tax purposes who are attending a university or training program in the US. Furthermore, all or part of your income is not reported on a Form W-2. I’m going to refer to you as a “fellow” in this video, although that might not be exactly the term that your university uses.

In this video, I will share with you the steps you should take when facing a high tax bill, both to address the current bill and also avoid getting into the same situation again next year. In the companion video, Why Is My Fellowship Tax Bill So High?!, linked in the description below, I explain why PhD fellows often face high tax bills.

Links Mentioned

Step 1

Step 1: Don’t panic! IRS agents are not going to break down your door and haul you off to jail over this tax bill. You can manage this. Take a deep breath. I’ve interviewed several graduate students and PhDs on the Personal Finance for PhDs podcast who were in this exact situation, and they all found that the IRS was pretty reasonable to work with.

Part b to this step, which I want you to keep in mind throughout this whole process of resolving your bill, is to stay in contact with the IRS. Don’t stick your head in the sand about this matter. File your return on time, respond to the letters they send you, even if you can’t pay right away. Falling out of communication is tempting, but it’s kind of the worst thing you could do.

Step 2

Step 2: Double-check your tax return. I want you to be sure that it’s correct and that you really do owe that much income tax.

I told you in the companion video, Why Is My Fellowship Tax Bill So High?!, that fellowships are taxed as ordinary income. That means that you should pay the same amount of tax on your taxable fellowship income that you would on that amount of employee income.

Use an income tax calculator like the one pictured from smartasset.com. It’s not going to be super precise in calculating your tax liability, but it should get you in the right ballpark. If you have one or more dependent children, choose a calculator that takes that into account. Enter your pertinent details.

Take a look at the calculated federal income tax.

Compare that amount to the total tax line on your Form 1040. Are they fairly close, maybe within 10%? If that’s the case, your tax return passes this quick check, and it’s likely that you do owe that large tax bill.

However, if your tax liability from your tax return is much higher, like double or more, what the calculator said, that’s a major red flag. You need to go through your return with a fine-toothed comb to figure out whether something went awry in the preparation process. I would be suspicious that your fellowship income has been confused with self-employment income.

If you are a grad student and would like to learn more from me about how to prepare an accurate tax return, join my paid tax workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), which is linked in the description below.

Step 3

Step 3: File your tax return and pay what you can. You can wait until Tax Day if you like, but do file by the deadline. Pay as much as you comfortably can, but do not put your bill on a credit card or anything similar.

If you have existing savings, how much should you put toward this bill vs. keep for yourself? My opinion is that you should treat IRS debt, which is what this bill is on the verge of becoming, similar to how you should treat credit card debt. That is to say, keep a small emergency fund of $1,000 to 2 months of expenses, and put any cash savings above that level toward paying this bill. That means forgoing investing and repaying lower-priority debts until it is paid. If you are familiar with my 8-step Financial Framework, I would place this bill in Step 2.

If you can completely pay the bill without dipping into your small emergency fund, that’s great! You’ll still need Step 4, though, so keep watching the video.

If you can’t pay the bill in full, keep working the steps.

Step 4

Step 4: Update your budget.

Your next step is not to get in touch with the IRS regarding paying your outstanding balance, although you should do that soon. First, you need to figure out your budget for this year.

In Step 4a, I want you to figure out how to stave off a large, surprise tax bill at this time next year.

If you are still on fellowship and still not having income tax withheld from your paychecks, I actually recommend that you figure out your tax bill for the current tax year before you commit to a payment plan for the tax year that has already ended.

That starts with estimating how much tax liability you will accrue on your fellowship income in this tax year.

You can use a calculator that I made, which you will receive after registering for my short, free email course at PFforPhDs.com/fellowshiptax/. Alternatively, you can use a calculator like the one I referenced in Step 2.

Figure out how much money you will need to set aside from each of your current fellowship paychecks to pay your tax bill for the current year. Build that number into your budget.

I recommend opening a separate savings account nicknamed Tax and setting up an autodraft from your checking account into the savings account for the correct amount of money immediately after you receive each paycheck. Then, when it comes time to pay your tax bill for the current year, you’ll have the money ready. This is what I call a system of self-withholding.

In Step 4b, you should determine if you are required, in the current tax year, to make estimated tax payments on a quarterly basis.

You do this by filling out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. The worksheet is a high-level draft of your tax return. At the end, it will tell you whether you are required to make estimated tax payments and if so in what amount. The payment deadlines for each quarter are in mid-April, mid-June, mid-September, and mid-January of each year. If you are required to make these payments, your system of self-withholding will keep you on track to be ready to make them.

If you would like my teaching and support in how to fill out the Estimated Tax Worksheet and handle common scenarios that PhD trainees encounter, join my paid tax workshop, Quarterly Estimated Tax for Fellowship Recipients, which is linked in the description below.

