Personal Finance for PhDs

Live a financially balanced life - no Real Job required

Emily

How Far Will My New Stipend or Salary Go?

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Virtually every PhD will experience this at one point (if not multiple points): You’re looking at an offer letter, whether for grad school, a postdoc, or a Real Job and you’re not sure what to think about the stipend or salary. Because you’ll have to move to a new city to accept the position, you don’t have any context for understanding if it is reasonable or generous or stingy. Your personal finances as well as the local cost of living play heavily into the determination you have to make. Will you be able to survive (or thrive – or neither) on this salary? How far will your new stipend or salary go toward paying your living expenses and getting ahead financially?

new salary new city

This isn’t at all a trivial question, especially for:

  • Graduate students and postdocs who unfortunately can’t assume they will be paid enough to live comfortably.
  • PhDs who are responsible for the well-being of others, e.g., spouse and/or children.
  • International scholars who are prohibited by their visas from working to earn extra money.

You can attempt to answer this question with little or much research, depending on how invested you are in the outcome and what your initial inquiries turn up.

Further reading:

Find Answers on the Internet

You can find a first-pass, non-personalized answer to “How far will my new stipend or salary go?” at any time over the internet.

Stipend and Salary Databases for PhDs-in-Training

If your offer is for a graduate program, go to PhDStipends.com and search for stipend entries for your university and other universities in your city, if any. Not only will this data tell you what other graduate students are being paid so you can compare your stipend offer, some of the entries contain subjective comments on how possible it is to live on that stipend. The stipends will also be normalized to the local living wage for the county the university is in (the LW Ratio) – more on that in a moment.

Similarly, if your offer is for a postdoc, use postdocsalaries.com.

The Living Wage

For graduate students and possibly postdocs, a well-researched, insightful database is the Living Wage Calculator. For each county in the US, this resource shows you the minimum your necessities will cost (on average) based on your family size. It calculates the “living wage” needed to support one adult, two adults, adults with children, etc. and breaks it down into its constituent categories: food, child care, medical, housing, transportation, other expenses, and taxes.

As graduate students are likely to be paid close to a living wage (perhaps above or below by up to 50%), this database will give you a starting point on what you can expect to spend in your various necessary budget categories. Postdocs who are paid close to the living wage can also utilize this resource. Higher earners and homeowners will not find the calculations as relevant.

Cost of Living Calculators

If you know what you spend on your expenses in your current city, you can use a cost of living comparison calculator to translate that amount of money into an amount of money in your new city based on the differences in the cost of living.

Some of the prominent cost of living comparison calculators are provided by:

These cost of living comparisons also break down into sub-categories of spending such as housing, utilities, food, transportation, etc. However, be warned that the housing data come from a mix of renters and owners, so you may find you own housing costs differ dramatically from the expected increase or decrease.

Find Answers from Your Peers

I think the best way to get an accurate answer to “How far will my new stipend or salary go?” is to survey people currently living on it in your new city, i.e., your future peers and co-workers.

This is trickier for PhDs starting Real Jobs because of the (damaging but firm) culture in most workplaces of not disclosing your salary. However, graduate students and postdocs are usually paid on a set schedule, so you can assume that someone already in the position you have accepted (e.g., within your same department or funded by the same source) does have the same or a similar salary to yours.

Simply ask an open-ended question such as “Are you able to make ends meet on the stipend?” or “Do you live more or less comfortably on the salary?” and see what it elicits. Be sure to ask several different people because you one person’s perspective may not be representative.

Find Individualized Answers through Research

If you are willing to dig into some financial weeds, the ultimate way to obtain an individualized answer to “How far will my new stipend or salary go?” is to draft a budget.

After all, your finances are unique, and looking to average data or asking a few peers will not directly speak to your specific obligations, lifestyle, and preferences.

If you already track your spending and keep a budget, you can use that as a starting point, or you can download a fresh template. There are plenty of templates available online, and I’ve also created one specifically for this purpose, which is available below.

