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Weird Tax Situations for Fully Funded Grad Students

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“Actually, I get paid to go to school.” How many times have you said that to distant relatives and new acquaintances? If you look at it that way, being a funded grad student is a pretty sweet gig. But there are definitely downsides, like the low pay, sub-par benefits, and the weird tax situations that come with getting paid to be a grad student in the US. Receiving a 1098-T that has seemingly no basis in reality and having to incorporate it into your tax return—or worse, not receiving one—can become a real time- and energy-suck. The whole tax return support system seems to have been set up to help people who are in the red with their universities, not people who are in the black. Fortunately, there are solutions to these weird tax situations for fully funded grad students, and I’ve brought them to light for you in this point.

weird tax fully funded grad student

The points covered in this post are strictly to do with being a funded graduate student (“candidate for a degree”) at a US university. It is primarily written for graduate students who are US citizens, permanent residents, and residents for tax purposes.

This article was most recently updated on 1/17/2025. It is not tax, financial, or legal advice.

Further reading:

You Might or Might Not Receive a 1098-T

Form 1098-T looks like a super official tax form, rather like Form W-2. However, it’s not as weighty of a form as other tax forms you might receive for the purpose of reporting income. Form 1098-T’s primary purpose is to let the IRS know that a student (or a student’s parents) might try to take a higher education tax credit so that it can check the amount of the tax break claimed; it’s not designed and is not well-suited for reporting income, which is primarily what funded graduate students need to do. In fact, it’s optional for universities to even generate a Form 1098-T for a student for whom the Form 1098-T’s Box 5 (“Scholarships or grants”) would be greater than Box 1 (“Payments received for qualified tuition and related expenses”), which is often the case for funded graduate students. So as a fully funded graduate student, you might receive a 1098-T or you might not; the choice belongs to your university.

Further reading: What Is a 1098-T?

Your 1098-T Might Mislead You

The only thing worse than not receiving a 1098-T is receiving one that is misleading.

Further reading: Form 1098-T: Still Causing Trouble for Funded Graduate Students

When a 1098-T is issued, it is supposed to contain all of the scholarships and grants that were processed through the graduate student’s account (Box 5) as well as the payments received (Box 1) for qualified tuition and related expenses. In addition, your fellowship stipend might appear in Box 5 (or it might not). You would think this would be straightforward bookkeeping, yet I’ve spoken with numerous graduate students who, even after careful study of the transactions in their student accounts, could not understand how the sums were calculated.

Even if your Form 1098-T is a straightforward representation of the transactions in your student account, the net fellowship/scholarship income you should report on your tax return is not necessarily Box 5 minus Box 1. More on that next!

You Have to Calculate Your Taxable Awarded Income

It’s really straightforward to report your Form W-2 income, which I call “employee income,” on your tax return. The number is right there in Box 1, and it goes into Form 1040 Line 1a.

However, you have to calculate the taxable portion of your fellowship/scholarship/grant income, which I call “awarded income,” before reporting it on your tax return.

This is because, as a student (“candidate for a degree”), you’re eligible for a higher education tax break called tax-free scholarships and fellowships, which is detailed in Publication 970 Chapter 1. This means that the awarded income that you receive is taxable only to the extent that it exceeds your “qualified education expenses.”

To calculate your taxable awarded income, you need to add up all of your awarded income and then subtract all of your qualified education expenses. (This is not the same calculation as subtracting your Form 1098-T Box 1 from your Form 1098-T Box 5—more on that next!) Sometimes, this will net out to zero, like if the scholarship for your tuition exactly pays the amount of your tuition. Sometimes, there will be excess income or excess qualified education expenses.

In fact, funded graduate students often overpay their true tax liability because they miss accounting for some of their qualified education expenses! This could happen because they forgot about an education expense they paid for out of pocket or because they misunderstood that a charge in their student account actually was a qualified education expenses under this benefit.

Further reading: Where to Report Your PhD Trainee Income on Your Tax Return

You Have to Figure Out Your Own Qualified Education Expenses

To expand on that point, there is a lot of well-deserved confusion over what a “qualified education expense” actually is. This is because the definition of a Qualified Education Expense is slightly different depending on the tax break you’re trying to take. Yeah, that’s another weird tax situation for fully funded grad students.

IRS Publication 970 p. 4:

“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.”

Tuition is considered a qualified education expense for tax-free scholarships and fellowships and the two higher education tax credits, but some additional expenses, such as required fees and course-related expenses, e.g., books and supplies, are included in the definition for tax-free scholarships and fellowships. Even a personal computer could be considered a qualified education expense for tax-free scholarships and fellowships under very well-defined circumstances. These types of expenses are unlikely to appear on your 1098-T in Box 1 because they’re usually paid out of pocket. You should refer to Publication 970 for the full definitions of qualified education expenses under the three different education benefits.