In Step 4c, you will reassess your budget. You need that savings rate to go toward your current year’s tax bill, but you also need to know how much you can feasibly put toward your previous year’s tax bill on a monthly basis going forward. It’s vital to know the maximum that you can realistically pay to the IRS on a monthly basis for that bill prior to setting up a payment plan with them.

Specifically, there are two types of plans, short-term and long-term. If you can adjust your budget so that you will pay off your entire past year’s bill within 120 days, you can opt for the short-term plan. If you can’t, you’ll opt for the long-term plan.

Sidebar here: I said earlier that you shouldn’t put your tax bill on a credit card. That is generally speaking good advice, because the typical interest rate on a credit card is far higher than the interest rate the IRS will offer you.

The one maybe-possibly exception would be to put the bill on a promotional 0% interest rate credit card. You should only consider this if you’re 1,000% confident that you will pay the entire bill before the promotional period ends and the interest rate jumps up. Compare the fees for using such a card, if you qualify for one, with the fees and interest the IRS will charge you over the period you expect to hold the debt.

I don’t love the option of using a credit card to pay this bill, but I also don’t love you being in debt to the IRS. Either way, it’s a high-priority debt that you should strive to pay off quickly.

Step 5

Step 5: Make a plan with the IRS. Now that you know how much you can afford to pay toward your previous tax bill and whether you’re able to opt for a short-term plan, you’re ready to set up a payment plan with the IRS. Make sure that the required amount of payment is set at less than what your budget tells you that you can afford.

The best website I’ve found to help with this process is the Taxpayer Advocate Service, which is linked in the description below. It explains all of the options the IRS will give you so you can decide which is the best fit. For example, if you owe less than $10,000, the guaranteed installment plan gives you three years to pay the debt. Once you have assessed all your options, get in touch with the IRS to set up your payments. If this is your first time being late on paying your tax bill, you can ask to have any penalties waived.

Step 6

Step 6: Follow through. Pay the IRS on the schedule you agreed to, and in fact try to pay them even sooner! Again, following my Financial Framework, I recommend that you get creative with your budget to funnel as much money as you can toward your IRS debt and any other high-priority debts you may have. Consider this a financial sprint with a definite end point, after which you can take your foot off the gas a smidge.

Conclusion

I hope hearing those steps helped calm you down and show you that there is a path through this situation. You are not the first nor will you be the last graduate student or postdoc to get on a payment plan with the IRS, if it comes to that.

If you haven’t yet, I encourage you to watch the companion video linked below, Why Is My Fellowship Tax Bill So High?!, to understand how this situation came about.

If you would like to learn more about income tax on fellowships, I please register for my free email course on the subject, linked below. You can also find it at PFforPhDs.com/fellowshiptax. This will really help you if you are continuing on fellowship in the current year.

Again, I’m very sorry that you’re facing a high fellowship tax bill. It may take you some time to completely resolve the issue, but you will get through it and nothing terrible is going to happen in the meantime. The IRS is fairly reasonable to work with. Good luck to you.

Is Fellowship Income Eligible to Be Contributed to an IRA?

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Update 2/22/2022: Great news! The point of this article has been fulfilled because the IRS re-revised Publication 970 for tax year 2021 to reflect the current tax code, which permits taxable graduate student and postdoc income, whether reported on a Form W-2 or not, to be contributed to an IRA.

Publication 970 p. 5 NOW states: “Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. A scholarship or fellowship grant is generally taxable compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. However, for tax years beginning after 2019, certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes. These include amounts paid to you to aid you in the pursuit of graduate or postdoctoral study and included in your gross income under the rules discussed in this chapter. Taxable amounts not reported to you on Form W-2 are generally included in gross income as discussed later under Reporting Scholarships and Fellowship Grants.”

The rest of this article is unchanged from its original publication date on 2/6/2022.

Believe it or not, I look forward to the release of each new version of the IRS’s Publication 970, which covers how fellowship and scholarship income is taxed. I read it thoroughly and make sure that what I teach is in line with it. However, when I opened up the new 2021 version a few days ago, I was disappointed to read on p. 5: “Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive “taxable compensation” (formerly “earned income”). Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement.” Disappointed doesn’t really touch the depths of my feelings… I was momentarily devastated! I’ve been telling you for over two years now that fellowship income is eligible to be contributed to an IRA regardless of how it is reported or not reported at tax time. Was I wrong? Let’s explore the relevant texts. I have great respect for the IRS publications and find them very useful, but they are not the final word on tax law… the tax code is.

Further reading/listening:

Pre-2020 Status

You must have “taxable compensation” to contribute to an IRA in a given tax year. You can contribute up to the cap for that year ($6,000 in 2019-2022) or your amount of taxable compensation, whichever is lower.

Through tax year 2019, with respect to PhD trainee income, only income reported on a Form W-2 was considered “taxable compensation.”

The text from the 2019 version of Publication 970, Tax Benefits
for Education, reads on p. 5: “Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. For more information about IRAs, see Pub. 590-A and Pub. 590-B.”

Similarly, the text from the 2019 version of Publication 590A, Contributions to Individual Retirement Arrangements (IRAs), reads on p. 6: “Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.”