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Some line items on your budget will need major overhauls due to your career and geographic transition:

  • Tax: If you’re changing salary and/or state (or making changes to your household), your income tax bill will need to adjust. Some early-career PhDs might also start or stop paying FICA tax or be excused from paying state income tax depending on the exact type of paycheck they will receive in the new position. My favorite calculator for estimating income and FICA taxes is from Smart Asset.
  • Employee/student benefits: With a change in university and/or employer comes different benefits that you may or may not have to pay for out of pocket. If the amount of money you are responsible for paying is not clearly delineated in your offer letter, it is worth inquiring about as you draft your budget. Examples of these types of payments are premiums (and copays/coinsurance) for your health, vision, and dental insurance; life and/or disability insurance premiums; and tuition and/or fees.
  • Student loans: If you are entering graduate school and have decided to defer your student loans, you’ll need to update your minimum required student loan payments to $0. Conversely, if you are exiting deferment for a postdoc or Real Job, you’ll need to know how much your payments will be. Your loan servicer should be able to tell you your minimum payments. If you have federal loans and are considering an income-driven repayment program, you can use the Repayment Estimator from studentloans.gov to compare your payments under different plans.
  • Living expenses: Obviously, if you are changing cities, many of your living expenses will shift. But the ‘major overhaul’ here is if you need to add or subtract whole budget categories, such car ownership, daycare, and travel to visit family, a partner, and/or friends.

As for your living expenses, you can use one or more of the methods detailed in the first two sections of this article to start putting numbers into each budget category. Some living expenses may stay more or less constant even when you change cities (e.g., cell phone bill, cost of electronics) while others will be subject to the cost of living (e.g., housing, utilities, food).

The most important budget categories to get right from a distance are your large, fixed expenses, e.g., housing, transportation (if you own a car), and childcare. The Living Wage calculator and the cost of living comparisons can help here, but it’s going to be even better for you to do your own research and determine your individualized expenses.

The two best ways to research your housing and childcare costs from a distance (and jump-start your housing search) are to ask your peers what they pay and monitor prices online for at least several weeks before you commit to your expense. (Knowing when to sign a lease/pay a deposit is part of familiarizing yourself with a market!)

Drafting a budget will help you decide how much you can afford to spend on these large fixed expenses, so it will be most beneficial to start drafting this budget before you commit to any expenses. Your ability to reach financial goals in your first year in your new position will likely hinge on getting these large, fixed expenses set at an appropriate level, so it’s worth quite a bit of time and research. Variable expenses can be changed more or less on a dime and small expenses aren’t so impactful, so it (literally) pays to focus your effort on the large fixed expenses.

If you would like some additional help with drafting your new budget at a distance, please purchase my previously recorded webinar ($24.99) below. The 30-minute “Draft Your Budget from a Distance” webinar also includes the budget template spreadsheet described above.

The objective of the webinar is to help you draft a complete budget for your new position (in a new city) so that you can set your large, fixed expenses at a reasonable level for your income and determine in advance what financial goals you might set for the next phase in your career.

Sign Up for “Draft Your Budget at a Distance”

The final answer to “How far will my new stipend or salary go?” will only come once you’re living in your new city. But you can start getting approximations on that answer immediately from online sources and your future peers. These initial answers may prompt you to create a more detailed draft budget before you move if it looks like you will experience a financial challenge or reaching financial goals is important to you. This budget will help you determine how much you can afford to spend on the expenses that are generally fixed prior to or upon your move. It will also help you decide how much money you can put toward your financial goals during your next position.

What to Do With Your 401(k) or 403(b) When You Start Grad School

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One of the common perks that companies and organizations give to their employees is access to a workplace-based retirement account such as a 401(k) or 403(b). They may even match your contributions to a degree! Unfortunately the great majority of universities do not give their graduate students access to their 403(b)s. (This does happen rarely, so it’s worth inquiring about.) If you had a 401(k) or 403(b) in a prior job, what do you do with that account when you leave your job for grad school?

Further reading: Financial Reasons to Work Before Starting Your PhD

401k grad school

Your Three Options for Your Workplace-Based Retirement Account

In general when you leave a job, you have three options for what to do with your 401(k) or 403(b).

Leave It Where It Is

Most of the time, your former employer will permit you to leave your 401(k) or 403(b) where it is and continue to manage the account for you while you are in grad school. Employers usually have a minimum balance requirement to maintain these accounts, so your account has to meet that bar.

The upside to this approach is that you don’t have to do anything, and if you liked the investment options and account fees, you can keep using it.

The downside to this approach is that you have to stay in some degree of contact with your former employer and go through them if you want to make any changes to the account.

Roll to Your New Workplace-Based Retirement Account

If you have the option to open a 403(b) with your university, you may be able to roll your previous 401(k) or 403(b) into that account. Again, this opportunity is rarely extended to grad students.

Roll to an IRA

You always have the option when you leave a job to roll your 401(k) or 403(b) into an Individual Retirement Arrangement (IRA). An IRA’s tax advantages are similar to those of a workplace-based retirement account, but you manage the account yourself instead of your employer managing it. Be sure that you have instructed your firms to execute a “rollover” directly to your IRA and not to cash out your account and send you a check, which would be a hassle to correct. You can use an existing IRA account or open an IRA account specifically to receive this transfer.

