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How Do I Calculate and Report My Taxable Income?

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The various types of income that you have may be reported in different places on your tax return, depending on their type. You must first catalog all the different types of income you have had throughout the year. Income from outside jobs (W-2 or 1099-MISC box 7), investment income, etc. are not unique to graduate students, so you can determine how to properly report it by reading the instructions on the forms that you receive.

This page will cover only the typical types of income that graduate students receive for their roles as graduate students. However, you must include all your reportable income on your tax return.

1) Identify the Type(s) of Graduate Student Income You Received

There are several common sources of income for graduate students, but they will ultimately be able to be classified as compensatory or non-compensatory. (The description below is how universities generally treat the various types of graduate student pay, but exceptions are possible.)

Compensatory pay is money you are paid for work that you do, for instance as an RA or TA. This pay will be reported on a W-2, which you will receive in January each year.

Non-compensatory pay is an award you are giving that is (allegedly/officially) unrelated to your work.

Fellowships are examples of non-compensatory pay that provide your stipend. If you have taxes withheld, non-compensatory pay will likely be reported on a 1099-MISC in box 3. If you did not have taxes withheld from your stipend, you may receive a courtesy letter, a 1098-T or no documentation whatsoever to indicate your non-compensatory pay.

Scholarships are also non-compensatory pay and are generally used to pay tuition and fees on behalf of the student. You need to take your scholarship income into account when you calculate your taxable income for the year, even if you never received it in your personal accounts. If scholarships were posted to an account under your name at your university (e.g., Bursar account, Cashier’s account), they are part of your gross income for the year.

As you may not be explicitly told that you have received non-compensatory pay (for example, in addition to your compensatory pay), it is up to you to figure out if you received any and what the amount was.

2) Calculate Your Gross Income

After you identify whether you have received compensatory pay, non-compensatory pay, or both, you need to add up all your sources of grad student income. Keep your compensatory and non-compensatory pay separate for the time being.

All your compensatory pay should be reported on a W-2, so that should be easy to find. If you have more than one W-2, just add the gross pay together.

You can find your non-compensatory pay officially reported on a 1099-MISC (box 3) or a 1098-T (box 5). Since you need to look for the less well-documented sources as well, make sure you capture all the fellowship and scholarship income you may have received by looking at your courtesy letter (if any), your bank account statements, and your Bursar/Cashier’s account transaction history. (The 1098-T, if you receive one, may reflect the scholarships posted to your Bursar/Cashier’s account in box 5, or box 5 may be used only to report your non-compensatory stipend.) Add all these portions of your income together, being careful not to double-count any sources or to leave any out. At this stage, your gross non-compensatory pay may be very high as it will include the scholarships that paid your tuition and fees. (See IRS Publication 970 Chapter 1 for more information.)

3) Use Your Qualified Education Expenses to Reduce Your Tax Burden

If you have qualified education expenses, you have the opportunity at this stage to reduce your taxable income or the total amount of tax you will pay for the year. There are a few different mechanisms by which you might do so, some of which are mutually exclusive. You can’t double-count your qualified education expenses, even if you are able to use more than one of these mechanisms. If you take the Lifetime Learning Credit, you can’t also take the Tuition and Fees Deduction (Publication 970 p. 22-23).

1) Your non-compensatory pay can be considered tax-free if it was used to pay qualified education expenses (Publication 970 Chapter 1). Qualified education expenses include required tuition and fees and course-related expenses, but not room and board, travel, research, etc. See Publication 970 Worksheet 1-1 to calculate the taxable portion of your non-compensatory pay. Basically, you will subtract your qualified education expenses from your non-compensatory pay, and only report as taxable income any excess non-compensatory pay. If you received a 1098-T from your university, you should see (some of) your qualified education expenses for the year listed in box 2. Whether or not you received a 1098-T, look in your Bursar/Cashier’s account transaction history to find the qualified education expenses paid through that mechanism, and also add in your course-related expenses.

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excerpt from Publication 970 Chapter 1

2) You may be able to take the Lifetime Learning Credit, which awards you up to $2,000 off your taxes for up to $10,000 in qualified education expenses. (The credit is worth 20% of the expenses.) See Publication 970 Chapter 3 for more details. You can choose to use the Lifetime Learning Credit to reduce the taxes you pay on your compensatory pay. You might also choose to include all of the scholarship and fellowship income that might otherwise be tax-free (point 1) in your gross income to use the Lifetime Learning Credit for your qualified education expenses. See the Publication 970 Chapter 3 section titled “Coordination with Pell grants and other scholarships” for more details and be aware of the effect on the rest of your tax return if you choose this option. To claim the Lifetime Learning Credit, you need to fill out and submit Form 8863 along with your 1040.

3) You can deduct up to $4,000 from your compensatory pay for tuition and required fees (not including health insurance premiums) using the Tuition and Fees Deduction. See Publication 970 Chapter 6 for more details. To claim the Tuition and Fees Deduction, you need to fill out and submit Form 8917 along with your 1040.

