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The Tax and Retirement Effects of Receiving Fellowship Funding

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In this episode, Emily interviews Dr. Jamie Lahvic about her experience being funded by fellowship during grad school at Harvard and her postdoc at the University of California, Berkeley. Regarding the tax complications of being on fellowship and the lack of retirement benefits, Jamie and Emily outline the issues, discuss possible solutions, and suggest advocacy avenues for instigating change. Listen through the end of the interview for the Big Questions regarding the true nature of fellowships and employment.

Links Mentioned in the Episode

S14E3: Image The Tax and Retirement Effects of Receiving Fellowship Funding

Teaser

00:00 Jamie: Because I often felt, you know, in addition to like the confusion and the frustration and wondering what to do, that I don’t know, it felt like an emotional hit. I felt unvalued when I’m put into this weird little category where my earnings don’t make sense and I can’t open an account and I can’t figure out how to pay taxes. And I went on this really kind of rollercoaster from feeling like, “Oh, I’m a valued scientist and worker in this field,” down to like, “Oh, nobody really cares about me or the type of work that I’m doing.”

Introduction

00:38 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. This is Season 14, Episode 3, and today my guest is Dr. Jamie Lahvic. We discuss Jamie’s experience being funded by fellowship during grad school at Harvard and her postdoc at the University of California, Berkeley. Regarding the tax complications of being on fellowship and the lack of retirement benefits, Jamie and I outline the issues, discuss possible solutions, and suggest advocacy avenues for instigating change. Listen through the end of the interview for the Big Questions regarding the true nature of fellowships and employment.

01:43 Emily: If there are any prospective PhD students listening—and I hope there are—I want to point you to a new workshop I’ve been publishing in installments throughout this academic year, Set Yourself Up for Financial Success in Graduate School. Now that we’re in admissions season, the modules are getting really exciting and immediately actionable. The two most recent modules are titled “Decipher and Compare Your Offer Letters” and “How to Negotiate Your Stipend and/or Benefits.” One from last fall that you might want to check out as you’re evaluating the cities your offers are in is “Stipends vs. Cost of Living.” I sincerely want you to go into grad school with your eyes wide open regarding the financial realities and in the strongest financial position possible for the program you choose. I hope you will check out the workshop and enroll in the modules that will help you accomplish that. Go to pfforphds.com/setyourselfup/ for more information. You can find the show notes for this episode at PFforPhDs.com/s14e3/. Without further ado, here’s my interview with Dr. Jamie Lahvic.

Will You Please Introduce Yourself Further?

03:01 Emily: I have joining me on the podcast today, Dr. Jamie Lahvic. Super delighted to have Jamie here. We actually met at a conference last summer. I’m recording this in November, 2022. So, we met at the Graduate Career Consortium Annual Meeting, which was in July, 2022. We ran into each other during like a break or something, and we just started chatting and we had this electric conversation about funding, about fellowships, about benefits, about systemic issues that need to be addressed. And I just wanted to capture some of that magical conversation here on the podcast. So, Jamie, I’m super delighted to have you on. Will you please introduce yourself to the audience?

03:42 Jamie: Sure! My name is Jamie Lahvic. I am currently working as a Program Officer at the National Institute on Aging, where I focus on some policies as well as programs related to graduate students, postdocs, and early career faculty. But today I’m kind of excited to talk about my own personal experiences as a graduate student and then a postdoc. So, I went to grad school at Harvard Medical School studying biomedical sciences and then I moved on to UC Berkeley to do a postdoc in cancer biology. And I wrapped up that postdoc in 2021.

04:18 Emily: I’m really excited to see all these different perspectives from you being at a private university, a public university, now in government. Like, this is awesome! And I’m of course going to share some of my own limited experience as well. But we’ve both had some observations about these issues about the finances and the benefits and so forth that are offered to graduate students and postdocs as employees or as fellows. So, I want to, for the listeners just to introduce them. I have a framework, this is not necessarily the way that everybody talks about this, but in my mind there are sort of two broad classifications that graduate students and postdocs can fall into. One is as an employee. The way you know that you’re an employee especially if you’re a citizen or resident, is if you receive a W-2 <laugh> at tax time, that’s like really indicative that you’re an employee.

05:04 Emily: So, you have this employer/employee relationship with the university and that may cause different benefits and so forth to be offered to you. The other classification, a little harder to name, a lot of people use the term fellowship, but not only things called fellowships could fall into this classification. So, I broadly call it awarded income when your income comes from an award that you received. Could be certain types of grants, could be a fellowship, could be some other things. So, that’s the language we’ll be using. We’ll just say fellowship for shorthand, but that basically just means non-employee or at least under the, you know, the timing and circumstances of receiving that award, you’re a non-employee.

Switching Between Grad Student Funding Sources

05:37 Emily: Okay. With that clarification out of the way, let’s talk about, you know, your personal experiences, my personal experiences with being an employee and/or being a fellow during grad school and postdoc. So, we’ll probably take this like topically. What would you like to share? What you know surprised you about maybe switching between these two types of funding? What issues did they bring up? Go ahead.

05:59 Jamie: Sure. Yeah, so as a graduate student, I was never an employee. I was always either paid a student stipend coming straight from the university or then a fellowship stipend once I got an NIH fellowship. So there, it still was a really complicated process. I remember being very surprised first year as a graduate student to try to figure out how to pay taxes, how to pay estimated taxes every year. And it seemed to become more complicated every year, especially because once I got my fellowship, some of my money would come from the fellowship, some of it would come from the university. Those would come in separate paychecks. And then later on once I was teaching I would get a third paycheck to cover the teaching that I was doing. And throughout all of that, I never received a W-2. Every now and then I would receive a 1099 for the teaching, but they were kind of inconsistent in whether they would send that. So come tax time, I kind of never knew what I should even do. So, that was a big struggle.

07:01 Emily: Yeah. Let’s talk about the tax issue for a minute longer, because I mean, you probably know this is like part of the bread and butter of my business now because so many graduate students and postdocs are running into confusion around the tax issues. And basically, I mean we will link in the show notes some episodes I’ve done on this in the past, but it basically boils down to like when you’re an employee, your employer has certain responsibilities in terms of telling you how much money you’ve been paid and how much money they withheld on your behalf and so forth. And once you get into this weird non-employee status, they simply don’t have those legal responsibilities in the way that they do for employees. And so, universities take like all these different approaches. And you’re saying even within Harvard, different pools of money were being reported in different ways.

07:46 Emily: And so, yeah, of course, that gets confusing for the recipient when the vast majority of our like, I mean already the U.S. tax system is so complicated to navigate, but if you step outside of the simple like employee world, it gets even harder to find, you know, the support and the resources that you need. That’s part of why I do what I do. But yeah, tell me a little bit more about how you dealt with these like challenges or complications of not having income tax withheld, for example, or like the reporting inconsistencies?

Team Effort for Taxes

08:15 Jamie: Yeah, I think a lot of the students kind of banded together to help each other. I remember we had one really proactive student who would post in our year’s Facebook group four times a year saying, “Remember, pay your estimated taxes.” And I was like so grateful to get that reminder because I was so caught up in, you know, rotations and qualifying exams and whatnot. I just couldn’t think about remembering to do this. So, just having somebody send a reminder was amazing. And then we did a lot of talking to each other to try to fill out the forms correctly. I think I was a few years into graduate school when I found your website and some of your tips, and I remember that being just amazing and just feeling like that’s something that was, you know, it’s complicated but once it’s laid out it is relatively simple. It is the type of information that the university could have given us that they never really did because they wanted to stay away from giving tax advice and they’re not a certified public accountant, and that type of thing. So, it felt like the students were on our own to try and figure it out.

