A courtesy letter is not an official tax form. Instead, it is a communication sent to you by your university or funding agency that tells you the amount of fellowship or training grant income they gave you in the course of the previous year. The letter might also include a warning that the sender will not be able to make any comments about your tax liability or how to prepare your tax return.
What Is a 1099-MISC?
The most widely recognized use of a 1099-MISC is to report non-employee compensation aka self-employment income. The fact that Form 1099-MISC is sometimes used to report fellowship pay, which is not self-employment income, can be quite confusing for grad students and the people and software that prepare their tax returns.
If a 1099-MISC is used to report fellowship pay, the pay will appear in Box 3 “Other income.” Fellowship pay is considered similar to an award. In its instructions to organizations, Form 1099-MISC (p. 5) states:
“Box 3… The amount shown may be payments received as the beneficiary of a deceased employee, prizes, awards, taxable damages, Indian gaming profits, or other taxable income.”
The 1099-MISC instructions (p. 5) make explicitly clear that the award should not be compensatory or paid in exchange for work:
“Also enter in box 3 prizes and awards that are not for services performed.”
Interestingly, the 1099-MISC instructions (p. 2) state that fellowships and scholarships should not be reported on a 1099-MISC:
“Scholarships. Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported by you to the IRS on any form.”
It seems that the universities that use the 1099-MISC to report fellowship pay are skirting this prohibition because the scholarship and fellowship grants are not being given for services. That type of pay is compensatory and usually referred to as an assistantship in the case of graduate students. The instructions clearly state that universities do not have to report non-compensatory taxable fellowships and scholarships to the IRS. However, some universities do report non-compensatory fellowships and scholarships using a 1099-MISC. Even though the 1099-MISC is a confusing form to receive, it might be even more confusing to not receive any communication whatsoever.
I have observed that use of the 1099-MISC to report fellowship income correlates with grad students having taxes withheld from their fellowship pay. The 1099-MISC, unlike the 1098-T, allows the university to report both the gross pay received and the amount of federal and state tax withheld.
If you receive a 1099-MISC that reports your fellowship income, you should report it as fellowship/scholarship income rather than as 1099-MISC “other” income. Your gross income from this source will appear in Box 3. Your amount of federal tax withheld will appear in Box 4, and your amount of state tax withheld will appear in Box 16.
If your income is reported in Box 7 instead of Box 3, this is considered self-employment income and you will pay a much larger amount in tax, so make sure that you were properly categorized. (Again, fellowship pay is not self-employment income, so self-employment pay from a university implies that you served as a contractor on a specific project outside of your direct role as a graduate student, and this was likely explicitly discussed with you in advance.)
Parent article: Think about Your Grad Student Income and Assess the Tax Forms Your University Generated
We at Grad Student Finances are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.
Where to Report Your Grad Student Income on Your Tax Return
There are two broad categories of grad student income: employee income and awarded income. Both types of pay are supposed to be reported in the ‘wages’ line on your tax return, Form 1040 Line 1. Read on for the relevant tax code references.
Where to Report Employee Income
Employee income comes from work and is reported on a Form W-2. Assistantships, whether research, teaching or graduate, provide the grad student with employee income. Postdocs often hold employee positions as well. This type of grad student and postdoc income is the same to the IRS as employee income from other sources.
Your gross yearly employee income will appear in Form W-2 Box 1, and the income tax that has been withheld from you pay will appear in Box 2 (federal), Box 17 (state), and Box 19 (local).
Form W-2 contains instructions for the employee (p. 7):
Where to Report Non-Compensatory Grad Student Income
Non-compensatory income is given as an award and is not in exchange for work. Scholarships and most fellowships are forms of non-compensatory work. Non-compensatory pay will be officially reported to the student on a 1098-T in box 5 or on a 1099-MISC in box 3. It also might be unofficially reported on a courtesy letter or not at all.
Please note that when you calculate the taxable portion of your non-compensatory income for the year, you have two choices for what to do with your qualified education expenses: to take a deduction or a credit.
Scholarship and fellowship income that is reported anywhere other than on a W-2 or not reported at all should also be added to the ‘wages’ line on your tax return alongside the letters SCH.
The Wages Line on the 1040
The 1040 instructions dictate that W-2 income should be reported in line 7 (p. 21):
Publication 970 says that fellowship and scholarship income should be reported in line 7 (p. 7):
The Wages Line on the 1040A
The 1040A instructions dictate that W-2 income should be reported in line 7 (p. 23):
Publication 970 says that fellowship and scholarship income should be reported in line 7 (p. 7):
The Wages Line on the 1040EZ
The 1040EZ instructions dictate that W-2 income should be reported in line 1 (p. 10):
Publication 970 says that fellowship and scholarship income should be reported in line 7 (p. 6):
Parent post: Grad Student Income Tax Guide: 2015 Edition
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.
Grad Student TurboTax Guide: 2016 Edition
The purpose of this guide is to help you enter your proper income and qualified education expense data into Turbotax so that it generates an accurate tax return for you. This guide uses the free version of TurboTax.
Before you begin, please review the 2016 tax guide home page to gather all the forms you need. If you do not have documentation for all of your income (both compensatory and non-compensatory), you will need to do some calculations before you start entering data into TurboTax.