Tip: The simplest approach here is to exclude from your taxable income the portion of your non-compensatory pay that went to your qualified education expenses, then use the Lifetime Learning Credit or the Tuition and Fees Deduction for any of your remaining qualified education expenses. This is particularly true if your qualified education expenses exceed $10,000 since that is the limit for the Lifetime Learning Credit. However, you may end up paying less in taxes overall by reporting a higher amount of non-compensatory income (<= $10,000 higher) and then taking the Lifetime Learning Credit for your qualified fees instead of treating that income as tax-free. You need to delve into the details in Publication 970 or use tax software to determine which approach is more advantageous to you, as claiming a higher or lower income may affect other parts of your tax return.

Reporting Your Income and Education Credits and Deductions

Your compensatory and (net) non-compensatory pay, after you have calculated them, will both end up being reported in the same line on your 1040.

The instructions for Form 1040 (the basic tax return form) state that W-2 income in box 1 (wages, tips, and other compensation) should be reported in line 7 (source: 1040 instructions, page 10). (If you are using Form 1040-EZ, W-2 income goes to line 1 (source: 1040EZ instructions, page 8). If you are using Form 1040A, W-2 income goes to line 7 (source: 1040A instructions, page 11).)

You should report the taxable portion of your fellowship and scholarship income in line 7 of Form 1040 (or line 1 of Form 1040EZ or line 7 of Form 1040A) with the letters “SCH” to the left of the entry (source: Publication 970, page 6).

All of your income related to being a grad student should end up in line 7 of form 1040, with or without “SCH” next to it, depending on the source.

Related article: Where to Report Your PhD Trainee Income on Your Tax Return

If you decided to use the Tuition and Fees Deduction, report the deduction in line 34 of your 1040 or line 19 of Form 1040A. If you decided to use the Lifetime Learning Credit, report the credit in line 50 of your 1040 or line 33 of Form 1040A.

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.

 

Do I Have to Pay Income Tax?

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Think of the question this way: The IRS starts from the position that you have to pay income tax on every dollar you take in, and it’s up to you to prove to them that you don’t through your income tax return.

Think about all the sources of income that you may have:

  • stipend
  • fellowship/scholarship (including ones that pay your expenses like tuition)
  • TA or RA income
  • outside jobs
  • gifts
  • banking or investment income
  • loans

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Not all of these sources of income need to be reported (and therefore are not taxed). Gifts are not taxable to the recipient and are only taxable to the giver under certain circumstances. Loans are also not taxable income as you will be repaying them in the future.

Even once you add up all your reportable sources of income, you will not be taxed on that full amount because you will have a personal exemption and some deductions. You will figure out the portion of your income that is taxable and how much tax you need to pay through filling out your income tax return.

As a general principle, if you are using any of your income for living expenses, at least that amount of income will be reported and possibly taxed. If all of your income goes toward qualified expenses like tuition, you probably won’t end up paying tax, but you will need to do the math on the proper forms to be certain.

Further reading: Grad Student Tax Lie #1: You Don’t Have to Pay Income Tax

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.

 

Graduate Student Benefits

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Wellness

While not the case in every program, grad students often receive free or subsidized health insurance and gym memberships.

On-Campus Entertainment and Socializing

Your student ID will likely give you access to all kinds of subsidized or free on-campus entertainment and socializing, such as happy hours, parties, sports, concerts, theater, etc.

Discounts

At on-campus and off-campus retailers, as whether they offer a student discount, especially for big-ticket items like computers.

Fellowships

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Frequently, PhD students will be supported for one or more years of grad school by training grants or fellowships. Training grants are given to departments to support incoming students while they are engaged with taking classes and doing rotations before committing to an advisor. Fellowships may be given by the university or an outside funding source and typically carry some prestige as well as possibly a higher pay rate. Both fellowships and training grants are typically considered non-compensatory pay because there is “no work requirement.”

Further reading: Stop Making Excuses and Start Applying for Graduate Grants, Scholarships, and Fellowships

Finding Fellowships

Before you enter your program, you should talk with faculty members, administrators, and older students to learn what type of funding you have been offered for the first and subsequent years and what additional funding you might apply for. Fellowship applications are often due in the fall for funding beginning in the next school year, so you may need to start your applications soon after arriving on campus.

In addition to university-based fellowship opportunities, there are many national-level field-specific fellowships available to students at different stages of their degrees that are catalogued in fellowship databases.

What if I have more than one fellowship?

It is not uncommon for students to receive more than one fellowship that provide stipends. In those cases, the funding agencies typically coordinate a schedule that will allow the student to use only one fellowship at a time and spread the funding out over more of the student’s tenure in grad school. These qualified students may have fellowship funding from the start of grad school to the end.