Furthermore, the number that appears in Box 1 of your Form 1098-T is not the sum of your qualified education expenses that are processed by your student account. Box 1 of Form 1098-T reflects “qualified tuition and related expenses,” which has its own definition that excludes certain expenses that are qualified education expenses under tax-free scholarships and fellowships.

Further reading: What Are Qualified Education Expenses?

One controversial point is whether your student health insurance premium is a required fee/qualified education expense for the purpose of making the scholarship that pays it tax-free. Insurance and student health fees, along with some other expenses, are explicitly disallowed as qualified education expenses for the Lifetime Learning Credit, but not for making scholarships tax-free.

My tax return preparation workshop contains a complete discussion of qualified education expenses, including common gray-area examples that graduate students encounter, and how to calculate the taxable portion of your awarded income.

You Might or Might Not Be a Dependent of Your Parents

Because graduate students are students, they might be considered dependents of their parents (or another relative) for tax purposes if they were under age 24 on 12/31. Many parents (and their tax preparers) try to claim their of-age children as dependents without referencing the relevant definitions. If your parents assume you are a dependent but you believe you are not, together you can go through the definition carefully to make the final determination.

The conditions for being considered a dependent of your parent are:

  • You are age 23 or younger at the end of the calendar year.
  • You were enrolled as a student in at least 5 calendar months (doesn’t have to be consecutive).
  • You lived with your parents for at least half the year (being away for educational reasons can count as living with them).
  • You are not filing a joint return (with a caveat).
  • You must meet the “Support Test”: You did not provide more than half of your own support in the calendar year (see Publication 17 Worksheet 3-1).

For any years that the first three points above apply to you, you should fill out the Support Test to determine if you provided enough of your own support to qualify as independent. Keep in mind that education expenses count as “support” that you needed, but scholarships and fellowships that paid that support don’t count as being provided by you, the student.

You’re (Mostly) Not Paying FICA Tax

FICA (Social Security and Medicare) taxes seem like an unavoidable burden for employees and self-employed people. But even if you’re an employee of your university (i.e., you receive a W-2 at tax time), you’re most likely not paying FICA tax because you have a student exemption. This exemption depends on both the primary function of the organization that employs you (i.e., educational) and your primary relationship with the organization (i.e., as a student rather than an employee).

The student exemption is almost universal for graduate students, but I have come across two exceptions that depend heavily on the exact wording of the exemption:

1) Graduate students at research institutions that are not primarily universities might not receive the exemption.

2) Graduate students, even at universities, whose primary relationship with their employer is as an employee rather than a student may pay FICA tax. For example, this might occur during the summer vs. during the academic year, and could happen without the student even perceiving a difference in roles. (This is not common, but I have seen it a few times.)

Graduate students receiving fellowships also do not pay FICA tax, but that is because they are not receiving wages rather than due to their student status.

You Cannot Take the Saver’s Credit

The Saver’s Credit is a very valuable credit that low-income earners can take if they contribute to a retirement account, such as an IRA. However, full-time students are not eligible for the credit.

Yes, there are a lot of weird tax situations for fully funded grad students. You have to do a bit of legwork instead of just blindly entering numbers from your 1098-T into tax software or ignoring your excess scholarship income. But if you break the issues down one by one, it’s actually straightforward to determine how to resolve them.

Do I Owe Income Tax on My Fellowship?

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Postbac, graduate student, and postdoc fellows frequently ask whether their fellowships are considered taxable income. PhD-type fellowships that are not reported on a W-2 are non-compensatory income. They might be reported on a 1098-T in Box 5, on a 1099-MISC in Box 3, or on a courtesy letter or not reported at all, which accounts for the widespread confusion. Publication 970 answers the question of when a fellowship can be considered tax-free. Fellowships are considered part of the recipient’s taxable income unless they go toward paying qualified education expenses (students only).

Links Mentioned in the Episode

income tax fellowship

Transcript

Welcome to the Personal Finance for PhDs Podcast – a higher education in personal finance. I’m your host, Emily Roberts.

I’m doing something a little bit different in this special bonus episode for Season 2.

I’m using it to answer a frequently asked question that I receive about taxes. The question is: Do I owe income tax on my fellowship?

In this episode, I’m speaking to citizens and residents in the United States. And I’m also talking about PhD-type fellowships whether at the postbac level, the graduate student level, or the postdoc level.

What’s going on with these fellowships that makes the recipient question whether or not they are taxable is that they are not reported on a W-2. They might not be reported at all, or they may be reported on a 1098-T in Box 5, on a 1099-MISC in Box 3, or on a courtesy letter, which is not an official tax form but rather just a letter that states what the amount of the fellowship was in that calendar year.