Which Option Should You Choose?

The general personal finance advice is to always roll your 401(k) or 403(b) when you leave an employer to avoid eventually having accounts scattered across many employers and potentially losing track of one. Whether you should roll into your new employer’s 401(k) or 403(b) or your IRA is debated. If you are trying to optimize the investments inside your retirement account, IRAs have an advantage because the entire world of investment options is open to you, whereas the options inside a 401(k) or 403(b) are only what your employer decides to make available. Sometimes, 401(k) or 403(b) plans are more expensive than what you can get inside an IRA, and since cost minimization is a key tenant of successful investing, again IRAs are preferred.

However, this general advice is not necessarily fully applicable to grad students.

First, your options are mostly likely to be either to leave your 401(k) or 403(b) where it is or to roll it into an IRA.

Second, you may not want to manage your own investments. While managing your IRA can be easy and hands-off, it may still be intimidating, and some students might prefer to simply choose among the options offered by the former employer to opening and managing an IRA.

Third, the investments available to an individual investor inside an IRA may not be as attractive as the institutional-level investments available inside a 401(k) or 403(b) in terms of their fees. To paint with an overly broad brush, 401(k) and 403(b) options at smaller companies and organizations may be more expensive than what you can buy inside an IRA, whereas 401(k) and 403(b) options at larger companies and organizations may be less expensive than what you can buy inside an IRA. So if you were employed by a university or a large company before starting grad school, compare the cost (expense ratios) of your current investment options with those at the brokerage firm you’re considering for your IRA. It may turn out that your existing options are more favorable.

Further reading:

My advice to entering grad students is to roll your 401(k) or 403(b) into an IRA unless you have high-quality, inexpensive investment options inside the workplace-based retirement account and do not want to manage your own account.

Other Advice Related to Retirement Saving

You’re on a great path already by starting to invest for retirement through your job. If at all possible, continue to make excellent choices related to retirement investing during grad school.

Contribute Money to Your 401(k) or 403(b) While You Still Can

It’s a great idea to kick your retirement savings rate into an even higher gear in the months you have left at your job. You’re likely to not have access to a 401(k) or 403(b) again for quite a while, so any additional money you can get into that tax-advantaged account will be a huge boon to your post-PhD self. (Plus, you’re forcing yourself to deflate your lifestyle, which you’ll have to do in a few months anyway!)

However, don’t become so zealous about retirement saving that you compromise your cash position. It’s going to take a good amount of cash to transition into grad school between moving costs, start-up expenses, and university fees. You don’t want to put a lot of money inside your 401(k) or 403(b) only to turn to credit cards to make it until your first grad school paycheck.

Keep Investing for Retirement!

Yes, it is sometimes possible to invest for retirement during grad school, but it heavily depends on your stipend, the local cost of living, and the rest of your financial situation. If you have no pressing debt, enough cash savings for emergencies and short-term expenses, and some excess cash flow, please continue to invest for retirement!

Further reading:

If you have W-2 income as a grad student (typically from an assistantship) in a given calendar year, you can contribute to an IRA. If you don’t have IRA eligibility due to receiving only non-W-2 (typically fellowship) income in a given calendar year, don’t let that stop you from investing for retirement! You can still use a taxable brokerage account. Between tax-efficient investments and your low tax bracket, you are likely to still enjoy tax benefits of investing even outside of an IRA.

Further reading:

Consider Traditional to Roth Conversion During Grad School

During your time in grad school, you may be in a lower tax bracket than you were while at your previous job. Grad students, unless married to someone with a much higher income, are usually in the 12% marginal tax bracket at the highest.

If you have any money in a traditional 401(k), 403(b), or IRA (which you certainly would if you ever received a retirement contribution match from your employer), consider converting it from traditional to Roth during your lower-earning grad school years. It’s pretty unlikely that you’ll ever be in the 12% (or lower) tax bracket again after you finish grad school due to both your personal earning potential and today’s rock-bottom income tax rates, so it makes sense to do the conversion at that low tax rate to gain the benefits of a Roth IRA. (People are flocking to do this type of conversion even in much higher tax brackets!)

Further reading: Why the Roth IRA Is the Ideal Long-Term Savings Vehicle for a Grad Student

When you do the conversion, you’ll have to pay income tax on the full balance of your traditional retirement account. Before you start the conversion process, be sure that you 1) have enough cash to pay the tax and 2) are not bumping yourself into a higher tax bracket with that income infusion.