If I win a fellowship, what does my department give me?

If you receive a fellowship that alleviates your university of providing your stipend, particularly if it is prestigious and for multiple years, ask your department if they provide a bonus or supplemental pay to students who win that fellowship. If you are receive the fellowship during your application process, find out which schools would offer a bonus or supplemental pay and consider letting your top choice know what your other offers are. This is possibly the only opportunity a grad student has to negotiate compensation.

What happens when my fellowship ends?

If you receive a fellowship that provides a stipend that is higher than the base stipend of your department, be cognizant that your stipend may decrease significantly when your fellowship ends. Be proactive in using your excess income for those years to beef up savings or pay down debt instead of inflating your lifestyle.

Finding Fellowships

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There are many opportunities for graduate students to win fellowship funding for their own stipends, tuition, and/or research expenses. The fellowships often provide a stipend that is higher than what the graduate programs normally pay, confer a degree of independence to the recipient, and boost the recipient’s CV with their prestige.

Fellowships Databases

ProFellow is a large, comprehensive, user-friendly database of fellowships that individuals can apply for that provide funding both for graduate student and for work opportunities. You can find fellowships to fund your graduate work by choosing either ‘Graduate study’ or ‘Doctoral study’ under the ‘Fellowship Type’ search field. After you create an account, you can keep track of fellowships of interest to you by bookmarking them.

These comprehensive databases of funding opportunities will also help you find fellowships and grants that you are eligible for:

Broad National Fellowships

The fellowships included below are popular among early-stage graduate students because they provide a large number of fellowships each year to students in a range of disciplines.

National Science Foundation

Graduate Research Fellowship Program

Award: $12,000 toward tuition and fees and a $32,000 stipend for three years

Fields: a variety of fields within chemistry, computer and information science and engineering, engineering, geosciences, life sciences, materials research, mathematical sciences, physics and astronomy, psychology, social sciences, STEM education and learning research

Eligible years: college seniors and first and second year graduate students

Deadline: October to November 2015 (field-dependent)

Further Reading: Preparing an Award-Winning NSF GRFP Application

Department of Defense

National Defense Science and Engineering Graduate Fellowship

Award: tuition, fees, and 12-month stipend of $30,500 in the first year, $31,000 in the second year, and $31,500 in the third year

Fields: Aeronautical and Astronautical Engineering; Biosciences; Chemical Engineering; Chemistry; Civil Engineering; Cognitive, Neural, and Behavioral Sciences; Computer and Computational Sciences; Electrical Engineering; Geosciences; Materials Science and Engineering; Mathematics; Mechanical Engineering; Naval Architecture and Ocean Engineering; Oceanography; Physics

Eligible years: college seniors and first and second year graduate students

Deadline: December 11, 2015

Fannie & John Hertz Foundation

Hertz Fellowship

Award: tuition and $32,000/year for five years

Fields: applied physical, biological and engineering sciences

Eligible years: college seniors and grad students

Deadline: October 31, 2015

Notes: Must agree to a moral commitment.

 

Do you know of another national fellowship for a variety of disciplines or a great funding database? Leave the name in the comments and we will add it to the list.

Types of Investments and Basic Principles

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Risk and Return

In general, in investing there is a correlation between risk and return. Over the long term, being willing to take more risk generally results in a higher overall return.

Further reading: Risk-Return Tradeoff

Asset classes

The three primary asset classes are stocks, bonds, and cash. Within stocks and bonds, there are a variety of sub-classes. Within the stock asset class, you can have US vs. international, large-cap vs. mid-cap vs. and small-cap, growth vs. income, etc. Within the bond asset class, you can have various time horizons, risk ratings, and organization types. There are also more minor asset classes (alternative investments), which include commodities, real estate, etc.

Further reading: Stocks – Part II: The Market Always Goes Up

Asset Allocation

Your asset allocation is the percentage of your investments that are in each asset class or sub-class. You can create an asset allocation that reflects your desired balance between risk and reward. A higher-risk, higher-reward asset allocation would be heavier toward stock investments, while a lower-risk, lower-reward asset allocation would be heavier toward bonds and cash. Your asset allocation will reflect your personal risk tolerance as well as your timeline on your investment. Traditionally, an individual with a consistent risk tolerance will move her retirement investments from more aggressive to more conservative investments as she draws closer to starting to withdraw the money.

Further reading: 9 Common Investment Mistakes and How to Avoid Them

Active vs. Passive Investing

Active investing usually involves a lot of activity, such as picking individual investments and trying to buy low and sell high. Passive investing, conversely, applies a buy and hold strategy in which the investments are held long-term. A subset of passive investing is index investing, in which the investor holds a representative sampling of a subset of investments, such as the S&P 500.

Further listening: Planet Money Episode 688 Brilliant vs. Boring; Passive Index Investing is Boring. And it’s Spectacular., Stocks – Part III: Most People Lose Money in the Market