09:17 Emily: Yeah, I think that again, while the universities don’t have again this legal requirement to issue tax forms that make sense, or whatever, I do think it’s really helpful when they try to address this as much as they’re able to. And I mean, I hear a lot of pushback when I work with uni–not a lot. Some places I hear pushback like, “Oh we really can’t, you know, give tax advice and so forth.” And I try to kind of make the point like, “Well, you on your own or me, like we could talk about this without it being advice.” Like we can just talk generally about how estimated tax works and what these different reporting things that are going on are. And that’s what I do like with my quarterly estimated tax workshop. Again, we’ll link it in the show notes. And so, a lot of times universities contract with me to provide that because they feel like that shifts some liability off of them and onto me and they’re more comfortable with that.

10:07 Emily: But again, just giving a little bit of education and some reminders and tips and so forth is not, to me, giving advice, because really it is ultimately up to the individual to figure this out. Like I’m not sitting down with anyone filling out their forms, like they’re still doing that on their own. I’m just providing guidance on how to do so. So, I guess this is kind of turning into an ad but like if the listener <laugh>, if you listeners are on fellowship and you want your university to help you, tell them about what I offer, because they may feel more comfortable working with me then doing this, you know, with an internal employee who, you know, might expose them to some liability.

Added Hardship of Inconsistent Tax Reporting

10:41 Emily: Okay. Estimated tax and reporting stuff, all a difficulty of being on fellowship. Anything more you’d like to add about that? Or should we move on to a new talking point?

10:52 Jamie: I just thought it, you know, in addition to kind of the confusion, it can sometimes cause real hardship. Like for me for instance, I didn’t receive a 1099 for my final chunk of teaching that I did in my like final year as a graduate student. And so, in between doing that teaching and like the spring and into summer semester, I got a postdoc. I moved across the country, I had started a whole new tax, you know, qualification as an employee there. And then when it came time to do taxes, I honestly completely forgot about the money I had gotten paid in the previous spring. Because I never received any kind of 1099, any kind of documentation, and I just didn’t pay taxes on it. And I think I like woke up in the middle of the night sometime like three months later and went like, “Oh my god, I made like thousands of dollars <laugh> that I didn’t pay any taxes on.” And then like on my own, I had to then figure out how to adjust my taxes. I had to pay a penalty for the amount that I, you know, had failed to pay previously. And at the time, like I had just spent all of this money to move cross country. I was making a postdoc salary. Like I really didn’t need to be paying any extra penalties on my taxes for that type of thing.

Potential Changes at the University Level

12:04 Emily: Absolutely. I mean, good for you for doing the amended return and everything, because I know some people will just kind of let it go after that point. But you really don’t want to let it go like multiple years and then have the IRS, I mean I know it’s rare, but it can happen that they can come after you, and then it’s an even bigger problem. So, good that you took care of it. But I think kind of what we’re saying here is just like communication, <laugh> communication is helpful around this topic. So, we’ve talked about this problem, various problems related to taxes. What are some things that could change at the university level, state level, federal level, whatever it is, to alleviate these problems?

12:41 Jamie: I mean at the university level, my understanding is that even if you’re not an employee, the university can still give you a 1099 for the money that you’ve made, and that universities, as far as I know, kind of choose whether or not to go through that step and send out those 1099s. So, I think that’s a major thing that just having a very clear document makes filing your taxes easier. You know, that’s something that like TurboTax and similar basic tax filing software knows how to work with. So, I think that would make a huge difference for a lot of students.

13:12 Emily: So, I actually did experience this during graduate school, so I’ve had a couple periods of my life where I was on fellowship. But when I was at Duke, Duke actually did manage to withhold income tax on behalf of at least me. I don’t know if every type of fellowship it was available, but at least for me, about half my years I was on this like non-employee kind of income. So, they were able to withhold on my behalf, and they did issue a 1099-MISC (Miscellaneous) at year’s end. So, that helps with like the problem you just identified of like, you know, a year and a half goes by and you’ve forgotten about some chunk of your income. Yes, that does help with that problem. The issue that it causes <laugh> is that the 1099 is most widely recognized as a self-employment income kind of document.

13:59 Emily: And so, then there’s, I feel like there’s even more burden on the recipient to properly communicate what this is with their tax software or their tax preparer. So, if they know to do that and they know that they’re not supposed to pay self-employment tax on this income, then it can work out. As a reporting document, it’s okay, but I would say, you know, nine times out of 10, people don’t know that it’s not self-employment income or maybe they know that, but they don’t know how to communicate that. And they don’t check that, they don’t understand how it’s going to affect their return. Anyway, so it can cause an even bigger mess. So like, I hesitate to say that that is the best solution. I mean really to me, I would say the 1098-T is the best form that we have as of now.

Reflections on an Adjusted 1098-T and Streamlined Tax Reporting

14:50 Emily: Although I would love it if there was just an adjusted 1098-T or a different kind of form that really could fully reflect the fellowship like situation. Because again, the 1098-T, while it’s used by many universities, they’re not required to issue one if you have more of this box five grant income than you do box one, like the educational expenses and charges. So, if they would just issue it all the time, I think that would be helpful. But even going beyond that, like this is now like a federal level kind of thing. Like if there were a different form or the 1098-T itself were somehow different, that would be even more clear.

15:26 Jamie: Totally. Yeah. Yeah, and I know anecdotally, I eventually switched over from like the TurboTax software to I think FreeTaxUSA that has a great little box to check that said you know, is this income, are you like, are you a graduate student or postoc rather than an undergraduate? Because I think it’s typically with that 1098-T where they’re trying to like not take out taxes on the portion that you’ve used to cover scholarly expenses, which applies to like an undergraduate who’s receiving, you know, tuition reimbursement, but not to a graduate student. So, I could imagine at the federal level, you could create a little box like that on the 1098-T, right? To check here if this is a graduate or postdoctoral level fellowship, right? Or check here if this money is not being used to cover tuition and scholarly expenses. It would be nice.

16:20 Emily: I think this is both like maybe a reporting option at the federal level, but also it comes down to the university level and how, like which department is the one that’s like processing these paychecks. And you are, like saying how you did about your various different incomes from Harvard, that indicates to me that like maybe payroll was issuing some of this, maybe financial aid was issuing some of this. And like having these different siloed departments separated from one another communication-wise means that things are not streamlined and you get different types of forms and maybe for you, maybe you were on different pay schedules for, you know, different sources. Yeah. So, having like a single department that handles like all, you know, income for graduate students and postdocs, whether it is payroll income for employees, whether it is, you know, non-employee income, that might help. I don’t know, maybe that’ll cause other problems too, but like right now, again, the universities are not really set up to handle this in a streamlined, or at least, I don’t want to say broadly. Some universities are not set up to handle this in a streamlined manner. Maybe others have it a little more figured out. I don’t know.