Fellowship income is considered part of your taxable income. Now, you may not actually end up paying tax on your fellowship income depending on the rest of your return, like the deductions and credits you’re going to be able to take, but it is considered part of that taxable income.

Now, I know you’re not inclined to just believe me right off the bat. I mean, there’s a strong incentive for you to believe that your fellowship income is not taxable, so I’m going to give you a bit of evidence here.

IRS Publication 970 is the definitive publication on the taxability of fellowship and scholarship income. I’ll read you a few excerpts from Chapter 1 of Publication 970.

First, some definitions:

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies.

A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

So you can see that fellowship grants are much more broad; they can be issued to non-students, whereas scholarships only go to students.

Chapter 1 of Publication 970 approaches fellowships and scholarships from the perspective of trying to make them tax-free.

So let’s see how that can happen:

A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.

So right off the bat we know that anybody who is receiving a fellowship who is not a student cannot make their fellowship tax-free, i.e., it is part of their taxable income.

Additionally:

A scholarship or fellowship grant is tax free only to the extent: It doesn’t exceed your qualified education expenses…

So now we’re just dealing with the graduate student population that has the potential to make a scholarship or fellowship grant tax-free.

The way that we use the terms ‘scholarship’ and ‘fellowship’ in academia, a ‘fellowship’ generally refers to the money that you take home for your living expenses, whereas ‘scholarship’ is the money that goes towards paying your tuition and fees, the qualified education expenses.

Very roughly speaking, your qualified education expenses can make your scholarships tax-free if you’re a fully funded graduate student, but there’s no more qualified education expenses to start making your fellowship income tax-free. Therefore, again, roughly, your fellowship income is included in your taxable income.

So to summarize, fellowship and scholarship income that goes towards paying our qualified education expenses like tuition and fees can be made tax-free, but fellowship and scholarship income that goes towards paying other kinds of expenses like your living expenses can’t be made tax-free.

Now, I’m glossing over some very important details on how you actually calculate your taxable income, so if you want more information about that, please see the tax center on my website, pfforphds.com/tax.

But, there you go, roughly speaking, fellowship income does need to be included in your taxable income, whether you are a postbac, a graduate student, or a postdoc.

Thanks for joining me in this short bonus episode!

Please share this episode on social media and with your peers because this is a message that they need to hear. It’s not a message that they want to hear, but it’s a message that they need to hear to stay on the right side of the IRS.

Show notes for this episode can be found at pfforphds.com/s2be1.

Thanks for joining me today, and I’ll see you in the next episode!

Further reading/viewing:

How to Prepare Your Grad Student Tax Return (Tax Year 2024)

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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 or waivers that pay tuition and fees, are rather unusual, so most people and even most professional tax preparers don’t have any experience with them. The strategies that apply for undergraduate-level taxes are pretty different from those that apply for graduate-level taxes. But learning how to prepare your grad student tax return isn’t actually difficult, nor are the resulting steps complicated. There’s no reason to be intimidated! This post covers the essential points you need to know to prepare your grad student tax return, whether you do it manually, with tax software, or with the help of another person.

grad student tax return

This post is for tax year 2024. This post only covers federal tax due for graduate students in the United States who are citizens, permanent residents, or residents for tax purposes; 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.

This article is for educational purposes only and does not constitute tax, legal, or financial advice advice. It was last updated on 1/17/2025. For more tax content, visit the Personal Finance for PhDs Tax Center.

Table of Contents (Links)

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 hits their bank accounts or is reported on an official tax document, and they need to deal with those incomes on their tax returns.

You have your stipend/salary that serves as your take-home pay; 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 and/or credits.

You also have another kind of potentially taxable income if you are funded: the money that pays your tuition, fees, and other education expenses. Your university might refer to this as scholarships, waivers, remissions, etc. Even if this money never passes through your personal bank account, it does pass through your name via your student account, which makes it potentially taxable to you as an individual. 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:

This article includes publicly available information on taxes for students and fellowship recipients, largely derived from IRS Publication 970 and my examinations of the tax policies of many universities across the US.

If you want a more in-depth and intuitive presentation of this material, designed for you to prepare your tax return as you go through it, that includes my interpretations of the tricky IRS language and the insight I gained from hiring a CPA to research grad student taxes…

Please consider joining my tax workshop. It comprises pre-recorded videos, worksheets, and live Q&A calls with me.

Click here to learn more about the grad student tax return workshop.