You don’t have to rush to do this in your first full calendar year as a grad student if you’re not ready, but you should do it as early as you can, and keep an eye on that year in which you expect to finish and get a higher-paying job.

This conversion can be slightly complicated if you only want to convert part of your traditional money in any given year, so be sure to discuss your plans with the brokerage firm that houses your IRA.

Conclusion

Great job on contributing to a 401(k) or 403(b) prior to starting grad school! The positive financial habits you’ve already cultivated will serve you well during and after grad school. If you want to take any steps at all with your existing workplace-based retirement account, they are quite straightforward and easily accomplished.

How to Start Grad School on the Right Financial Foot

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Starting a PhD program is, professionally and personally, one of the most exciting times of life. You’re meeting people who will be your peers and advisors in the coming years whose research interest align with yours, getting acclimated to a new university and city, and of course starting a fresh school year. However, many first-year PhD students, as they’re going to happy hours to get to know their cohorts and buying their textbooks, are thinking to themselves: “Am I going to make it until my first paycheck arrives?” Financially speaking, starting a PhD program is one of the most challenging times of life as well.

The financial challenges of the transition into a PhD program are myriad and the resources are likely to be few. Moving to a new place and starting the school year are expensive endeavors, and sub-optimal decisions around housing and transportation may reverberate in your finances for years to come.

I present this article not to discourage you in what should be an invigorating and hopeful experience, but so that you have time to prepare for its unique financial demands. Starting grad school on the right financial foot means that you are poised for financial success throughout your PhD instead of reeling from the initial financial blow and playing catch-up for months and years to come. Here is what you can do in the months leading up to your transition into grad school to start in a place of financial strength.

grad school right financial foot

Draft a Budget ASAP

It’s vital to put your stipend offer in context as early as possible. The number may strike you as generous-for-a-stipend or meager, but until you know something about the local cost of living it is rather meaningless.

The best way to get an idea of how far your stipend will go is to start drafting a budget and use approximate numbers until you lock in various aspects of your living expenses. Two starting points are the Living Wage Calculator and the estimated room and board from your university’s financial aid office. Neither one of these numbers will prove to be totally accurate (I hope they are both overestimates of what you will pay) but it’s a start for the triangulation.

Your draft budget should include:

  • The income tax you expect to pay,
  • Your necessary expenses, i.e., housing, transportation, utilities, groceries, household consumables, clothing, etc.
  • Your discretionary expenses, i.e., restaurant and bar spending, travel, entertainment, etc.), and
  • Your education expenses, i.e., tuition and fees required to be paid out of pocket, course supplies, etc.

Further reading: How to Read Your PhD Program Offer Letter

To a degree, you can use your current expenses (if you track them) to estimate what your future expenses will be, possibly with an adjustment for the shift in the cost of living.

It’s quite difficult to drill down into the specifics of what you will spend in a job/life that you’re not yet in, especially if you are not currently tracking your expenses. Therefore, you can use placeholder percentages to help you estimate your expenses and guide your decisions. For example, the Balanced Money Formula states that you should not spend more than 50% of your net (after tax) income on all of your necessities together (including minimum debt payments). This is a challenging benchmark for grad students to adhere to, especially in high cost of living areas, but it illustrates how important it is to keep your necessary expenses in check to the greatest degree possible.

Further reading:

Thoroughly Research Your Housing Options

Housing is by far the largest expense in virtually every grad student’s budget, and first-year PhD students are expected to make this enormous financial decision with little to no insight into the local area. The result is that graduate students often overextend themselves in their housing costs, which are financially, logistically, and emotionally difficult to change.

Starting grad school on the right financial foot means locking in your fixed housing and transportation costs at a reasonable level for your stipend. The general rule of thumb is to spend no more than 25-30% of your net (after tax) income on housing. This guideline proves impossible for many if not most PhD students, who may be paid too little, live in an expensive area, or both.

Further reading: How Much of Your Stipend Should You Spend on Rent?

Particularly in those challenging housing markets, the best course of action to find the most suitable housing (even if you spend more than the guidelines) is to start your search early and thoroughly research your options. I recommend starting your research with a housing survey conducted by your university or graduate student association (if one exists) and senior grad students who are paid a similar stipend to what you will be (e.g., 3rd years and up). From these sources you can ascertain the price range you can expect for housing and potentially tips on the best locations, housing types, and even specific complexes or landlords to pursue.