17:23 Jamie: I know actually when I got paid at UC Berkeley, it was more like that. So there, I was eventually on a fellowship as well, but I received one paycheck per month. And it was kind of interesting because, you know, I would receive my lump monthly salary or stipend from the fellowship, but only a little portion of that would get taxed. So, there would be like a little tiny bit of tax taken out, and then the rest of it was untaxed. But it at least came to me on like one single paycheck where it was very clear how much tax had been withheld, and then I could run the numbers when it came time to pay the estimated taxes on the rest.

17:59 Emily: So, it sounds like you were still receiving a pay stub. Even though a portion of this is employee. Yeah, that’s perfect. I mean, I kind of always tell people who are employees like, “Okay, look at your last pay stub, even before you receive your tax forms. Look at your last pay stub.” Maybe you have to access it through your payroll system or whatever, but you can find out how much tax was withheld. But again, those pay stubs are not generated usually if you’re a non-employee. But it sounds like Berkeley has this figured out, so I’m really happy to hear that. I would, yeah, I would love to be able to come up with like, I don’t know best practices, like which universities are using the best practices. So like, Duke has something figured out over here, Berkeley has something figured out over here. Like, I don’t know, maybe there’s a way to again, promulgate these best practices among these different universities and financial whatever, backend stuff.

18:44 Jamie: Yeah, and you know, I think great groups to kind of connect to for that are unions. Within the UC system, we have a strong postdoc union. And I think they had done a lot of pushing, you know, both on how much you get paid, but also a lot of these minute policies about how you get paid. And so I wouldn’t be surprised if the more streamlined system came about because of pressure from the union. And I’d be interested to know what other, you know, grad student unions and postdoc unions are where they’re having successes.

19:13 Emily: Yeah, I’m super glad to hear that. Exactly. Like sort of giving a voice to these, well, you might not know, but the downstream effect of this like decision that you’ve made, the way you’ve set up the system is it’s causing these problems.

Commercial

19:28 Emily: Emily here for a brief interlude! Tax season is in full swing, and the best place to go for information tailored to you as a grad student, postdoc, or postbac is PFforPhDs.com/tax/. From that page I have linked to all of my tax resources, many of which I have updated for tax year 2022. On that page you will find free podcast episodes, videos, and articles on all kinds of tax topics relevant to PhDs. There are also opportunities to join the Personal Finance for PhDs mailing list to receive PDF summaries and spreadsheets that you can work with. The absolute most comprehensive and highest quality resources, however, are my asynchronous tax workshops. I’m offering four tax return preparation workshops for tax year 2022, one each for grad students who are US citizens or residents, postdocs who are U.S. citizens or residents, postbacs who are U.S. citizens or residents, and grad students and postdocs who are nonresidents. Those tax return preparation workshops are in addition to my estimated tax workshop for grad student, postdoc, and postbac fellows who are U.S. citizens or residents.

20:43 Emily: My preferred method for enrolling you in one of these workshops is to find a sponsor at your university or institute. Typically, that sponsor is a graduate school, graduate student association, postdoc office, postdoc association, or an individual school or department. I would very much appreciate you recommending one or more of these workshops to a potential sponsor. If that doesn’t work out, I do sell these workshops to individuals, but I think it’s always worth trying to get it into your hands for free or a subsidized cost. Again, you can find all of these free and paid resources, including a page you can send to a potential workshop sponsor, linked from PFforPhDs.com/tax/. Now back to the interview.

Advocacy Avenues for Grad Students and Postdocs

21:28 Emily: The last kind of question in this area, and you just mentioned one of the advocacy avenues: unions. Can you think of any other advocacy avenues that graduate students and postdocs might be able to use to make these kinds of changes that we’re talking about?

21:45 Jamie: I mean, even outside of a formal union, I’ve seen a lot of success from graduate students and postdocs just banding together and working together on these things. Whether that is kind of peer-to-peer advice and providing resources, or working together as a group to request something from your department, from your university. You know, I have so many memories of like trying to do my taxes, trying to fill in the forms, and getting like frustrated and upset and not knowing what to do. And I think like you have peers who can help you through some of those things and at least to help you feel supported.

22:25 Emily: Now, I don’t know exactly what avenue this is, but I have noticed over the years that I’ve been studying federal taxes for, you know, as in how they affect graduate students and postdocs, that there have been changes. The 1098-T has gone through actually a big remodel in the last few years. The Kiddie Tax went through a slight change with the Tax Cuts and Jobs Act. So, there have been other changes that have been made that makes me realize that changes possible. Now, I don’t know what the avenue is for letting someone know, <laugh> that you want a change to happen. Maybe it’s contacting your representative or your senator or whatever. We can talk about some of the advocacy around like retirement stuff that happened a few years ago in a moment, but the change can happen. I’m just not clear exactly how you communicate, you know, this advocacy at the federal level.

23:09 Jamie: Yeah, that’s a good question. I mean, I know I’ve been on like the IRS website looking for like from their resources, like what is their advice for people in these situations. And what I found was only a few lines, right? Like not a lot of detail. So, I would love to see, you know, coming directly from the IRS some more clear advice around these types of situations. And I do know that government agencies put out things like RFIs, requests for information, and they do have various sort of feedback channels, so trying to find those for the IRS or for your state tax departments could be one way to go about it.

(No) Access to University Retirement Accounts

23:48 Emily: Okay. Future project for me. Okay, well I just alluded to retirement accounts, so let’s talk about that next. What’s been your experience with being offered or not being offered access to university retirement accounts?

24:01 Jamie: Sure. So, as a graduate student, I didn’t have any option for any kind of retirement account. And my understanding was that from legal sort of tax reporting purposes, I wasn’t able to open an official retirement account. So, in graduate school I was making like just enough money to save up a little bit and I did start buying like some mutual funds with that. And then as a postdoc, I did have a retirement account offered. However, I started out by like not really contributing very much to it at all because I was living in this really high cost-of-living area with not a lot of income. And then I actually found out as I was going through the fellowship application process that I was going to be losing that retirement contribution once I got a fellowship coming in. So then I sort of, at the last minute just before my fellowship came in, I like maxed out all my contributions as best as I could for like the last few months and tried to top it off. But then the fellowship came in and those accounts kind of sat stagnant for the rest of my postdoc. So, that was a frustrating thing to see. And it’s definitely been really nice now for a little more than a year I’ve been in, you know, a real job with very solid you know, federal government retirement accounts. So, that’s been nice to watch those finally like properly growing.

25:26 Emily: Yeah, it’s been my observation that if you’re not an employee, you do not have access to the 403(b) or 457. I actually don’t know why this is the case, but I’ve never seen an exception to it. Like yeah, I guess it has to do with like the rules behind what kinds of money can be contributed to a 401(k) or a 403(b), 457, these kinds of accounts. What I mentioned earlier, and you probably know this is, at the end of 2019 with the SECURE Act, there was a definitional change. So, 2019 and prior, fellowship-type income not reported on a W-2 was not permitted to be contributed to an IRA, an individual retirement arrangement. But that definition of what kind of money is allowed to be contributed to an IRA was changed by the SECURE Act.