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 employee income for your stipend or salary will be reported to you on a Form W-2. This typically comes from a teaching assistantship, research assistantship, or graduate assistantship.
  2. Your awarded income that pays your stipend or salary may be reported to you on a 1098-T in Box 5, on a 1099-MISC in Box 3, on a Form 1099-NEC in Box 1, on a 1099-G in Box 6, on a courtesy letter, or not at all. Awarded income typically comes from fellowships, training grants, and awards. If your university does not send you any documentation of your fellowship income for 2024, you have to sum all the payments you received to figure out what it was.
  3. Your awarded income that pays your education expenses may be reported to you on a 1098-T in Box 5 or not at all. Awarded income typically comes from scholarships, waivers, remissions, and awards. 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:

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.

Would you like the opportunity to ask me a question about your tax situation? I hold monthly live Q&A calls throughout tax season for my workshop participants!

Click here to learn more about the tax return workshop.

Categorize Your Income

Your grad student income (assistantship pay, fellowships, scholarships, etc.) falls into two broad categories: employee income and awarded income.

Employee income is easy to define, as you will receive a Form W-2 for it.

Awarded income is best defined as any grad student-related income that is 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… includ[ing] 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 2024, there are two* relevant education tax benefits that you can access to reduce your tax burden: making awarded income tax-free and the Lifetime Learning Credit.

You use your qualified education expenses (QEEs) to take a deduction (by making your awarded income 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.

(* There is one more education tax benefit, the American Opportunity Tax Credit, which is each beneficial for a very small percentage of graduate students. See the section at the end of the article for more details on this benefit and whether it might apply to you.)

Generally speaking, graduate students should make their awarded income tax-free to the greatest extent possible before applying any remaining QEEs to the Lifetime Learning Credit; this is how tax software will prepare your return. However, some graduate students may be eligible to prioritize the Lifetime Learning Credit (or the American Opportunity Tax Credit) over making awarded income tax-free to further reduce their tax liability (could be worth hundreds of dollars); this scenario is discussed in detail inside my tax workshop.

Qualified Education Expenses

The definition of a QEE changes slightly for each tax benefit. From Publication 970 p. 4:

“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.”

Tuition at an eligible education institution is a QEE for both tax benefits (although to make awarded income tax-free you have to be a degree candidate). “Required fees” are QEEs for making awarded income 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 payments for your the “qualified tuition and related expenses” that were processed by the office at your university that prepared the form. You may have additional QEEs not reported on the Form 1098-T, because the qualified tuition and related expenses on Form 1098-T do not include “charges and fees for room, board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses” (Form 1098-T Instructions, p. 2)

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!).

It’s very worthwhile to examine the definition of a QEE because uncovering additional QEEs almost always translates to a lower tax liability.

Make Awarded Income Tax-Free

The awarded income 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 awarded income. In fact, you don’t even have to show the IRS this calculation; you only have to report the portion of your awarded income that exceeds your QEEs.

The definition of a QEE to make awarded income tax-free is (excerpted from Publication 970 Chapter 1 p. 6):

Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:

  • Tuition and fees required to enroll at or attend an eligible educational institution; and
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don’t qualify. Qualified education expenses don’t include the cost of:

  • Room and board,
  • Travel,
  • Research,
  • Clerical help, or
  • Equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.“

Are you unsure whether one of your expenses is a “qualified education expense” to net against awarded income? In my tax workshop, I present the common higher education-related expenses that graduate students incur and tell you whether or not they are QEEs under each of the education tax benefits.

Click here to learn more about the tax return workshop.

Lifetime Learning Credit

The Lifetime Learning Credit reduces your tax burden and may be beneficial to apply if 1) your QEEs exceed your awarded income 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 $80,000 for a single person and $160,000 for a married couple filing jointly.

The definition of a QEE for the Lifetime Learning Credit is (excerpted from Publication 970 Chapter 3 p. 24, 28):

“Qualified Education Expenses

For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

Related expenses. Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance.

Expenses That Don’t Qualify

Qualified education expenses don’t include amounts paid for:

  • Insurance;
  • Medical expenses (including student health fees);
  • Room and board;
  • Transportation; or
  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.“

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

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 employee income (W-2 pay with respect to your grad student income),
  • Your net awarded income (after applying your QEEs to reduce it),
  • The amount of your Lifetime Learning Credit (maximum $2,000) from Form 8863, and
  • The amount of income tax you already paid, whether through withholding or estimated tax.

You now have an idea of the actions to take and decisions to make regarding your grad student tax return. I know it can seem overwhelming! I don’t want you to spend hours and hours feeling frustrated paging through IRS documentation or wrestling with tax software.

Commit a couple hours to taking my tax return workshop, feel confident and supported, and emerge with an accurate and minimized tax return!

Click here to learn more about the grad student tax return workshop.