This text is very clear and reflects the widely held understanding of eligibility for IRA contributions. It was very disappointing for many members of the PhD community; winning a fellowship often comes with a pay raise and therefore an enhanced ability to save for retirement, yet those recipients were barred from making IRA contributions. Keep in mind, these fellowships were taxable as ordinary income, just not considered taxable compensation for IRA contribution purposes. I didn’t like this rule, but I taught it as part of my personal finance material.

The Graduate Student Savings Act

Somehow, the plight of graduate students and postdocs who received fellowship income was heard! The Graduate Student Savings Act proposed to change the definition of taxable compensation. It was put before Congress as a bill in 2016, 2017, and 2019.

An excerpt of the fact sheet for the Graduate Student Savings Act of 2019 reads: “While fellowship or stipend income is taxed by federal and state governments, it doesn’t qualify as “compensation,” meaning that none of a student’s fellowship funds can be saved in an IRA… Many postdoctoral fellows… also receive taxable fellowship income, yet these fellows are also barred from using their fellowship income to contribute to tax-preferred retirement accounts. The Graduate Students Savings Act of 2019 would ensure that any graduate student or postdoctoral fellow who is
paid for their work or their studies can save a portion of their stipend in an IRA.”

While not using super specific or technical language, this excerpt makes clear the intent of the bill: to allow “any graduate student or postdoctoral fellow who is paid for their work or their studies” to contribute to an IRA, i.e., change the definition of taxable compensation.

Graduate Student Savings Act was not successful in being passed as an independent bill in any of those years. Then, in 2019, it was included in the SECURE Act.

The SECURE Act

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is described by Investopedia as a “far-reaching bill includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.” It was signed into law on December 20, 2019.

The Graduate Student Savings Act was included in the SECURE Act. Here is the relevant text from the bill:

“SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES.

“(a) In General.—Paragraph (1) of section 219(f) of the Internal Revenue Code of 1986 is amended by adding at the end the following: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”.

“(b) Effective Date.—The amendment made by this section shall apply to taxable years beginning after December 31, 2019.”

This expands the definition of taxable compensation for the purposes of contributing to an IRA beyond what is reported on a Form W-2. To me, this definition clearly includes taxable fellowship and training grant income paid as stipends and salaries not reported on a Form W-2.

The Tax Code (2021)

From the current Internal Revenue Code section 219 on Retirement Savings, section (f)(1) reads:

“(1) Compensation For purposes of this section, the term “compensation” includes earned income (as defined in section 401(c)(2)). The term “compensation” does not include any amount received as a pension or annuity and does not include any amount received as deferred compensation. For purposes of this paragraph, section 401(c)(2) shall be applied as if the term trade or business for purposes of section 1402 included service described in subsection (c)(6). The term “compensation” includes any differential wage payment (as defined in section 3401(h)(2)). The term “compensation” shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

Again, I read this as any type of grad student and postdoc salary or stipend with no clauses about being reported on a Form W-2. The language is very similar to how IRS Publication 970 describes fellowship income on p. 5: “A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.”

The Internal Revenue Code does seem, to me, to reflect the intent of the Graduate Student Savings Act of expanding the definition of taxable compensation with respect to graduate student and postdoc income beyond what is reported on a Form W-2.

The 2021 Publications

Publication 970

As I stated at the start of this article, Publication 970 disappointingly has not changed its tune on the definition of taxable compensation. It says the same thing in 2021 that it did in 2019 as if the Graduate Student Savings Act had never passed.

Publication 590-A

Publication 590-A, to its credit, now has some mixed language regarding taxable compensation and fellowship stipends and salaries. I’ll compare the 2018 and 2021 versions of this publication.

The 2018 version of Publication 590-A contains exactly one reference to fellowship income on p. 6 in the section titled What Is Compensation?: “Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.”

The 2021 version of Publication 590-A contains this language on p. 6 in the section titled What Is Compensation?: “Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.” So no change there.

However, further down in the same section it says: “Graduate or postdoctoral study. Compensation includes any income paid to you to aid you in the pursuit of graduate or postdoctoral study.”

Are they trying to draw a distinction between “any income paid to you to aid you in the pursuit of graduate or postdoctoral study” and “scholarship and fellowship payments”? What could “any” income mean if not, at least in part, fellowship payments?

To further muddy these waters, Publication 590-A includes Table 1-1, Compensation for Purposes of an IRA. The 2018 version of this table doesn’t mention either fellowship income or graduate or postdoctoral study. The 2021 version lists “taxable non-tuition fellowship and stipend payments” as included in the definition of taxable compensation.

This language in the table is consistent with both employee and non-employee graduate student and postdoc income, again, with no mention of a Form W-2 reporting requirement.