26:18 Emily: And so 2020 and forward, you can contribute fellowship income not reported on a W-2, if you’re a graduate student or postdoc, to an individual retirement arrangement. I don’t know why a similar definition change could not occur for 403(b)s, 457s, et cetera. I just know that I’ve never seen it. I’ve never seen a non-employee be offered access to that particular benefit. Furthermore, at the graduate student level, it’s just very, very rare. Not totally unheard of, but rare, that a graduate student employee is offered access to those accounts. It does happen from time to time, but usually not. I’ve had a couple podcast episodes, and we’ll link in the show notes, where people have talked about as a graduate student contributing to those types of accounts. But again, it’s not common.

27:00 Jamie: I didn’t know actually about that change to the SECURE Act. Like I was still a postdoc in 2020 and I had had that IRA that I had opened like just before my fellowship started. But yeah, I definitely wasn’t contributing to it in 2020 and 2021. I had no idea that that was a possibility.

27:17 Emily: Yeah, I don’t think it was, I mean I talked about it a lot, but just like generally speaking, people make that assumption, right? That graduate students and postdocs are usually not able to contribute to a retirement account. So, why would we even have the conversation about whether they’re allowed to or not? Thankfully, someone was having the conversation because there was a change, right? Because I mean I remember that Senator Elizabeth Warren was a sponsor of this bill. There were other co-sponsors. It came up multiple times in the Senate and the House and it just never passed, multiple years, until it was rolled into the SECURE Act. There were a lot of other changes going on with how retirement accounts were being treated. So, it was kind of rolled into that and I’ll link in the show notes a couple of episodes we did right around that. But again, people make these rules. So, if people at the federal level decided that graduate student and postdoc non-employee income was legitimate in whatever, you know, little tax benefit they’re trying to offer, then it could become legitimate and maybe universities also would follow suit and start to offer that benefit. I actually don’t know why graduate students would be excluded from 403(b)s and 457s. Does it cost the university anything? Like a little more administrative burden to extend those benefits? I honestly don’t know why they wouldn’t for those students who can.

28:34 Jamie: Yeah, especially if it’s not a question of matching, if it’s just a question of contributing your own earnings into this account, right?

28:41 Emily: We can dream, Jamie, that there would ever be a match <laugh>. That’s a couple more steps down the road. No, some postdocs do receive matches or actually, I don’t know about you for being a postdoc in the UC system, but the UC system has a defined contribution level for their employees. I don’t know if it applies to postdocs, but in any case you might get that as an employee and then lose it if you, you know, then switch over to fellowship at a non-employee.

29:06 Jamie: Yeah, I believe in the UC system, I never got any kind of match, but I did have access to that 403(b) as well as I think a DCP.

29:15 Emily: Yeah.

“Non-Employee” Fellowship Income Legitimacy

29:16 Jamie: But yeah, I think it’s interesting that you describe it as like the legitimacy of being an employee and the legitimacy of that income. Because I often felt, you know, in addition to like the confusion and the frustration and wondering what to do that, I don’t know, it felt like an emotional hit. I felt unvalued when I’m put into this weird little category where my earnings don’t make sense and I can’t open an account and I can’t figure out how to pay taxes. I remember having like some really sharp juxtapositions between attending a professional conference and like giving a talk and talking to PIs in my field and having people really excited about the work that I was doing and then coming home a week or two later and trying to figure out some of my financial life and it being so confusing and seeing that there was just no support set up for it. And I went on this really kind of roller coaster from feeling like, “Oh, I’m a valued scientist and worker in this field,” down to like, “Oh, nobody really cares about me or the type of work that I’m doing.” So, I think it can have an emotional hit as well.

30:24 Emily: I’m so glad that you shared that. I think this is how we started our conversation at GCC actually, that fellowships and similar kinds of awards are supposed to be so prestigious.

30:35 Jamie: Exactly.

30:36 Emily: It’s supposed to be such an honor. It’s supposed to be based on your merit that you’ve received this. And yet the downstream effects are, well now you’ve been unclassified as an employee and your benefits are reduced. And I don’t know, maybe at some point in the past, the money made up for it. Like maybe you could make more as a fellow, which could make up for some of these issues. But I don’t know that that’s so much the case now. I was actually just seeing on Twitter today that like, you know, fellowship awards on certain grants are set at such a level that they’re below the minimums the universities have to pay their own graduate students and postdocs. So it’s like, well if you’re not even making more and the university has to make up some deficit in the award that you’re receiving, like what is the point of this when it has these negative implications later on?

31:27 Jamie: Yeah, absolutely. I mean I think the point for, well you know, it’s a point for your PI, right? It saves them some money out of their budget, and otherwise it’s a line on your resume. You got this prestigious award, congrats. Here’s some prestige. Right?

Inherent Value of a Fellowship

31:44 Emily: This almost reminds me of like, I don’t know, I’m thinking like crypto, like a currency. Like it only has value because we’ve decided it has value, it doesn’t have inherent value. If it came with more money that would be inherent value, but would it still be actually worth it? How much money would it take to make up for some of these deficits that we’re talking about?

32:04 Jamie: That’s a good question, yeah.

32:05 Emily: Right. So like, not only is it maybe the retirement stuff that we mentioned. Now on the tax front, you’re not necessarily paying more in taxes, it’s just more difficult. But I will say there are certain tax benefits I know at the federal level that you’re not eligible for if you have only this non-employee kind of income. So for example, the earned income tax credit, which is supposed to be for low-income individuals, usually with children, multiple children who are not making enough money, they have to have “earned income.” And under that definition, as of now, 2022, fellowship income is not considered earned income. So, you can’t get the earned income tax credit. You also can’t get the child and dependent care tax credit, which was so valuable in 2021. It was massively increased in 2021. You can’t get it if, let’s say even if you’re married to someone else, let’s say I ran into this situation literally I had a question from this married couple, both postdoc fellows, could not take this tax benefit because they did not have earned income under the definition. Now, graduate students can take it because students have an exception. But postdocs, everybody forgets about the postdocs!

33:08 Jamie: Everybody forgets the postdocs, it’s true!

33:11 Emily: Postdocs don’t have this exception <Laugh>. Everybody forgets that postdocs exist and yet for some, in some career paths, you can spend just as much time as a postdoc as you will as a graduate student, maybe even if not more. It’s a very important life stage. There’s family formation going on, and yet they’re excluded from some of these benefits. And like we were just saying, it comes back to is this fellowship income considered earned income? And that term earned income is used all over the tax code or the way the tax code is interpreted. Now, it used to be used for retirement account contributions, then the term was changed, taxable compensation, then the definition of taxable compensation was changed to include fellowship income. So, why can’t this term earned income be changed to include this type of income? I think this brings up a bigger, even bigger, bigger question though, which is like what is earned income?

Earned Income: Great Expectations

34:04 Emily: What is the responsibility that you have when you receive this non-employee income? What’s the responsibility that your employer has to you or your non-employer has to you? What’s the responsibility you have to your non-employer? So, if you’re an employee, you’re expected to work and produce certain outputs, whether it’s teaching, research, whatever. If you’re receiving a fellowship, it’s much less clear what the outputs are supposed to be. You have to have outputs to continue to be on the fellowship. But what are they exactly? And I think that lack of definition is what’s going into this earned income, not, you know, fellowship income not being considered earned income.

34:39 Jamie: Yeah, no, I think you’re right about that and I think that’s how this ties into kind of bigger labor questions, right? About our graduate students. Should they be classified as employees? Are they workers or are they students? And these are, you know, big things that have big implications across the U.S. and especially for universities on not just tax status but on a lot of things about how academics do their work and how academics get paid.