Fill Out Your Grad Student Tax Return

With respect to your taxable 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

Write your employee income (reported on your Form W-2) on Form 1040 Line 1a.

Write your taxable awarded income on Form 1040 Schedule 1 Line 8r. (This dedicated line is new as of 2022!)

Further reading: Where to Report Your PhD Trainee Income on Your Tax Return

Report Your Lifetime Learning Credit

Report your Lifetime Learning Credit on Line 3 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 Form W-2 and/or Form 1099 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 25 of Form 1040. There are different parts of the line depending on which form was used.

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

If you paid quarterly estimated tax on your fellowship income, report the total of the estimated tax payments you made in Line 26 of Form 1040.

Other Education Tax Benefits

I have omitted from detailed discussion two education tax benefits that you may be familiar with from past experiences preparing your tax return.

American Opportunity Tax Credit

The American Opportunity Tax 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 2024 (in four years) and you (or your parents) claimed the American Opportunity Tax 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 for 2024.

The American Opportunity Tax Credit is the most valuable education tax benefit available, so if you are eligible for it, you will almost certainly want to use it to the greatest degree you can. It is a 100% credit on up to $2,000 of QEEs and a 25% credit on up to $2,000 of QEEs.

The definition of a QEE for the American Opportunity Tax Credit is distinct from the definition for other education tax benefits.

If you claim the American Opportunity Tax Credit, you cannot use the Lifetime Learning Credit or the Tuition and Fees Deduction. If you are considered a dependent on your parents’ tax return in 2024, you cannot claim the credit (your parents would).

To claim the American Opportunity Tax Credit, you need to fill out and file Form 8863.

Tuition and Fees Deduction

The Tuition and Fees Deduction expired at the end of 2020.

Would you like the opportunity to ask me a question about your tax situation? I hold monthly live Q&A calls throughout tax season for my workshop participants!

Click here to learn more about the tax return workshop.

If You Were Under Age 24

If you were age 23 or younger on December 31, 2024 and a full-time student for at least five months of the year, you may be subject to an alternative, higher tax known as the Kiddie Tax. This could be the case if your income was primary awarded income.

Further reading: Fellowship Income Can Trigger the Kiddie Tax

As a full-time student (for at least part of 5 calendar months) and under age 24, your parents (or another relative) might also be able to claim you as a dependent, though you will have to pass the ‘residency test’ and ‘support test.’

One entire module of my tax return workshop is devoted to the special tax considerations of graduate students under the age of 24. Please consider joining the workshop for much more details about the Kiddie Tax and dependency.

Click here to learn more about the tax return workshop.

Conclusion

The most challenging aspect of this process is simply knowing the various aspects that you have to consider. The most complicated aspect is collecting and categorizing all of your income sources and education expenses.

Best of luck to you as you prepare your grad student tax return this year! If you need additional support:

  1. Download my tax “cheat sheet”
  2. Register for my workshop (includes live Q&As!) for only $34

Please consider sharing this post with your peers through social media or a list-serv!

Financial Reasons to Work Before Starting Your PhD

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College students who aspire to earn PhDs often ask themselves if they should proceed directly from undergrad into a PhD program or take a year or more “off” to work. From a career perspective, there are some arguments on either side (and it’s probably field-dependent), though personally I think it’s better to not go straight from college to grad school. However, from a financial perspective, working for at least a year prior to starting grad school is a slam-dunk better choice – provided you handle your salary the right way in the meantime.

I’ll assume in this article that you’re earning more in your post-college job than you will as a grad student. I know that’s not always the case (my postbac fellowship paid a stipend comparable to that of a grad student), and if it’s not true for you, simply pick and choose the advice that works for you.

This article provides financial arguments for working prior to starting a PhD and gives you a strategy to combat the biggest potential downside to doing so. Working before starting a PhD program gives you the best shot at starting grad school (and the rest of your life) on the right financial foot.

Save Cash for Start-Up Expenses

Starting grad school, especially if you have to move to do so, is a cash-intensive endeavor. It can be done on the cheap depending on your city, but you are looking at paying for much or all of this before receiving your first grad student paycheck:

  • Moving expenses
  • First month’s rent (maybe last as well)
  • Security deposits, installation fees, and/or service fees for housing and utilities
  • All your normal living expenses like food, transportation and personal care for a month or more
  • Fees (and possibly tuition) if not covered by your program, e.g., parking or an insurance premium
  • Textbooks and other course-related expenses

Those expenses are similar to any that you would incur if you moved for a job, but in addition you have the educationally-related ones and you most likely will wait over one month for your first paycheck to arrive instead of the two weeks to one month typical for a job.

If you work prior to starting grad school, you have the opportunity to save for those start-up expenses. If you don’t have enough savings available when you matriculate, you’ll start grad school already feeling financially behind.