Further reading: Your Most Important Budget Line Item in Graduate School and Why You Need to Re-Evaluate It

A note on on-campus or university-affiliated housing: On-campus housing is attractive for students moving from a distance because it short-circuits this whole decision-making process. But this type of housing was not all created equal. At some universities, the university housing is subsidized, which means there is likely fierce competition to live in it. At other universities, the university housing is more expensive than comparable non-affiliated housing. You won’t know whether university housing is a good deal and worth pursuing until you talk with current grad students.

Further reading and listening:

Go Frugal on Transportation

Alongside figuring out your housing options and eventually committing to something, you need to decide how you will get around town. If you don’t own a car, you might need to buy one. If you already own a car, you have to decide whether to bring it with you or sell it.

Owning a car, even without a car loan, is a very expensive undertaking. Beyond the cost of the car itself, you typically have to pay for insurance, parking, gas, registration fees, inspection fees, taxes, maintenance, and repairs.

If it is feasible to live car-free in your new city and you don’t currently own a car, I recommend trying to live car-free for your first year. You can always reassess and buy a car at a later time if you decide you want one.

If you decide to buy a car or keep the car you already own, make sure you globally assess your expected costs (not just the best-case scenario!) and write them into your budget. An expensive or newer car costs you more not just in the purchase price but in your insurance premiums as well.

Your transportation and housing expenses are necessary to fix in concert to a degree. If you decide to live car-free, you might choose to pay more to live closer to campus or on a convenient bus route. If you decide to buy or keep a car, you can offset some of those costs by finding less expensive and less convenient housing.

Create a Transition Budget

Most graduate students experience what I call the long and expensive first month of grad school, though I have noticed some universities are working to change this pattern. You must prepare for this long and expensive first month prior to starting your transition to grad school.

The expense of the first month comes from your move. First, the moving expenses themselves: your and your possessions’ transportation to your new city plus the cost of feeding yourself and so forth during that time. Second, the start-up expenses for your new place: first (and last) month’s rent and security deposit, deposits for your utilities, furniture, and stocking your pantry. Third, the expenses of a new school year/term: any money that you must pay to your university in a lump sum and the expenses associated with your coursework.

The long first month refers to the length of time from when you move to your new city until you receive your first paycheck. Personally, I showed up for orientation in mid-August and didn’t receive my first paycheck until the last day of September. Of course, that time includes all your regular living expenses, on the back of your moving expenses.

You want to be sure going into the long first month that you can come out the other side without racking up debt. Saving cash in advance to pay for the transition is the best solution, and a transition budget will help you estimate the total cost.

Build Your Financial Foundation Now

Because you have several months between now and your matriculation into your PhD program, you have the opportunity to establish your financial foundation prior to the challenges of this transition. By financial foundation I am referring to saving cash for the transition, saving an emergency fund, paying off debt, and/or investing – whatever is most appropriate for you right now.

If you currently have a full-time job, you have the most opportunity to shore up this foundation, but even as a student or part-time/gig economy worker, it is still possible to a degree. It will be well worth a few months of sacrifice, either in terms of earning more through a side hustle or spending less through frugality, to start grad school on the right financial foot instead of a few steps behind.

Further reading: Financial Reasons to Work Before Starting Your PhD

After you save the money you need for your transition into grad school, consider whether you can pay off any of your current consumer debt completely (e.g., credit cards, car loan, medical debt, IRS debt). While you can defer student loans while you are in grad school, these other kinds of debts will still require minimum payments even while you receive your stipend, so it’s worthwhile to attempt to knock them out completely.

Further reading:

If you spend the time and effort now on planning out your expenses and saving money, once you matriculate you will be able to focus solely on the stimulating new people and experiences you encounter instead of experiencing financial stress. Starting grad school on the right financial foot by locking in a good deal on housing and not allowing yourself to fall into credit card debt also sets you up for financial success throughout your PhD. An ounce of prevention is worth a pound of cure.

If you would like to me to work with you on navigating your financial transition to graduate school, please check out my financial coaching program exclusively for rising grad students.

Rising Grad Students: Start Grad School on the Right Financial Foot

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Start Grad School on the Right Financial Foot is my coaching program for rising funded grad students (matriculating fall 2019).

Objective: To guide rising graduate students to start graduate school in a strong financial position and position themselves to be financially successful during their PhDs.

Topics: The core areas of focus of the program are drafting a budget, researching and committing to housing and transportation, estimating moving and other transition-related expenses, saving for your transition, and setting realistic financial goals. As needed and as time allows, we can also discuss increasing income, saving for retirement, debt payoff, tax on fellowship income, and building credit.