35:08 Emily: I’m so thankful for this conversation because it’s really like stretching me to think about these like bigger issues exactly as you were just saying. Whether we’re on fellowship or whether we’re employees, is there actually a difference there? Why are these differences encoded at the university level, at the federal level, state level, if they don’t have much meaning to us at the functional day-to-day, month-to-month, year-to-year. I know I mentioned earlier about half my time as a graduate student was spent as an employee, half as a non-employee. Functionally, what is the difference between what I was doing one year versus another year? It felt all pretty much the same to me.

35:45 Jamie: Yeah, and I think I remember it being sold to me as if you receive a fellowship, you have more independence from your PI because you’re bringing in your own money so you can be more independent in, you know, what experiments you do or how you drive your project. But in actual experience of my own or talking to other people, their level of independence was really just dependent on their PI and how that PI ran their lab. And I didn’t know anyone who was able to be more empowered because they had the fellowship or were able to push back on PI demands because of the fellowship.

36:22 Emily: I did see people who received fellowships be able to switch labs when possibly that wouldn’t have been the case otherwise. They were more attractive to that PI like accepting them. And they could, you know, take some time to get up to speed or whatever, again, without some maybe output expectations of being on a different kind of grant or whatnot. But I think you’re right, you know, we’re both kind of speaking coming from like the biological sciences kind of research. There’s so much overhead, there’s so much cost to that. How much money is the student really bringing in versus how much is their research overall costing the PI and the university? And so, if that ratio is not that great in the student’s favor, I don’t think there’s much independence that they can advocate for. Now, if your cost of doing research is like pretty much only your salary if you don’t have those kinds of overhead from doing like wet lab experiments and so forth, then maybe there’s a better argument here about independence from the PI. And I think in the humanities fields, some of them, at any rate, my understanding from talking with people is that like they have a lot more independence anyway in their research questions. And so a fellowship could be even more in that direction. But, yeah, I do think this is very, very field dependent.

37:32 Jamie: Yeah, I think that makes a lot of sense.

Future of Research

37:35 Emily: Well, this conversation has been so invigorating. Is there anything else that you want to share about your experiences or your observations or advocacy avenues that we can encourage listeners to take?

37:46 Jamie: I mean, I always love to tell people to check out the organization Future of Research. I used to serve on their board of directors and it’s a really great non-profit that kind of helps students and postdocs come together and crowdsource information and advocacy plans and push the field of research forward from the point of view of these early-career folks.

38:08 Emily: Excellent. And we will link in the show notes an interview that I did with Dr. Gary McDowell, the former director of Future of Research where we talked about post-doc salaries and post-doc work environments and how to, you know, choose a supportive PI and these kinds of questions. That’s excellent. Well, Jamie, I’m so glad that we got this interview out on the podcast that it didn’t just have to stay in the halls of the GFF conference, but that’s where great ideas are born with these like mixings and so forth and it was great to meet you in person and yeah, to be able to record this for the podcast listeners. So, thank you so much for coming on!

38:44 Jamie: Thanks, it was wonderful talking to you!

Outtro

38:51 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

How This Grad Student Fellow Resolved an Expensive Tax Bill in His Favor

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In this episode, Emily interviews Matty Dowd, a sixth-year PhD student in history at Princeton. Matty openly shares with us the tax horror story he lived for most of 2021 and into 2022. In 2018 and 2019, Matty reported his fellowship income as “other income” on his tax returns, which caused the IRS to mistakenly think that he owed self-employment tax. To compound the issue, the IRS’s snail mail communications never reached him. By the time Matty realized what was going on, the IRS thought he owed $16,000 in back taxes, penalties and interest. Matty reached out to multiple sources to help him resolve this, but ultimately used Emily’s workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), to explain to the IRS what had gone awry and have the issue resolved in his favor. It’s a harrowing story with a happy ending! You won’t want to miss Matty’s ending thoughts on the most effective way to approach tax and financial education.

Links Mentioned in the Episode

Image for S14E2: How This Grad Student Fellow Resolved an Expensive Tax Bill in His Favor

Teaser

00:00 Matty: I’ll be very honest and upfront to the point where it may be a little bit embarrassing for me, looking back at how I handled this throughout these years.

Introduction

00:14 Emily: Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs. This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others. This is Season 14, Episode 2, and today my guest is Matty Dowd, who at the time of the recording was a fifth-year PhD student in history at Princeton. Matty openly shares with us the tax horror story that he lived for most of 2021 and into 2022. In 2018 and 2019, Matty reported his fellowship income as “other income” on his tax returns, which caused the IRS to mistakenly think that he owed self-employment tax. To compound the issue, the IRS’s snail mail communications never reached him. By the time Matty realized what was going on, the IRS thought he owed $16,000 in back taxes, penalties, and interest. Matty reached out to multiple sources to help him resolve this but ultimately used my workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), to explain to the IRS what had gone awry and have the issue resolved in his favor. It’s a harrowing story with a happy ending! You won’t want to miss Matty’s ending thoughts on the most effective way to approach tax and financial education.

01:55 Emily: If you would like to sign up for the tax workshop Matty and I discuss during this interview or one of the sister workshops for postdocs or nonresidents, you can find everything linked from the Tax Center of my website, PFforPhDs.com/tax/. The first live Q&A call for this tax season will take place this Thursday, January 26, 2023. So, if you plan to file your tax return in January, I highly recommend joining the workshop now so you’re prepared with your questions by Thursday. You can find the show notes for this episode at PFforPhDs.com/s14e2/. As ever nothing you hear on this podcast should be considered tax, financial, or legal advice for any individual. Without further ado, here’s my interview with Matty Dowd.

Will You Please Introduce Yourself Further?

02:52 Emily: On today’s episode, we are going to talk about one of my favorite subjects, which is taxes, but we do not have such a cheerful story. My guest today is Matty Dowd. He’s a fifth-year graduate student at Princeton in history. And he’s going to be telling us about a tax debacle <laugh> that he walked into a few years back, and that has taken a few years to unravel. So, it’s going to be a really like involved story. But for those of you who are confused about taxes or worried about taxes, <laugh>, this might be a really great episode to listen to and to share because a lot of people make the same kinds of mistakes that Matty did, and they get amplified and he’ll tell us how to resolve it or at least how he resolved it. So, really, really glad to have you on, Matty. Would you please introduce yourself a little bit further for the listeners?

03:36 Matty: Sure. Thank you for having me on! It’s great to be here. Yeah, so my name’s Matty. I’m a fifth-year PhD student, as was said. I studied at Tufts University for undergraduate and then did a master’s at the University of Paris. So, I went kind of straight through in the academic path, which may or may not be relevant to the later <laugh> discussion. And then I also worked a bit on the side and kind of continued to have over the past several years a mixture of like hobbies and other small jobs, translating, working as a resident assistant as a tour guide, playing piano at churches, tutoring, and that kind of thing. So, sort of supplementing my income with other hobbies slash skills that were somewhat related maybe to my interests.

Funding and Tax Preparation 2018-2019

04:23 Emily: Well, Matty, I’m really pleased that you’ve joined us because you’re going to share a tough story with us, but I know it’s going to be really beneficial to a lot of people. So, just for listeners’ notes, we are recording this in April, 2022. I’m planning to publish this in early 2023, but we are talking about events that started back in 2018, I believe. And so, Matty, tell us like for tax years 2018, and then I think you did the same thing again in 2019: How were you funded during those years? And like how did you prepare your tax return in those years?