Build a Strong Financial Foundation

Working prior to starting grad school also means you can improve your overall financial health compared to where you were when you finished undergrad. You can work on one or more of these goals right away:

  • Saving cash for an emergency fund and short-term irregular expenses
  • Paying down debt (prioritize high interest rate debt such as credit cards and unsubsidized student loans)
  • Contributing to a tax-advantaged retirement account such as a 401(k) or IRA

Starting grad school doesn’t necessarily mean stalling financially, but it is easier to make progress with a salary intended to do more than pay basic living expenses.

Further reading:

Investing for Retirement

I already mentioned retirement saving above, but it’s worth emphasizing again. Saving for retirement during grad school is a challenge. This is due primarily to your limited cash flow, but in addition grad students are sometimes disallowed from contributing to any kind of tax-advantaged retirement account due to their income type. If you receive only fellowship income throughout an entire calendar year, you will not be able to contribute to an IRA. It is also exceedingly rare for a grad student to have access to a workplace-based retirement account like a 403(b).

Further reading: Taxable Compensation or Earned Income

Getting an early start on retirement investing will make an enormous difference in your account balances once you reach retirement. For example, if you work for one year until age 23 and contribute $1,000 per month to a retirement account, just that $12,000 contribution alone can grow to approximately $434,000 by the time you are 68 (assuming an 8% average annual rate of return.

Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

If you have to slow down or stop retirement investing during grad school, you can still feel good about the investments you already have in place that are working for you in the background.

If your employer provides a retirement match, please contribute enough to get the full match! It’s going to be a long time before that opportunity comes around again.

Applying Everywhere that Is a Fit

Grad school applications can easily cost over $1,000 between the direct application fees and indirect costs like taking the GRE. If you are working when you apply instead of doing it during college, you will have more money (and time) to apply and visit everywhere that is a good fit for you. It would be such a shame for a low budget for applications to constrain your career choices.

Further reading: The Full Cost of Applying to PhD Programs

Start a (Passive) Side Hustle

Side hustling during grad school is a great way to earn some extra income, maintain an identity and emotional outlet separate from your research, and potentially improve your post-PhD career prospects. But when you’re busy with research, classes, and/or teaching, it can be difficult to put in the time and energy needed to get your side hustle off the ground.

It’s much easier to maintain a side hustle you established prior to starting grad school (or you could continue some aspect of your job as a side hustle). An ideal side hustle for someone anticipating entering grad school is one that is location-independent and time-flexible.

The perfect side income for a grad student is not a “hustle” at all but passive income. Passive income comes in many forms, but requires an up-front investment of time or money to establish the income stream with little to no additional work required on an ongoing basis.

Minimize Your Tax Burden

In our current low tax environment, I don’t talk about tax planning, that is, changing your behavior due to the tax implications. I don’t like to let the “tail” of tax repercussions wag the “dog” of the rest of your life. However, in this case, I want you to at least be aware of the tax implications of starting a PhD program right away vs. waiting a year or two.

There are two big tax effects of having a “student” status (i.e., being a full time student in at least part of five months in the calendar year) and also being young (i.e., 23 or younger on 12/31 of the year in question).

Dependent

Normally, being considered a dependent of your parents expires at age 18, but students can be claimed as dependents up until the year they turn 24. Generally speaking, being claimed as a dependent is bad news for your tax return and good news for your parents’ tax return (or whoever is claiming you).

There are a few ways to avoid dependency status in the year you exit undergrad and/or the year you enter grad school, all of which can be more easily accomplished by working in between:

  • Live apart from your parents for at least six months of the year you finish undergrad (assuming you graduate in the spring) and continue to do so until the year you turn 24 (at least).
  • Wait to start grad school until at least the year in which you turn 24.
  • Provide at least half of your own “support.” Support is basically all your expenses, both living expenses and educational expenses. If you provide at least half of that support through your own income (taxable fellowships and loans count, but scholarships do not), you are independent. This is much easier to accomplish if you earn a higher income and minimize your educational expenses in any year that you are under age 24.

Kiddie Tax

The Kiddie Tax is bad news for the “kid” subject to it (that’s you, potentially) as it imposes a much higher tax rate on “unearned” income than what you would have on ordinary income. Weirdly and unfortunately, fellowship income is considered “unearned.” If you are a student, under age 24, and do not provide more than half of your own “support” with ”earned” income, your “unearned” income is subject to this higher tax rate. You do not have to be a dependent for the Kiddie Tax to apply to you.

How do you avoid the Kiddie Tax through tax planning? 1) You can wait to start grad school until the year you turn 24. 2) If you start grad school prior to the year you turn 24, make sure you have enough “earned” income in each year you are a student to cover at least half of your own “support.” Keep in mind that “support” includes educational expenses.