Furthermore, the 2021 version of Publication 590-A says under the Reminders section on p. 2: “Certain taxable non-tuition fellowship and stipend payments. For tax years beginning after 2019, certain taxable non-tuition fellowship and stipend payments are treated as compensation for the purpose of IRA contributions. Compensation will include any amount included in your gross income and paid to aid in your pursuit of graduate or postdoctoral study.”

I am not sure what “certain” means in this paragraph. “Non-tuition fellowship and stipend payments” reads to me as stipend or salary as long as your tuition is being paid by another source of funding. “Any amount included in your gross income and paid to aid in your pursuit of graduate or postdoctoral study” reads to me as both your employee income (reported on a Form W-2) such as from a graduate assistantship position or postdoctoral employee position and taxable non-employee (not reported on a Form W-2), often sourced from a fellowship or training grant.

My Conclusion

My conclusion is that the very clear language in Publication 970 and Publication 590-A excluding taxable fellowship and scholarship income from the definition of taxable compensation unless it is reported on a Form W-2 is not consistent with the spirit of the Graduate Student Savings Act or the current tax code. The changes made by the SECURE Act to the tax code included in the definition of taxable compensation “any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.” To me, this means that if you receive a taxable stipend or salary as a graduate student or postdoc, even if it is not reported on a Form W-2, it is taxable compensation for the purpose of contributing to an IRA.

What Do You Think?

I am really struggling with this and I honestly want to know: Do you see a flaw in my reasoning? Is there some difference between “fellowship” and “any income paid… in the pursuit of graduate and postdoctoral study”? Leave a comment here or email me ([email protected]). I am open to the idea that there is something I don’t see or understand. Or let me know if you agree with me.

What Can We Do?

If my argument is valid and the text in IRS Publication 970 and Publication 590A (in part) is incorrect, what can be done? Hit me with your ideas for getting this text updated.

My initial idea is to write to the offices of the Senators (Elizabeth Warren, Mike Lee, Ron Wyden, and Tim Scott) who sponsored the Graduate Student Savings Act to see if they can clarify why the IRS’s language in these publications doesn’t reflect the change the Act brought about. Do you have any other ideas?

The big win for our community was getting the Graduate Student Savings Act passed. The follow-through on that win is making sure that people (and tax software/preparers) know about the change so that graduate students and postdocs can functionally contribute to IRAs.

Fellowship and Training Grant Tax Forms

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There is no single correct IRS tax form on which to report PhD trainee fellowship and training grant stipends and salaries. Universities and funding agencies take different approaches, which often confuses grad students, postdocs, and postbacs. This article shares the crowd-sourced information on how universities and funding agencies are reporting fellowship and training grant income.

Please contribute to this project by filling out this survey to have your tax form included in this article—and share the survey as well.

I have included the number of entries that I’ve received for each type of tax form.

Further reading:

Tax Year 2024 Survey Results

External Fellowships

National Institutes of Health (NIH)

Continuing Education Training Grant (T15)

The T15 has been reported on a:

  • Form 1098-T Box 5 (1 entry)

Intramural Research Program: Postdoctoral Research Training Award (IRTA)

The postdoc IRTA has been reported on a:

  • Form 1099-G in Box 6 (1 entry)

Ruth L. Kirschstein Institutional National Research Service Award (T32)

The T32 has been reported on a:

  • Courtesy letter (2 entries)
  • W-2 (1 entry)

Ruth L. Kirschstein Predoctoral Individual National Research Service Award (F31)

The F31 has been reported on a:

  • Form 1099-MISC Box 3 (2 entries)

It has also been not reported in any way (1 entry)

Linked Training Award (TL1)

The TL1 has not been reported in any way (1 entry)

National Science Foundation

Research and Mentoring for Postbaccalaureates in Biological Sciences (RaMP)

The RaMP has been reported on a:

  • Courtesy letter (1 entry)

Graduate Research Fellowships Program (GRFP)

The GRFP has been reported on a:

  • Form 1098-T Box 5 (2 entries)
  • Courtesy letter (1 entry)

It has also been not reported in any way (2 entries)

National Aeronautics and Space Administration

Future Investigators in NASA Earth and Space Science and Technology (FINESST)

The FINESST has been reported on a:

  • Form 1098-T Box 5 (1 entry)

It has also been not reported in any way (1 entry)

American Institute of Indian Studies

Junior Fellowship

The Junior Fellowship has not been reported in any way (1 entry)

National Institute for Occupational Safety and Health

Occupational Health Psychology Total Worker Program

The Occupational Health Psychology Total Worker Program funding has not been reported in any way (1 entry)

Internal Fellowships

Harvard University

Funding (stipend) for doctoral students still in coursework has not been reported in any way (1 entry – told to use paystub for reporting to IRS)

Northwestern University

The First-Year Fellowship was reported on a courtesy letter (1 entry – letter was requested by recipient).

Stanford University

Funding (stipend) for doctoral students has been reported on Form 1098-T Box 5 (1 entry).

University of Connecticut

The Jorgensen Fellowship has not been reported in any way (1 entry).

University of Pennsylvania

The Educational Fellowship has not been reported in any way (1 entry).