04:56 Matty: Sure. So, in 2018 and 2019, I was on a university fellowship, so through my university, through Princeton. And in part of 2019 I was on what was called an assistantship, which was a bit different because I was a teaching assistant or a preceptor as we call them there. So, there was a W-2 tax form generated for this income, the assistantship income, that is. Whereas for the general university fellowship, there was no tax withholding, there was no W-2 form. And I also earned some side income in some of those other hobbies I referenced at the time. So, that was what comprised my income during those years.

05:35 Emily: So, I understand there was no tax withholding on the, what I call this awarded income, this like non-W-2 fellowship/stipend/training grant. There are different words for it, but I call it awarded income if it’s not reported on a W-2. You said that there was not any tax withholding, but did it show up anywhere? Did it show up on a 1098-T? Did it show up on a 1099? Anywhere?

05:54 Matty: Nowhere.

05:55 Emily: Okay. So, no tax reporting whatsoever. This is actually a pretty common approach, and it’s frustrating, but anyway, go on. How did you prepare your tax return?

06:05 Matty: <Laugh>, I should maybe say quickly before I say this kind of in general about this story, I’ll be very honest and upfront to the point where it may be a little bit embarrassing <laugh> for me, looking back at how I handled this throughout these years. But anyway, so here it goes.

06:21 Emily: The listeners are with you, don’t worry. A lot of people are in the same situation. I was, too, when I was early on in grad school.

06:29 Matty: Alright. So, I prepared the tax return myself primarily during these years using online software that was sort of available, like file your taxes, free filing, et cetera. I also didn’t pay estimated quarterly taxes during these years, even though I should have. And so, I essentially treated this, I used the filing software to kind of generate a lump sum number for the awarded income that I would then pay around the time I filed my taxes. So, obviously, this was not the right way to do this for a number of reasons, but it’s what I did for 2018, for 2019, and what I was doing for 2020 until I realized that there was a problem. And the last thing I’ll say about this is that I reported, and this will get into what the bigger problem was, that I reported my fellowship income as other income on the tax return. And so, this is what was going to lead to big problems for me down the road.

07:28 Emily: I have to say, Matty, that I did the exact same thing when I was in my first few years of graduate school. My university, Duke, does things a little bit differently because at that time they did withhold income tax from my awarded income stipend. But they issued a form 1099-miscellaneous [MISC] with Box 3 income. And so, if you look at like the instructions, like you didn’t get instructions right because you didn’t get a form. So, good on you for even like knowing that this was even taxable income. So, actually you did something right from the beginning, which was reporting it <laugh> even though you reported it slightly incorrectly. Like if you look at the instructions for what I was dealing with, it says report it as other income if it’s not self-employment income, which this wasn’t. So, I did that. And it turns out that was wrong. For me, it didn’t get caught in the same way that yours did probably because of how it was reported. So, I didn’t have the same outcome, but I started down the same path that you did. So, you are definitely not alone. I still talk to people to this day who have read my materials and are asking me, do I report this as other income? The answer is no, and we will see why.

IRS Notices During COVID

08:30 Emily: Okay. So, you know, you sort of mentioned that you figured out when you are going to file your 2020 tax returns, so that’s early 2021, right? That, you know, these errors had gone on. But let’s back it up and talk about what was happening from the IRS’s perspective. So, the IRS receives your 2018 year, 2019 returns, they see this other income. What are they thinking, and what are they trying to do to reach out to you?

08:53 Matty: So, the IRS is beginning to send me notices from, I guess it was around actually the summer of 2020, that the IRS began sending notices about my 2018 tax year. And, the thing was, I received none of the notices. This was also going to be a big part of the story. The reason for that, there are really two reasons. The first is that I had moved out of my Princeton graduate apartment abruptly at the start of COVID in March of 2020. And so, I was living in Massachusetts with my family, my sister, and her fiance, just kind of waiting out early COVID, not sure what was going to happen. I didn’t think to change my address on file with the IRS at that time, which in my slight defense I think was a reasonable thing to not think of.

09:45 Matty: The second problem though, which also gets back to another important part of why those tax filing softwares aren’t great if you don’t use them in the right way, is that the IRS didn’t even have my correct apartment number because I had typed it in correctly on the website, which I was able to go back and check, but that website generates a 1040 tax return form, which I didn’t look at before I submitted it and it cut off my apartment number. So, it said I lived at apartment 40 and not 405. So, even though after I left Princeton, I had, you know, set up a mail service through the USPS, who I don’t even know if that worked <laugh> to forward mail at home. And had I been at Princeton, you know, I know the building manager, they may have seen the letter and kept it aside for me, but in any case, not having the right address on my file did no benefits for me as the situation went on.

10:41 Matty: So, basically, yeah, from the IRS perspective, I didn’t respond to months of deficiency notices regarding 2018. And so eventually after not hearing from me, they just assessed a bill on my IRS online account for basically $7,500 in underpayments, penalties, and then fees, interest rather, associated with the non-paid taxes, which I didn’t discover until preparing my 2020 tax return in May of 2021 because it was a bit delayed during that year. Because of COVID, you could do it in May. And I saw this charge on my online account and obviously was very thrown off and surprised by that.

11:23 Emily: Okay, so in a second, I want to get to why this massive charge existed because again, you had paid what you thought was your income tax, you know, or in those earlier years. But first, I just want to take a little sidebar to tell you that I had a very similar experience with the Virginia Department of Taxation. So, state-level taxes. I moved from Virginia to North Carolina when I started graduate school. So, I was like a part-year resident in each state for that year. And for whatever reason in the next year, Virginia decided that I owed them income tax even though I was paying tax in North Carolina. And I had been a part-year resident the year before, which they supposedly should have known, but they could not track me down because I had moved multiple times near graduate school. I did not set up mail forwarding, which you were like, that’s great that you even thought of it.

12:10 Emily: I did not do that. I also got married and I changed my name. So like, they could not find me to like assess me what they thought was their tax bill. So, ultimately, that bill went to collections and I like freaked out when, this was like years later, they finally sent to collections. The collections agency immediately found me because guess what? They use things like your phone number, which the IRS does not do. The IRS will strictly only use mailing addresses. And so, anyway, the collections company found me and I was able to quickly figure out that this was just a completely like fabricated bill. Like I had no responsibility for this, and it was very easy to get it cleared up, but it really freaked me out when it happened because like, I’m supposed to be like this responsible financial person and I’m like sent to collections over something.

Incorrect Characterization of Fellowship Income

12:51 Emily: Like it’s really, anyway, I just think it’s not great that in the, you know, era that we’re in with all these other modes of communication that we have that they still rely on physical mailing addresses, but they do. That’s the policy. So, you know, we have to deal with it. So like, good on you for setting up mail forwarding <laugh>. Too bad that the address was actually wrong and blah, blah, blah, all these other problems. So, that’s my sidebar. What I want to ask you about though is, so why did the IRS think that you owed this massive tax bill?