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How to Make the Most of Your Salary and Start Grad School on the Right Financial Foot

Have you ever heard the advice to “live like a college student” or “live like a resident?” Take that a step further and “live like a grad student” in your working years prior to starting grad school.

Further reading: Is “Live Like a College Student” Good Advice?

The advantages to living like a grad student when you have a job are three-fold:

  1. You will get a head start on the essential financial skills you’ll need during grad school, such as budgeting, frugality, and saving.
  2. You will rapidly increase your net worth through saving and/or debt repayment because you will be living far below your means.
  3. You will avoid experiencing the very painful process of decreasing your standard of living when you enter grad school.

Living like a grad student when you have a better-paying job is definitely a sacrifice, but it’s one that is well worth it. I often speak to grad students who worked prior to starting grad school, and their common refrain is “I wish I had saved more when I had the chance!”

The First Step to Complete Your Grad Student Tax Return (2018)

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There is one vital step grad students need to take when starting to prepare their tax returns. It’s a super simple step, but most often overlooked, and skipping it can lead to an inaccurate return or even overpaying tax. This is the step that you take before you start feeding any numbers to your 1040, your tax software, or your tax preparer, and it is to find and categorize all of your income sources (funded grad students have at least two!).

If you found this video insightful and you want to take the next step to completing your tax return – including one trick to reduce your tax due that your tax software or tax preparer can easily miss – register for my workshop, “How to Complete Your 2019 PhD Trainee Tax Return (and Understand It, Too!).”

grad student tax return step

Can a PhD Achieve FIRE?

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Would you like for paid work to become optional for the rest of your life? What would you do with your time if you didn’t have to work? When you become “financially independent,” you have enough money and passive income streams to sustain you for the rest of your life without earning any more. At that point, you have the option of retiring (whether or not you actually do). Achieving this goal in youth or middle age instead of 65 is the objective of adherents of the FIRE movement (Financial Independence / Retire Early). Typically, FIRE walkers earn high salaries and save a radically large percentage of their income. This article explores whether FIRE is a good or reasonable goal for a PhD (graduate student, postdoc, or PhD with a Real Job) to set.

Can PhD FIRE

 

Further listening: This Prof Used Geographic Arbitrage to Design Her Ideal Career and Personal Life

What Is the FIRE Movement?

The FIRE movement (or at least the current iteration of the trend) started to gain traction within the last decade. Two of the fathers of the movement who documented their FIRE journeys on popular blogs are Jacob Lund Fisker (Early Retirement Extreme) and Pete Adeney (Mr. Money Mustache). They both advocate establishing a very frugal lifestyle to 1) save a high percentage of your income while working and 2) minimize the size of the nest egg needed to retire from paid work.

Now that the FIRE movement has gained popularity, it has diversified (it’s not just for young, single, male tech workers!) and splintered. One of the useful delineations is among ‘lean FIRE,’ ‘FIRE,’ and ‘fat FIRE.’ Roughly speaking, lean FIRE adherents seek to achieve FIRE primarily through expense minimization (and a high salary as well) while fat FIRE adherents seek to achieve FIRE primarily through vastly out-earning their spending (and keeping a lid on expenses as well), with regular FIRE falling somewhere in the middle.

Why Would a PhD Want to FIRE?

A person who completes a PhD has passion for her work (as well as incredible perseverance). I find it hard to imagine that such a person would want to retire early from her chosen field – especially those pursuing a life of the mind in academia.

But people who complete PhDs are also people. They end up in all types of jobs with all levels of job satisfaction. Even those with high job satisfaction might want to escape the demands of full-time work.

Even if retiring early is not attractive, becoming financially independent may be. Once you are financially independent, even if you keep working, you don’t have to be concerned about losing your job or put up with a job that’s no longer a good fit. Even during the journey to FIRE, you will have a much, much greater degree of financial security than most Americans, which brings peace of mind.

How Do You FIRE?

While difficult and rare to achieve, the mechanism of becoming FIRE is easy to understand.

To become financially independent (from active work), you need to have investments and/or passive income streams that will pay for your expenses in perpetuity. I’ll focus this discussion on the investments needed rather than the passive income streams.

Basically, to achieve FIRE, you need a nest egg of investments that is large enough that you can withdraw what you need to live on each year without eating into the principal. The higher your living expenses, the larger the nest egg you need to support them in perpetuity.

FIRE adherents usually follow the “4% Rule,” also called the Safe Withdrawal Rate (SWR), or perhaps a more conservative 3% or 3.5% Rule. The 4% Rule means that withdrawing 4% of your portfolio balance each year gives you a very good chance of your portfolio not running out of money prior to your death; it is based on historical market returns. (Early retirees may adjust this rule to be more conservative due to their post-FIRE life expectancy being longer than a typical retirement.)