Mechanism: The coaching component consists of four sessions over approximately 2 months – one 55-minute session and three 25-minute sessions. You will additionally receive three template documents to assist you: a balance sheet, a budget, and a moving expense tracker.

Price: $174.99

Next step: Interested in learning more? Let’s have a quick 15-minute chat about the program. Sign up below.

Further reading: Rising Grad Student Resources

Fellowship Income Can Trigger the Kiddie Tax

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The Kiddie Tax is an alternate, higher rate of calculating tax due that applies to young people. While it was intended to ensure that wealthy parents paid their full share of tax on their investments, it also sometimes applies to graduate students whose income comes primarily from a fellowship or training grant.

Kiddie Tax fellowship graduate student

If you have found this article through search, it’s likely that your (software or human) tax preparer has determined that you owe the Kiddie Tax. This article will help you understand what the Kiddie Tax is, who it applies to, how it is calculated, and how to avoid it in the future.

What is the Kiddie Tax?

Back in the early 1980s, finding tax shelters (i.e., legal ways to avoid paying tax) was all the rage because tax rates were much higher than they are today. The top marginal tax rate was reduced to 50% in 1981 and finally to 28% in 1988 with the last major tax reform prior to the Tax Cuts and Jobs Act (source).

One of the tax shelters was for parents to put income-generating assets in their minor children’s names. The children were (presumably) in much lower tax brackets for investment income than their parents, so overall the family paid less in tax for those assets (source).

In 1986, the “Kiddie Tax” was enacted to close this loophole. Under the Kiddie Tax, a child or young adult’s unearned income is taxed at a higher rate than it would be if they were older (with all other factors being the same).

How Does the Kiddie Tax Affect PhD Students?

The way the Kiddie Tax is written and structured makes sense for the purpose of preventing wealthy parents from sheltering their income using their children. However, it has an off-label effect on PhD students.

The Kiddie Tax applies to all children through age 17, some children through age 18, and some students through age 23. It applies to “unearned income,” which includes not only investment income but also income from fellowships, scholarships, and training grants.

This means that a graduate student under the age of 23 whose income is from a fellowship may be taxed not at the ordinary income rates that they will be at age 24+ but rather at their parents’ marginal tax rate (if it is higher than their own).

(The Tax Cuts and Jobs Act, passed at the end of 2017, changed the alternate tax rate to be the one used for estates and trusts rather than the parents’ marginal tax rate, which it had been historically. This negatively affected college students from low-income backgrounds, who are often funded by scholarships and grants. At the end of 2019, the Kiddie Tax rate was changed back to the marginal tax rate of the parents, which was also retroactively applied for 2018. If you paid the Kiddie Tax in 2018, an amended return may be warranted.)

The PhD students most in danger of the Kiddie Tax applying to them in a way that will massively increase their tax due are those who received fellowship (awarded) income for an entire calendar year, e.g., January of the first year through December of the second year.

Who Has to Pay the Kiddie Tax?

The Kiddie Tax does not apply to every graduate student on fellowship, though it applies to many.

The instructions for Form 8615 lay out who has to file the form and (potentially) pay the Kiddie Tax. There are five qualifications for being subject to the Kiddie Tax, all of which must apply. If any one of the following is not true for you, you aren’t subject to the Kiddie tax.

1) You had more than $2,200 of unearned income.

Taxable fellowship and scholarship income counts as “unearned income.”

The definition of “unearned income” from p. 1 of the instructions for Form 8615 is:

“For Form 8615, “unearned income” includes all taxable income other than earned income. Unearned income includes taxable interest, ordinary dividends, capital gains (including capital gain distributions), rents, royalties, etc. It also includes taxable social security benefits, pension and annuity income, taxable scholarship and fellowship grants not reported on Form W-2, unemployment compensation, alimony, and income (other than earned income) received as the beneficiary of a trust.”

2) You are required to file a tax return.

The Form 1040 instructions (p. 8-11) answer the question of who has to file a return for 2019.

Chart A (p. 9) is for most people under age 65. It states that you must file a return if you are single and your gross income is at least $12,200.

Chart B (p. 10) is for dependents. You are required to file a tax return if you are single and:

  • “Your unearned income was over $1,100.
  • Your earned income was over $12,200.
  • Your gross income was more than the larger of
    • $1,100, or
    • Your earned income (up to $11,850) plus $350″

For the purpose of Chart B only, taxable scholarships and fellowships are “earned income” while “unearned income” includes taxable interest, ordinary dividends, and capital gains distributions.