Vanderbilt University

Funding (stipend) for doctoral students has been reported on Form 1098-T Box 5 (1 entry).

Non-tuition scholarship awards (e.g., health insurance, health fee award) have been reported on Form 1098-T Box 5 (1 entry).

Tax Year 2023 Survey Results

External Fellowships

National Institutes of Health (NIH)

Dissertation Award (R36)

The R36 has not been reported in any way (1 entry).

Intramural Research Program: Postdoctoral Research Training Award (IRTA)

The postdoc IRTA has been reported on a:

  • Form 1099-NEC Box 1 (1 entry)

Ruth L. Kirschstein Institutional National Research Service Award (T32)

The T32 has been reported on a:

  • Form 1098-T Box 5 (3 entries)

It has also been not reported in any way (2 entries).

Ruth L. Kirschstein Predoctoral Individual National Research Service Award (F31)

The F31 has been reported on a:

  • Form 1098-T Box 5 (2 entries)
  • Form 1099-MISC Box 3 (1 entry)

National Science Foundation

Graduate Research Fellowships Program (GRFP)

The GRFP has been reported on a:

  • Form 1098-T Box 5 (2 entries)
  • Form W-2 (1 entry)

It has also been not reported in any way (1 entry).

Internal Fellowships

Harvard University

The Prize Fellowship has not been reported in any way (1 entry).

Mayo Clinic Graduate School of Biomedical Sciences

Funding (stipend) for doctoral students has been reported on Form 1099-MISC Box 3 (1 entry).

Ohio State University

The Presidential Fellowship has not been reported in any way (1 entry).

Smithsonian Institution

The postdoctoral Smithsonian Institution Fellowship Program (SIFP) has not been reported in any way (1 entry).

University of Nevada, Reno

The Bilinski Fellowship has been reported on Form 1098-T Box 5 (1 entry).

University of Virginia

The Diversity, Equity, and Inclusion Dean’s Doctoral Fellowship has not been reported in any way (1 entry).

A graduate research assistantship position has not been reported in any way (1 entry).

The Raven Fellowship has been reported on Form 1099-MISC Box 3 (1 entry).

Tax Year 2021 Survey Results

National Institutes of Health (NIH)

Ruth L. Kirschstein Institutional National Research Service Award (T32)

The T32 has been reported on a:

  • Form 1098-T in Box 5 (5 entries)
  • Courtesy letter (3 entries)

It has also been not reported in any way (3 entries).

Ruth L. Kirschstein Individual Predoctoral NRSA for MD/PhD and other Dual Degree Fellowships (F30)

The F30 has been reported on a:

  • Form 1098-T in Box 5 + Form W-2 in Box 14 (1 entry)

Ruth L. Kirschstein Predoctoral Individual National Research Service Award (F31)

The F31 has been reported on a:

  • Form 1098-T in Box 5 (2 entries)
  • Form W-2 in Box 1 (1 entry)

It has also been not reported in any way (1 entry).

Ruth L. Kirschstein Postdoctoral Individual National Research Service Award (F32)

The F32 has been not reported in any way (1 entry).

Individual Predoctoral to Postdoctoral Fellow Transition Award (F99/K00)

The F99/K00 has been not reported in any way (1 entry).

Intramural Research Program: Postdoctoral Research Training Award (IRTA)

The postdoc IRTA has been reported on a:

  • Form 1099-G in Box 6 (1 entry)

NIH Oxford-Cambridge Scholars Program

The Oxford-Cambridge Scholarship has been reported on a:

  • Form 1099-G in Box 6 (1 entry)

National Center for Advancing Translational Sciences Clinical and Translational Science Awards (CTSA) Program TL1

The CTSA TL1 has been reported on a:

  • Form 1099-MISC in Box 3 (2 entries)

Clinical Connections-Connecticut (CNC-CT)

The CNC-CT has been not reported in any way (1 entry).

Molecular Biophysics Training Grant

The Molecular Biophysics Training Grant has bee reported on a:

  • Form 1098-T in Box 5 (1 entry)

National Science Foundation (NSF)

Graduate Research Fellowships Program (GRFP)

The GRFP has been reported on a:

  • Form 1098-T in Box 5 (13 entries)
  • Form W-2 Box 1 (1 entry)
  • Courtesy letter (1 entry)

It has also been not reported in any way (5 entries).

Postdoctoral Research Fellowships in Biology (PRFB)

The PRFB has been not reported in any way (1 entry).

Department of Energy (DoE)

National Nuclear Security Administration (NNSA) Stewardship Science Graduate Fellowship

The NNSA Stewardship Science Graduate Fellowship from the Krell Institute has been reported on a:

  • Courtesy letter (1 entry)

Department of Defense (DoD)

National Defense Science and Engineering Graduate Fellowship (NDSEG)

The NDSEG has been reported on a:

  • Form 1099-NEC in Box 1 (1 entry)
  • Courtesy letter (1 entry)

Science, Mathematics, and Research for Transformation (SMART)

The SMART Scholarship has been reported on a:

  • Form 1099-MISC Box 3 (1 entry)

The National Academies

Ford Foundation Predoctoral Fellowship

The Ford Foundation Predoctoral Fellowship has been reported on a:

  • Courtesy letter (1 entry)

Henry Luce Foundation

Clare Boothe Luce Fellowship

The CBL Fellowship has been not reported in any way (1 entry).