13:19 Matty: So, this goes back to how I had characterized the fellowship income. So, actually in reality there were a few problems with the tax return for 2018, even apart from the address. But the major one, and the thing that I think raised the attention of the IRS, was the fact that I had reported this as other income, which they thought that I needed to pay self-employment taxes on. And this self-employment tax assessment was not a part of the number, the lump sum number I generated from those filing tax softwares. That was something separate that I was going to have to figure out on my own. And so, this is what led them to send the initial deficiency notice, which again, I didn’t receive, but based on the kind of the timeline, I think I figured out, would’ve come in the summer of 2020 to Princeton, with an underpayment of about $5,500 that they thought that I owed in self-employment and hadn’t paid.

14:17 Matty: And then the penalty, which was in part a function of by how much I’d underpaid, I would think it was an $1,100 penalty because I had underpaid by over $5,000 and then interest on that. So, that’s what they were really after. And if I can just add, so I’ve sort of referenced this already, but I realized I had, you know, this was after I had filed taxes for 2019, a long time before. So I knew I had the same problem for that income that I had done in the same way. And I guess we’ll maybe get into this in the next question, I don’t want to jump ahead, but just to say the low point was that in June of 2021, I started receiving notices about the 2019 tax year for about the same amount. So at one point, the Internal Revenue Service thought that I owed them about $16,000 between taxes, penalties and interest. So, that was kind of the low moment, but yeah, I hope I didn’t anticipate <laugh> your later questions there.

15:23 Emily: No, that’s horrifying for a grad student, that’s what, like 50% ish of your income for the year?

15:30 Matty: Yes.

Did You Know This Was a Mistake?

15:31 Emily: So, was there ever a point that you thought maybe they were right? Or did you know from the beginning that this was a mistake?

15:38 Matty: So, I didn’t know from the beginning that this was a mistake because I didn’t really understand how this works. I didn’t have the vocabulary to understand it. This also maybe gets into a bit where I found your site helpful and maybe I’ll say a bit more about that in a minute, but it was not really understanding it. And so this week in May of 2021, as I’m realizing that I have this charge from 2018, I’m preparing the 2020 tax return, wondering what went wrong and how to do things the right way, that I began to realize about this sort of other income question about really the specific nature of how to manage these sort of awarded income from university fellowships that don’t generate any documentation associated with them. What I will say is that I did very early in the process reach out first to my parents and then to my parents’ accountant who was, I’m sure that she’s very competent, was very nice, but didn’t have experience with this and actually thought that I did owe them that money.

16:44 Matty: And so, I was actually encouraged by a tax professional to pay the money, and then she was going help me draft a letter to try to get the penalties minimized because it was my first mistake. But around the same time I’m reading the IRS site, I’m finding your website, Emily, and even though I feel like am I being too, you know, is this hubristic of me to think that I know more than the tax professional, but I really sensed that no, this really was a mistake in how I characterized the income. I don’t actually owe it. But it was an open question for a few days whether I was right or not. And then obviously a separate question as to whether the IRS was actually going to agree that I was right or not.

17:26 Emily: Absolutely. I think it is so hard for graduate students and postdocs and anybody with this like weird academic income, as you said, to kind of like challenge or like stand up to or like correct someone who you’re paying <laugh> to help you with this process. Like who’s supposed to be an expert, but like, yeah, the fact is that they may not deal with these types of taxes very often. They may like, whatever, like you said, they’re very nice. They’re probably very competent in many areas. Like for example, small business taxes is probably what she’s much more familiar with than fellowship income. And so she was going down a route of like, oh yeah, this was self-employment income and oh yeah, these are correct, you know, charges, but like we can get the penalty blah blah. That’s a fine thing if like, the whole thing was right from the beginning, but it wasn’t. So, I would love to hear more about how you like discovered and then worked with the IRS, like to clarify for them that this was actually fellowship income that you should have never even thought to report as like other income that, you know, we just went off the rails from the start with that reporting like type.

18:28 Matty: Yeah. Yeah. So, what I was able to find out right away once I saw the charge on my account online was I could download the transcripts and records of accounts from 2018. Because remember at this point I still had received no notices about it. This is just me logging on very casually one night in May of 2021 to see if I got a stimulus payment in 2020 that I had missed. So, that 2018 tax record or record of account and transcript, which you can I think normally download from past tax years, helped me to see what was actually at issue and to see why the IRS had labeled what they had as penalties. What I then did, the good piece of advice I got from the accountant was to call the IRS either late in the day or early in the morning to try to get through and talk to someone, which I did.

19:23 Matty: And for anyone who’s called the IRS, and I would do this many times over the succeeding several months, it’s quite an experience. You know, sometimes you get people who are very helpful and knowledgeable, sometimes you don’t. Sometimes it takes a long time. Again, I was still at the stage where I was learning about this and like figuring it out. And so again, it’s difficult sometimes you don’t understand what people are telling back to you. But eventually what happened through a few phone calls in the days after I made the initial discovery was I talked to an IRS agent who basically told me that I could fax, he gave me a fax number, and said I could fax an explanation of my situation to what he called the reconsideration department, which sounded like 1984, kind of scary style instructions. But that was the first time that I talked to someone where there was a kind of glimmer of, okay, maybe there is going to be some potential light at the end of this tunnel.

20:24 Matty: So it was, in talking to those agents, I came to realize a number of the mistakes, which I’ve already communicated to you and began to see a way out of beginning to resolve the 2018 tax issue. I was also though a bit uncertain whether I should also talk to them about 2019, if that would just be confusing. Was that going to be bad for me in some way? I was almost treating it as though, I mean, I don’t have much experience like with lawyers or with like a criminal case or something, but as though I didn’t really know how to best talk to the IRS about some of these issues. And yeah, but I guess that first piece of advice was the beginning of the rest of the story.

Commercial

21:11 Emily: Emily here for a brief interlude! Tax season is about to start heating up, and the best place to go for information tailored to you as a grad student, postdoc, or postbac is PFforPhDs.com/tax/. From that page I have linked to all of my tax resources, many of which I have updated for tax year 2022. On that page you will find free podcast episodes, videos, and articles on all kinds of tax topics relevant to PhDs. There are also opportunities to join the Personal Finance for PhDs mailing list to receive PDF summaries and spreadsheets that you can work with. The absolute most comprehensive and highest quality resources, however, are my asynchronous tax workshops. I’m offering three tax return preparation workshops for tax year 2022, one for grad students who are U.S. citizens or residents, one for postdocs who are U.S. citizens or residents, and one for grad students and postdocs who are non-residents.

22:19 Emily: Those tax return preparation workshops are in addition to my estimated tax workshop for grad student, postdoc, and postbac fellows who are U.S. citizens or residents. My preferred method for enrolling you in one of these workshops is to find a sponsor at your university or institute. Typically that sponsor is a graduate school, graduate student association, postdoc office, postdoc association, or an individual school or department. I would very much appreciate you recommending one or more of these workshops to a potential sponsor. If that doesn’t work out, I do sell these workshops to individuals, but I think it’s always worth trying to get it into your hands for free or a subsidized cost. Again, you can find all of these free and paid resources, including a page you can send to a potential workshop sponsor, linked from PFforPhDs.com/tax/. Now back to the interview.

Helpful Advice: Finding the PF for PhDs Tax Workshop

23:20 Emily: So, let’s continue then. So, how did you ultimately figure out that, you know, you should have explicitly communicated this as being fellowship income, and that that miscommunication was at the root of all these other issues?

