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

 

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

Preliminary Remarks

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

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

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

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

Further reading:

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

Collect All Your Income Sources

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

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

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

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

Further reading:

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

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

Categorize Your Income

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

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

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

Qualified Education Expenses

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

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

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

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

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

Further reading: What Is a 1098-T?

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

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

Make Non-Compensatory Pay Tax-Free

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

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

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

Lifetime Learning Credit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Numbers You Need for Your Tax Return

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

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

Fill Out Your Grad Student Tax Return

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

Report Your Income

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

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

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

Report Your Lifetime Learning Credit

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

Report Your Tax Already Paid

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

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

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

Notes on Other Education Tax Benefits

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

American Opportunity Credit

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

Conclusion

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

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

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

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

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

A version of this post first appeared on GradHacker.

Further reading:

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

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

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

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

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

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

Further reading: How to Prepare Your Grad Student Tax Return

Prepare Your Tax Return Manually

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

Pros:

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

Cons:

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

Prepare Your Tax Return Using Tax Software

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

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

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

Pros:

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

Cons:

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

Get a Relative or Friend to Prepare Your Tax Return

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

Pros:

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

Cons:

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

Outsource Your Tax Return to a Professional Tax Preparer

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

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

Pros:

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

Cons:

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

Conclusion

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

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

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

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

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

Further reading: How to Prepare Your Grad Student Tax Return

My Choice

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