Not receiving official-looking tax forms or receiving forms you don’t understand leaves room for wishful thinking such as “This money is not taxable if the IRS doesn’t know about it.” However, this is erroneous. You might get away with not paying tax (for a while) because your university didn’t withhold it for you or tell the IRS about it, but that doesn’t mean you didn’t really owe it.
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IRS Publication 970 Chapter 1 (p. 5) states:
“A scholarship or fellowship grant is tax free only to the extent:
- It doesn’t exceed your qualified education expenses;
- It isn’t designated or earmarked for other purposes (such as room and board), and doesn’t require (by its terms) that it can’t be used for qualified education expenses;
- and It doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship. For exceptions, see Payment for services, later.”
To rephrase the first bullet point, your scholarship and fellowship income must be included in your gross income to the extent that they exceed your qualified education expenses. This is true whether or not your university issues you any official tax forms.
Your university is not required to report fellowship and scholarship pay to the IRS. Some universities have found ways to do so anyway by fitting the income in to forms not intended to support it, namely the 1098-T and 1099-MISC.
For fellowship stipend pay, your university might send you a courtesy letter or have no communication with you about that income whatsoever; both of these tactics are exercising their exemption from reporting. Other universities choose to add the fellowship pay to Box 5 of the 1098-T or issue a 1099-MISC with Box 3 income (the latter is most often used for fellowships from which income tax has been withheld).
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For scholarship pay that exceeds the student’s qualified education expenses, the university might issue a 1098-T or it might not. The intention of form 1098-T is to assist the student (or parent of a dependent student) in claiming a tax deduction or credit. When the amount of scholarships and fellowships reported in in Box 5 exceeds the amount of qualified education expenses in Box 2, the taxpayer will not be able to take a deduction or credit, so some universities choose to not issue the form.
Whether or not official tax forms have been issued, it’s important to strive to make your tax return reflect reality. The IRS knows that universities do not have the responsibility to report non-compensatory pay, so it’s perfectly fine to just fill in the appropriate numbers on your tax return. Just make sure that you keep the documentation of how you did your calculations in case you are audited.
We at Personal Finance for PhDs are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.