Simons Foundation

The Simons Postdoctoral Fellowship has been reported on a courtesy letter (1 entry).

Internal Fellowships

Cornell University

A fellowship for first-year rotating students has been reported on a Form 1098-T in Box 5.

Harvard University

The Prize Fellowship has been not reported in any way (1 entry).

Indiana University

The University fellowship has been reported on a Form 1098-T in Box 5 (1 entry).

Mayo Clinic

The Mayo Foundation for Medical Education & Research Fellowship has been reported on a Form 1098-T in Box 5 + Form 1099-MISC in Box 3 (1 entry).

Rochester Institute of Technology

A graduate research assistantship position has been reported on a Form 1099-MISC in Box 3.

University of California, Berkeley

The Chancellor’s Fellowship has been reported on a Form 1098-T in Box 5.

University of California, San Diego

The Summer Training Academy for Research Success (STARS) Fellowship has been reported on a Form 1098-T in Box 5 and a courtesy letter (1 entry).

University of Connecticut

The Jorgensen Fellowship has been not reported in any way (1 entry).

University of Michigan

The Rackham Merit Fellowship has been reported on a Form 1098-T in Box 5 (1 entry).

University of Pennsylvania

The Dean’s Fellowship in the Graduate School of Education has been reported on a Form W-2 in Box 1 (1 entry).

University of Southern California

The Merit Fellowship has been reported on a Form 1098-T in Box 5 (1 entry).

University of Virginia

The Diversity, Equity, and Inclusion Dean’s Doctoral Fellowship has been not reported in any way (1 entry).

Washington University in St. Louis

The WM Keck Postdoctoral Fellowship has been reported on a courtesy letter (1 entry).

Please contribute to this project by filling out this survey to have your tax form included in this article—and share the survey as well.

Want more tax content specific to graduate students, postdocs, and postbacs?

Visit the Personal Finance for PhDs Tax Center.

Workshop: How to Complete Your Grad Student Tax Return (and Understand It, Too!)

Workshop: Quarterly Estimated Tax for Fellowship Recipients

What to Do at the Start of the Academic Year to Make Next Tax Season Easier

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In this episode, Emily teaches what various types of PhD trainees can do at the start of the academic year to make next tax season go more smoothly. She covers tracking qualified education expenses, quarterly estimated tax, the Kiddie Tax, and state residency. Please consider sharing this episode on social media or with an email list-serv so your peers have access to this information as well!

Links Mentioned in the Episode

easier tax season

Introduction

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 10, Episode 2, and I don’t have a guest today, but rather I will tell you what various types of PhD trainees can do at the start of the academic year to make next tax season go more smoothly. We will discuss tracking qualified education expenses, quarterly estimated tax, the Kiddie Tax, and state residency. Please consider sharing this episode on social media or with an email list-serv so your peers have access to this information as well!

We are at or near the start of a new academic year, which means it’s time to take a moment to think about taxes. A few minutes of consideration at this time of year can save you a big headache and wallet-ache during tax season, so it’s worth it.

This episode has four sections, and I’m going to clearly identify at the beginning of each section who the information is for, because it will switch around. Overall, this episode is for US citizens, permanent residents, and residents for tax purposes living in the US. The various intended audiences for the sections are full-time graduate students; postbacs, grad students, and postdocs receiving non-W-2 stipends or salaries; full-time graduate students age 23 and younger; and grad students who either moved states in 2021 or whose income is coming from a new state. Our overarching topic is what you can do now to make next tax season easier.

Please note that I am not a Certified Public Accountant or Certified Financial Planner. This content is educational in nature only and should not be considered tax, financial, or legal advice for any individual. You are entirely responsible for your own financial decisions.

Tracking Education Expenses

Section A is for full-time graduate students.

In early 2022, once you get into preparing your annual tax return, you are going to need to use your so-called “qualified education expenses.” You can use these expenses to reduce your tax liability. Depending on which higher education tax benefit you employ, your qualified education expenses will either be used as a deduction or a credit. I’m not getting into all the details now because you will figure that out during tax season, but if you want to read more, go to PFforPhDs.com/prepare-grad-student-tax-return/ for my article updated for 2020.

The action step for you at this point in the year is to keep track of any education expenses that you suspect might be qualified education expenses. Now, the education expenses that are paid through your student account are already tracked for you, and you should be able to access your 2021 statement during tax season to look at all of the transactions for items like tuition and fees. What I’m suggesting that you manually track is any education expense that you transact outside of that student account, such as textbooks, course-related expenses, and computing purchases.
What I mean by tracking is to save two types of documents: 1) The receipt of the purchase showing the price paid. 2) The document stating that the purchase was required by your course instructor, your department, your school, or your university. The document could be a course syllabus, an email, or a screenshot from a webpage. You can choose how you want to save these records, but I suggest a digital copy maintained in cloud storage.