If your gross income was less than $11,850 and your unearned income (taxable interest, ordinary dividends, and capital gains distributions) was less than $350, you do not need to file a tax return and are not subject to the Kiddie Tax.

Alternatively, you can use the IRS’s Interactive Tax Assistant to determine whether you are required to file a return: Do I Need to File a Tax Return?

3) You are a student under age 24

To be subject to the Kiddie Tax, you must be (Form 8615 p. 1):

  1. “Under age 18 at the end of 2019,
  2. Age 18 at the end of 2019 and didn’t have earned income that was more than half of your support, or
  3. A full-time student at least age 19 and under age 24 at the end of 2019 and didn’t have earned income that was more than half of your support.”

Full-Time Student Status

Form 8615 refers to Publication 501 for the definition of ‘full-time student’ (p. 12):

“To qualify as a student, your child must be, during some part of each of any 5 calendar months of the year:

  1. A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school, or
  2. A student taking a full-time, on-farm training course given by a school described in (1), or by a state, county, or local government agency.

The 5 calendar months don’t have to be consecutive.

Full-time student. A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.”

You do not have to be a student throughout the calendar year to be defined as a student and subject to the Kiddie Tax. You are considered a student if you are a full-time student in (part of) 5 calendar months, which do not have to be consecutive.

Support Test

Defining support and who/what provided it is the trickiest part of determining whether you are subject to the Kiddie Tax. First, you must determine your support, and then calculate whether your earned income amounted to more than half of your support.

The Form 8615 instructions defines support as (p. 1):

“Support. Your support includes all amounts spent to provide you with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. To figure your support, count support provided by you, your parents, and others. However, a scholarship you received isn’t considered support if you’re a full-time student. For details, see Pub. 501, Dependents, Standard Deduction, and Filing Information.”

Publication 501 includes the Worksheet for Determining Support (p. 15), which you must go through in detail. Your support is the amount of money that is used to pay all your living, education, medical, and travel expenses. The education expenses include the tuition, fees, etc. for your graduate degree.

If you do not have earned income totaling at least half of your own support, you may be subject to the Kiddie Tax. Scholarships and fellowships do not count as earned income for this purpose.

The support test being calculated this way creates a very high bar for funded graduate students as tuition can easily rival or exceed living expenses.

4) At least one of your parents was alive at the end of the year

If your parents (including adoptive and step-parents) are deceased, the Kiddie Tax does not apply to you.

5) You don’t file a joint return

If you are single, the Kiddie Tax may apply to you. If you are married filing jointly, the Kiddie Tax does not apply to you.

If you meet all five of these criteria, you need to fill out Form 8615, as the Kiddie Tax may apply to you.

How Is the Kiddie Tax Calculated?

Form 8615 calculates your Kiddie Tax. Part I calculates your net unearned income, and Part II calculates your tax.

You should carefully fill out each line and read the instructions to find the correct definitions. I have highlighted some points about each line specific to fellowship recipients, but you still need to read the full instructions.

Line 1

Line 1 asks for your “unearned income” as defined above. If you had no earned income (i.e., you were 100% on fellowship for the calendar year and had no other income sources), you can use the value from your Form 1040 Line 1. If you had both earned and unearned income, you need to fill out the Unearned Income Worksheet (p. 2 of the form instructions), which subtracts your earned income from your total income.

Line 2

If you took the standard deduction, enter $2,200. If you itemized your deductions on Schedule A, there is a different formula to use in the instructions.

Line 3

Line 3 = Line 1 – Line 2

If the value in Line 3 is 0 or negative, you do not have to pay the Kiddie Tax. (Translation: If you took the standard deduction and your unearned income is less than $2,100, you do not have to pay the Kiddie Tax.)

Line 4

Enter in Line 4 your taxable income from Form 1040 Line 11b (your gross income minus all relevant deductions).

Line 5

Enter in Line 5 the smaller of the values in Line 3 and Line 4.

Line 7

To calculate your tax, you have to use the Line 7 Tax Computation Worksheet on p. 4 of the instructions or the Tentative Tax Based on the Tax Rate of Your Parent Worksheet on p. 5. The first worksheet applies the tax rates for estates and trusts to your unearned income; it is likely more advantageous to you to elect to use the second worksheet, but you will need to know your parents’ and siblings’ incomes for the calculation.