The 4% Rule shows you the two vital factors to FIRE: size of your nest egg and yearly living expenses. Therefore, to achieve FIRE you must save (invest) a lot of money and keep your living expenses in check. For example, for a household with $50,000 in yearly living expenses, a portfolio of $1,250,000 is needed.

A person pursuing LeanFIRE will primarily focus on minimizing living expenses. The rough definition of LeanFIRE is living expenses of under $40,000/year or a portfolio of $1,000,000. A person pursuing FatFIRE will primarily focus on building a large portfolio. The rough definition of FatFIRE is a portfolio of over $2,500,000 or living expenses of at least $100,000/year.

There is a delightful synergy between the necessarily high savings rate and necessarily low expenses. Given a static income, the less you spend on living expenses, the higher your savings rate can become, enabling you to achieve FIRE even faster. Mr. Money Mustache published in “The Shockingly Simple Math Behind Early Retirement” a set of ratios that illustrates the relationship between savings rate and years of saving needed until the SWR could be achieved. For example, with a savings rate of 10%, you need 51 years to save before you can retire, but that drops to 22 years with a savings rate of 40% and 8.5 years with a savings rate of 70%.

Because the key to achieving FIRE is an unusually (to say the least) high savings rate, it is almost exclusively pursued by high income earners. There is a floor on how low you can drop your living expenses (although that varies person to person), so if your income doesn’t exceed your expenses by much, achieving the “E” in FIRE becomes a remote possibility.

Can PhDs FIRE?

PhDs can FIRE if they commit to the process, but they have challenges that are not shared by their peers from college who went immediately into high-paying careers. (It has been done; Jacob Lund Fisker has a PhD and retired at age 33.)

The ideal path for someone pursuing FIRE is to obtain a high-paying job immediately upon completion of their education at 18 or 22, commit to a low-cost lifestyle, set up a radically high savings rate into investments, and keep the pedal to the metal until FIRE is achieved, for instance by age 30 or 35.

A PhD becomes derailed from this ideal path upon entering graduate school. Unless he previously set up massive passive income streams, a grad student’s income is nowhere near large enough to achieve a high savings rate (even if you live in a van like Ken Ilgunas did at Duke). This means that pursuing FIRE with a high savings rate will have to wait until landing a post-PhD Real Job.

However, the graduate school experience offers a unique advantage to FIRE: A necessarily low lifestyle. The $40,000/year maximum living expense for the definition of LeanFIRE is much higher than what virtually every graduate student takes home after paying income tax. Even a couple living the graduate student lifestyle can usually spend less than that amount.

Further reading: What Grad Students Can Learn from the FIRE Movement

A PhD also confers the possibility of a high income. While PhDs are not needed in currently high-paying careers such as finance, medicine (some specialties), computer science, and engineering, a person with a PhD does on average earn much more in a lifetime than the average person with less education, and people with PhDs can absolutely land well-paying jobs.

Therefore, a PhD maintaining her grad school lifestyle (more or less) while earning a high salary post-PhD is a recipe for FIRE, albeit starting in earnest closer to age 30 than age 20. A LeanFIRE early retirement can still be achieved within a short period, and of course she could opt for FatFIRE if her income is generous enough.

However, a graduate student (or postdoc) who commits to FIRE can go further than this default:

  1. Instead of living at 100% of net income during graduate school, save (invest) as much as possible. This will have the dual effect of further lowering living expenses and getting a head start on building your nest egg.
  2. Experiment with frugality to discover whether you want to ultimately pursue LeanFIRE, FIRE, or FatFIRE. You may decide that living below a graduate student’s means is not what you want long-term.
  3. Finish your training as quickly as possible to increase your income as early as possible. Prepare yourself to land a high-paying job through professional development and networking.

Further reading: Whether You Save During Grad School Can Have a $1,000,000 Effect on Your Retirement

What Is Your Reason to FIRE?

Ultimately, it’s vital to have clarity on why you want to pursue FIRE. It’s easy to become consumed by the numbers and the process and lose track of your motivation along the way. Sometimes it’s possible to achieve aspects of the FIRE lifestyle without actually being FIRE, and I think that’s particularly true for PhDs who have a lot of transferrable skills and potential for autonomy. Remember the parable of the fisherman and the businessman. Just like you shouldn’t put your “Real Life” on hold during graduate school, you shouldn’t put your Real Life on hold while building up to FIRE.

If you are a PhD (-in-training) and seriously pursuing FIRE, I’d love to interview you on my podcast! Please fill out this form to volunteer.