Now, not every education expense that you track may turn out to be a “qualified education expense” as that will depend on which higher education tax benefit or benefits you choose to use for your tax return. I suggest you leave the task of figuring out what is qualified and what is not to Future You. Present You only has the responsibility to track the expenses, and Future You will thank you for that.

Awarded Income and Estimated Tax

Section B is for postbacs, grad students, and postdocs receiving non-W-2 stipends or salaries.

Right up front, I need to define what I mean by a non-W-2 stipend or salary. I use a framework wherein there are two basic classifications for a stipend or salary that a PhD trainee might receive: employee income and awarded income. These are my own terms, so you won’t find ‘awarded income’ in IRS documentation or used by universities.

Employee income comes from the work than an employee performs for their employer. At the graduate student level, employee positions are often but not exclusively called assistantships, e.g., research assistantship, teaching assistantship, or graduate assistantship. If you have employee income and are a US citizen, permanent resident, or resident for tax purposes, this income will be reported on a Form W-2 at tax time.
The other type of income, awarded income, is more difficult to define. It is given as an award rather than for work performed. At the postbac, grad student, and postdoc levels, awarded income is often but not exclusively called fellowship income. If you are a US citizen, permanent resident, or resident for tax purposes, this income could be reported on a Form 1098-T, a Form 1099-MISC, a Form 1099-NEC, or a courtesy letter. However, there is actually no IRS reporting requirement for this type of income, so many PhD trainees receive absolutely no documentation whatsoever.

If you want to understand this framework more fully, I suggest listening to Season 8 Episode 1 of this podcast, which is titled “What Your University Isn’t Telling You About Your Income Tax.”

Now, the important things to know about awarded income, which I also call non-W-2 stipends or salaries, at this time of year are that 1) this is taxable income and 2) your university is likely not withholding income tax from your paychecks.

There are endemic rumors running around universities that this non-W-2 type of income is not taxable. While it is very tempting—and self-serving—please do not believe these rumors. Listen to Season 2 Bonus Episode 1 of this podcast, titled “Do I Owe Income Tax on My Fellowship?”, in which I clearly delineate which portion of your awarded income is taxable and which is tax-free.

One of the reasons these rumors sound believable is that, with rare exceptions, universities and institutes do not withhold income tax on behalf of their non-employees.

If your stipend or salary recently switched to an awarded income source or this is the first time you’re learning about this income tax issue, you have a few action items:

1) Figure out if income tax is being withheld from your paychecks. If it is, you’re done until tax season.

If income tax is not being withheld:

2) Fill out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. Essentially, you will do a high-level draft of your 2021 tax return, and the worksheet will tell you whether you are required to pay estimated tax and if so in what amount. The principle behind estimated tax is that the IRS expects to receive income tax payments from each taxpayer throughout the year as they receive their paychecks. If your employer does not withhold income tax on your behalf, this becomes your responsibility. However, there are some situations in which estimated tax is not required, and the Estimated Tax Worksheet will tell you if you fall into one of the exception categories. If you are required to pay estimated tax, please be aware that the next due date is September 15, 2021. The due dates typically fall in mid-April, mid-June, mid-September, and mid-January of each year. If you are required to pay estimated tax and fail to, you may be fined by the IRS.

3) Whether you are ultimately required to pay estimated tax or not, the Estimated Tax Worksheet will tell you how much you can expect to pay in tax above your withholding for the year. I strongly encourage you to start saving up for your eventual tax payment or payments. Divide your additional tax liability in Line 14b by the number of remaining paychecks you’ll receive in 2021 and start saving that amount of money from each paycheck. Personally, I have a dedicated savings account named Taxes into which I transfer money from each paycheck. Then, when my quarterly bills are due, I have the money ready to go, and the payment doesn’t strain my cash flow at all.

Please keep in mind that if you have a state tax liability in 2021, you may be required to pay estimated tax to your state as well.

If you want some help with filling out your Estimated Tax Worksheet, please check out my workshop, Quarterly Estimated Tax for Fellowship Recipients at PFforPhDs.com/QEtax/. The workshop explains how to fill out every line of the Estimated Tax Worksheet plus how to handle common scenarios that PhD trainees encounter, such as switching onto or off of fellowship mid-year and being married to someone who has income tax withholding. The workshop comprises numerous pre-recorded videos, a spreadsheet, and an invitation to the next live Q&A call, which will take place on September 12, 2021. To join the workshop, go to PFforPhDs.com/QEtax/. That’s q for quarterly, e for estimated, t a x.