How to Avoid the Kiddie Tax

Once a tax year ends, you run out of opportunities to avoid the Kiddie Tax. To avoid the Kiddie Tax in the current or a future tax year, make sure that at least one of the five above points on who the Kiddie Tax doesn’t apply to is true for you. For example, you could:

  1. Delay your matriculation into grad school
  2. Configure your income and expenses such that you pass the support test, e.g.,
    • Request that you are paid by an assistantship instead of a fellowship for part or all of the calendar year
    • Earn a significant side income
  3. Get married and file a joint return.
  4. Find every applicable qualified education expense to make more of your fellowship income tax-free (e.g., your student health insurance premium if paid by scholarship)

How to Minimize the Kiddie Tax

If you are subject to the Kiddie Tax, the best thing to do is minimize your unearned income and taxable income. If you have any influence with your parents and they are willing and able to minimize their taxable income, please ask them to do the same.

You can minimize your unearned (awarded) income by making as much of it tax-free as possible using your qualified education expenses. This is largely accomplished more or less automatically, but please be thorough in tracking down and documenting every possible qualified education expense, such as course-related expenses and certain fees. Box 1 of your Form 1098-T is likely not the full sum of your qualified education expenses for this purpose.

You can minimize your taxable income by taking additional above-the-line deductions or adjustments to income, such as contributing to a traditional IRA (through April 15 of the subsequent year) or paying student loan interest (during the tax year).

Remarks

The fact that fellowship income triggers the Kiddie Tax is unconscionable and potentially highly financially damaging to an already vulnerable population, graduate students funded by fellowship or awarded income. Despite their lack of earned income, these graduate students are typically financially independent from their parents, so their parents’ income, even if high, is immaterial to their lives. This aspect of our tax code desperately needs reform; however, I am not hopeful that it will be reformed in the near future as it has withstood two recent tax code updates.

Where to Report Your PhD Trainee Income on Your Tax Return (Tax Year 2024)

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There are two broad categories of PhD trainee income: employee income and awarded income. Employee income is W-2 pay, whereas awarded income is any other regular type of income for a graduate student or postdoc, which might be reported on a Form 1098-T in Box 5, a Form 1099-MISC in Box 3, a Form 1099-NEC in Box 1, a Form 1099-G in Box 6, or a courtesy letter—or not reported at all. For US citizens, permanent residents, and residents for tax purposes (the intended audience for this article), both employee and awarded income are supposed to be reported in the ‘wages’ line on your tax return, i.e., Form 1040 Line 1.

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

PhD where tax return

Where to Report Employee (i.e., W-2) Income

Employee income comes will be reported on a Form W-2. The terms used for employees at the postdoc level vary quite a lot, but at the graduate student level the positions are usually called assistantships (research, teaching, graduate, etc.).

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 Boxes 2 (federal), 17 (state), and 19 (local).

Form W-2 contains instructions for the employee (p. 7), which state: “Box 1. Enter this amount on the wages line of your tax return.”

The wages line of your tax return is Form 1040 Line 1a, which is labeled: “Total amount from Form(s) W-2, box 1.”

The Form 1040 instructions for Line 1a (p. 23) state: “Enter the total amount from Form(s) W-2, box 1. If a joint return, also include your spouse’s income from Form(s) W-2, box 1.”

Where to Report Awarded Income

Awarded income is not given in exchange for work as an employee, and therefore no W-2 is issued. At the graduate student level, awarded income is usually called scholarships, fellowships, and grants. The titles used for postdocs receiving awarded income vary, but they are not considered employees.

Awarded income will be officially reported to the student on a Form 1098-T in Box 5, on a Form 1099-MISC in Box 3, on a Form 1099-NEC in Box 1, or on a Form 1099-G in Box 6. It also might be unofficially reported on a courtesy letter or not appear on any documentation at all.

Further reading:

Please note that you must calculate the taxable portion of your awarded income for the year; it is not necessarily the same as your stipend/salary. Unlike with a Form W-2, you do not necessarily report exactly the amount that appears on your tax form or courtesy letter. See How to Prepare Your Grad Student Tax Return for more details.

Publication 970 Chapter 1 discusses where to report the taxable portion of scholarships, fellowships, and grants (p. 7):

Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, include any taxable amount reported to you in box 1 of Form W-2 in the total on line 1a. Include any taxable amount not reported to you in box 1 of Form W-2 on Schedule 1 (Form 1040), line 8r.

The Form 1040 Instructions for Schedule 1 Line 8r (p. 24) state:

Line 8r Scholarship and fellowship grants not reported on Form W-2. Enter the amount of scholarship and fellowship grants not reported on Form W-2. However, if you were a degree candidate, include on line 8r only the amounts you used for expenses other than tuition and course-related expenses. For example, amounts used for room, board, and travel must be reported on line 8r.