The common combinations of tax documents that grad students receive are:
- I received a W-2 for my stipend and a 1098-T for my scholarship income and qualified education expenses.
- I received a W-2 for my stipend and no documentation for my scholarship income and qualified education expenses.
- I received a 1098-T for my stipend and/or scholarship income and my qualified education expenses.
- I received no documentation for my stipend and/or scholarship income and qualified education expenses.
- I received a 1099-MISC for my stipend and a 1098-T for my scholarship income and qualified education expenses.
- I received a 1099-MISC for my stipend and no documentation for my scholarship income and qualified education expenses.
If you made estimated tax payments on your fellowship income, you will also need to enter your estimated tax payments into TurboTax. Read: How to enter estimated tax payments into TurboTax
Related article: Paying Income Tax throughout the Year
Even if your income and expenses don’t exactly match one of the above scenarios, you can likely combine them to figure out how to report all of your income and qualified education expenses.
Parent post: Enter Your Grad Student Income into Tax Software
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.
Enter Your Grad Student Income into Tax Software
Grad students frequently choose to prepare their federal and state tax returns using tax software, but using software to prepare an accurate return is not always as straightforward as it should be. The difficulty grad students may encounter when using tax software depends on the type(s) of tax documentation their universities and funding sources send them. Before you start using tax software, you’ll need to think about your grad student income and assess the tax forms you received.
These guides include step-by-step instructions for entering your grad student income and qualified education expenses into different brands of tax software. Preparing the remainder of your return, which might include other sources of income and non-educational deductions and credits is up to you to research.
For the purposes of these guides, I imagined a hypothetical grad student with stipend income.
The ‘personal information’ relevant to the student’s taxes is:
- 24 years old
- single
- living in Durham, NC
- not a dependent; doesn’t have dependents
The student received a $25,000 stipend. Her scholarships totaled $22,000 and her qualified education expenses totaled $20,000. If she had taxes withheld, they were $1,500 for federal tax and $1,000 for state tax.
How to enter your grad student income and qualified education expenses into TurboTax (2016 Edition)
Parent post: Grad Student Income Tax Guide: 2016 Edition
We at Grad Student Finances are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.
Grad Student Income Tax Guide: 2016 Edition
Welcome to the 2016 edition of the Grad Student Income Tax Guide! While no one really wants to shell out money in taxes, it is part of our civic duty. Our intention with this Guide is to make the process of preparing your grad student tax return as easy as possible. Grad student non-compensatory income (fellowship, scholarship, training grant, etc.) is unfamiliar to many people, including tax preparers, but it’s actually not that complicated to understand and report properly. This tax guide applies to US graduate students who are US citizens, though other students in the US may find aspects of it illuminating.
We here at Grad Student Finances are not tax or financial professionals; nothing you read on this site is advice and you are still entirely responsible for the accuracy of your tax return(s). At every possible point, we will provide references to the tax code to substantiate the steps in the guide.
Think about Your Income and Assess Your Tax Forms
Before you start working on your tax return for the year, you must think about what your true taxable grad student income is and assess the tax forms you received from you university. Skipping this step and jumping straight into preparing your return may result in confusion, frustration, incorrect returns, and even the over- or under-payment of your tax due.
Before you begin: Think about your income and assess your tax forms.
Where Your Grad Student Income Should Be Reported on Your Tax Return
It’s also important to understand where your grad student income should ultimately be reported on your tax return. For how confused tax software and tax preparers get over this issue, it has a surprisingly simple answer.
Educate yourself: Find out where your grad student income goes on your tax return.
Tax Return Preparation Methods
The first big step you’ll take toward preparing your income tax return is to choose what method to use. Generally, your options are to prepare it yourself (manually), to use tax software, to outsource it to a professional, or to outsource it to a relative or friend. There are pros and cons to each method, and your decision should largely depend on the complexity of your (tax-related) life and the resources available to you.
If you have a simple (tax) life, the fastest and easiest route to prepare your tax return may be to do it manually. We have provided a step-by-step method for manually calculating and reporting your grad student income. How to incorporate your other income sources and possible deductions/credits into your return is up to you to research.
If you choose to outsource the preparation of your tax return, you should still look over the manual guide so that you can double-check that your grad student income has been calculated and reported correctly.
Probably the most popular route grad students take to prepare their tax returns is to use tax software. While this is probably the least expensive way to have a comprehensive return prepared by a ‘professional,’ because the software is not designed with grad student (non-compensatory) income in mind, it can often be tricky to get it to properly interpret the information you give it. We have generated step-by-step instructions with screenshots for entering your grad student income into tax software (for the rest of your return, you can follow the software prompts).
Further reading: What Method Should You Use to Prepare Your Tax Return?
Understanding Your Grad Student Taxes
At the end of the day, what you need is an accurate tax return, but it’s also highly beneficial to understand how your financial life as a graduate student fits in with the tax code. The best resource for learning about it is IRS Publication 970. If you understand the types of income you (may) receive as a graduate student, you can prevent yourself from falling for the tax lies that are pervasive at universities and answer questions such as can a graduate student contribute to an IRA? To be a financially literate citizen, you should also understand concepts like marginal tax brackets, credits, and deductions.
We at Grad Student Finances are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.