By the way, I give a discount for bulk purchases of this workshop, and it’s not too late to ask your department, graduate school, graduate student association, postdoc office, etc. to buy it on behalf of a group of graduate students, postdocs, or postbacs. Simply email me at emily at PFforPhDs dot com to get the ball rolling on that purchase.

Commercial

Emily here for a brief interlude!

We have a special event coming up on Friday, August 27, 2021! It’s the fourth installment of my Wealthy PhD Workshop series. The subject is debt repayment.

This workshop is for you if you are in debt of any kind and want to learn the best strategies for getting out of debt. These strategies are tailored to the PhD experience, particularly that of graduate students. We will cover student loans, of course, which are such a complex topic, as well as mortgages, credit card debt, auto debt, medical debt, etc. I’ll give you a spreadsheet that will help you work through in which order to tackle your debts, taking into account the type of debt, the interest rate, and the payoff balance. We’ll also discuss how to sustain your motivation through a long debt repayment process.

This is going to be a value-packed session, so please join us on August 27th. You can register at PFforPhDs.com/WPhDDebt/. That’s PF for PhDs dot com slash W for Wealthy P h D D e b t.

Now back to our interview.

The Kiddie Tax

Section C is for full-time graduate students age 23 and younger.

I want to give you a heads up that a higher tax rate might apply to you if you meet the following criteria:

  1. You are age 23 or younger on 12/31/2021.
  2. You are a full-time student.
  3. You receive a non-W-2 stipend or salary for at least part of 2021.

If you checked all of those boxes, you might be subject to the Kiddie Tax, which means that part of your income may be taxed at your parents’ marginal tax rate instead of your own. The Kiddie Tax can apply even if you aren’t being claimed as a dependent.

I can’t say for sure that you will or will not be subject to the Kiddie Tax as there are more calculations that have to be performed, but I suggest that you look into this before the end of the calendar year and possibly take some mitigation measures if your parents’ marginal tax rate is higher than yours. You may need to engage a professional tax preparer to help you and your parents with tax planning and preparation for 2021. You may need to save more from each paycheck for your eventual tax bill than I laid out in Section B.

I have an article about how the Kiddie Tax affects funded PhD students at PFforPhDs.com/kiddietax/. That P F f o r P h D s dot com slash k i d d i e t a x.

State Residency

Section D is for graduate students who moved states in 2021 or are receiving income from a new state.

I find that people get rather mixed up about state residency and taxes, especially when they are in graduate school. For a traditional college student who is a dependent of their parents, it is common to maintain your residency in the state your parents live in even while you attend college in another state. However, I rarely come across a compelling reason that a graduate student should do the same.

The pandemic has also thrown a wrench into the question of state residency due to how common remote work is now. So even if you lived in only one state in 2021, if your income comes from a different state, that’s something to contend with.

What I think you should do at this time of year to make tax season easier is to figure out and/or decide in which state or states you will be a resident, part-year resident, or non-resident in 2021. This will require you to read about how your new state and your old state define residency and how they tax residents, non-residents, and part-year residents.

My totally generic, blanket recommendation if you have moved states to start grad school is to consider yourself a resident of your new state, even if technically your former state allows you to still be considered a resident due to your student status. You’re a full-fledged adult with a more-or-less proper income now. Why would you want to keep close ties to your parents’ address? In almost all cases, there is no financial advantage to doing so plus you’ll likely have to file two state income tax returns, one as a non-resident in the state you live and work in and one as a resident in the state you don’t live or work in. For how long do you want to keep that up?

If you agree that you don’t want to keep filing two returns indefinitely if there’s nothing in it for you, take a few steps this fall to firmly establish your ties to your new state. Reference how your new state defines a resident for the definitive word on how to do so, but for some starting ideas you should get a new driver’s license, register to vote, change your address with your car insurance, and update your mailing address with all your financial institutions.

Now, if you really do have a compelling reason for maintaining your residency in your old state while you’re a student, by all means try to do so. You still have to read all the material I mentioned before, but this time with the goal to maintain your residency in your old state and avoid being considered a resident in your new one. By the way, in all my conversations with grad students about taxes, I’ve only ever heard one reason that I considered compelling: A resident of Alaska who was attending graduate school in another state wanted to maintain their Alaska residency so they could continue to receive universal basic income. Please remember that even if you do have a great reason to want to maintain residency in your old state, you have to cross all your ts and dot all your is to make sure you meet the requirements.

Conclusion

That it for this episode! I hope you’ll check in with me during next tax season for more tax education and support for PhD trainees. I offer a workshop titled How to Complete Your Grad Student Tax Return (and Understand It, Too!) during each tax season, which can be purchased by individuals or groups at a discounted rate. I’m making plans for how I can help PhD trainees with their tax returns in brand-new ways in the upcoming tax season. Join my mailing list at PFforPhDs.com/subscribe/ to stay in the loop! You can expect to receive 2-3 emails per week from me on various personal finance topics.

Before you go, would you please share this episode with your peers, especially new graduate students? Join me in helping to make next tax season go smoothly for all PhD trainees!