23:34 Matty: So, I think this is really where your website and especially your workshop on the, I forget the specific title, like filing a grad student tax return and understand it too. Something like that.

23:47 Emily: Yeah, it’s How to Complete your Grad Student Tax Return (and Understand It, Too!). If anyone wants to find it, you can go to PFforPhDs.com/taxworkshop. I will have the 2022, presumably, version of that available by the time this comes out. So, yes, go on.

24:03 Matty: Yeah, so I, you know, I think I had maybe found on the IRS website some information about this as I was looking around, but the clearest statement of and the most focused advice for graduate students in the situation that I was facing at least, I mean, not so much, you know, when you’re two years behind the ball and facing what I was facing with the IRS, but with just filing a tax return in general–because I still needed to do the 2020 one at that time–was through your website. And so that’s, I think when it became clearest to me about this other income that this was what sort of my problem had been and finding the steps that I would need to do in order to to do the 2020 return, right?

24:56 Matty: And then also in the communications that I was to have with the IRS, by faxing them info about 2018, how I should sort of write my statement explaining what had happened. So, I think that workshop was, I mean, it was helpful on its face for just filing a sort of a normal tax return and understanding what you’re doing, but it also helped me to find the words to explain to the IRS in writing and then, which I also then backed up with other documentation that I faxed along with it, related to the 2018 issue.

25:32 Emily: So, it is interesting to me that you found the workshop. And as you said, the workshop is great for like preparing your this year’s current year’s tax return. It’s not designed to like ameliorate past issues, as you said, I’m <laugh> I’ll actually link in the show notes. It sounds like you maybe didn’t find this through a Google search, but my old personal finance website, which is evolvingpf.com, I actually published a couple of posts from people who had been in your exact same situation. They had reported their fellowship income as other income, the IRS thought it was self-employment, and I actually published their accounts as well, like we’re doing here on the podcast, of how they fixed the issue. And like even they included the text of the letter that they sent to the IRS. Would you actually be willing to share like an anonymized version of the letter that you sent, or is that too much information?

26:20 Matty: No, no. Yeah, I’d be willing to do that.

26:22 Emily: Okay. So, we’ll set that up in the show notes. So, by the time this is published, we’ll have that all ready to go. So anybody else who finds this podcast episode later and is in the same situation, can at least not have to repeat all this research that you did and like have sort of a model to go off of, as you said, to have even the language to explain to the IRS. It’s funny because when you’re filing a fresh tax return, you can just sort of report your taxable fellowship number on your tax return, and the IRS you know, in whatever, 99.999 cases is not going to come back to you and say, “Wait, was this really fellowship income? Blah, blah, blah.” But once you go down your route of you have misreported in some way and they’re suspicious about it, then you have to back it up with documentation. Like you probably sent in your award letter, I would imagine, that like uses the word fellowship. Yeah, go ahead and talk about that.

27:04 Matty: Yeah, yeah, no, so I did, I mean again, at that stage too, I was just trying to gather as much information that would be potentially helpful or would, you know, show that I was kind of legit in the case that I was making. So, I probably sent way more than they <laugh> needed or cared to look at. But I think I did include the award letter and then even maybe like, not a pay stub, but some kind of like summary of, you know, year-end summary that showed at least that I was receiving income from Princeton University as a PhD student. Yeah.

Patiently Waiting for 2018 Tax Year Resolution

27:47 Emily: Yeah. And so, did all of that like fix the issue? I understand this took several months, played out, but like this ultimately was effective. Yes. So like what was the final outcome?

27:56 Matty: Yeah, so actually maybe first, let me just say, so this was all, that initial fax was all about the 2018 tax year. But meanwhile, I knew I had this 2019 problem. I felt good about the 2020 return that I was doing, because again, I had used your website and your workshop and felt like I knew what I was doing for the first time. But for 2019, in speaking with, I’d also reached out to someone at H&R Block, local to Princeton. And their advice was basically to file an amended return for 2019 to try to anticipate if the IRS is going to probably come after me for that year because they’ll think I made the same mistake, to anticipate that by filing an amended return. That was one advice. The second piece of advice was then for me to figure out if I thought I owed anything to the IRS from those years to pay it as basically right away or as soon as I could.

28:56 Matty: And so, I did both of those things for 2018 and for 2019 and, in fact, I thought I calculated that I did underpay in fact, by a few hundred dollars. And so, paid that, basically. So, by the end of May or maybe early June, I was, from my perspective, totally paid up. I didn’t know what they were going to do in terms of penalties and how that was going to work. And then for 2019, I submitted an amended return, which you can follow online, how it’s being processed and you know, it’s supposed to take, I think six to eight weeks, and it was so delayed because of COVID. So, I never even got word that it was received. I was worrying, I sent it in by sort of USPS. I was worried I didn’t put enough stamps on the package.

29:43 Matty: Like just these kind of silly administrative things that hang over you as you wonder and hear nothing about it. But anyway, so at this point then I had 2018, all the faxed information, and then 2019, the amended return. And it’s pretty amazing. I sent all that in May, and I heard nothing from the IRS about the 2018 fax from May 12th until Valentine’s Day of 2022. So, nine months. I had heard every three months I would get a letter from them saying, “Hi, we’ve received your information, which was reassuring, but we’re very busy, we’ll get to it as soon as we can.” Meanwhile, though, so this is the reconsideration department. The collections department is saying, “Hey, we’re going to file a lien or levy against your assets,” because from their perspective, this was a case open and closed, and I didn’t pay it, I didn’t challenge it, I didn’t respond.

30:35 Matty: So, they are not being as let’s say generous, that’s not the right word. Like the other side, the reconsideration department can take as much time as they need to process it. The collections department is not giving me that option, even as I explained to them what’s going on. But they’re saying, well, how do we know you have a legitimate case? Which from their perspective, it’s understandable why they would take that position. So, as this is playing out and I’m hearing nothing and just waiting, which is really the dominant part of the story, it’s the waiting in between this really frantic week in May until February to begin to hear stuff about anything actually occurring with my cases. It was being in touch with the collections department who actually I mean, they didn’t force me to, but I was highly encouraged to sign a payment agreement with them to agree to pay the 2018 taxes with the understanding that once they got to my case, if it turned out that I had, you know, paid them any more than I needed to, they would refund me the money.

31:44 Matty: And because I was nervous about what might happen, I mean, I don’t have a ton of assets <laugh>, I just didn’t know what was going to happen the longer that I was getting these sort of scary notices, final notices, and that they’re going to go after me. So, that was sort of a long-winded answer. But the major process was again, waiting, hoping the reconsideration department and amended tax return will be processed, and in the meantime, as the clock is ticking, beginning to get more notices about both years and about my needing to pay.

Agreeing to a 180-Day Payment Plan

32:18 Emily: So, ultimately, did you agree to a payment plan? Or did you hold out long enough that the reconsideration department got around to it?

32:25 Matty: So, I agreed to a 180-day, I guess I’ll be honest, I’m not entirely even sure how it was supposed to work. I agreed to, at the start of July of 2021, to a 180-day plan. And then at the end of that, I was then supposed to have made an agreement on how I was going to pay, which would include, you know, either a big lump sum or certain monthly payments. But when I made that agreement in July, I was thinking, okay, six months, like the reconsideration department is going to get it. I was so naive when I sent in that initial tax, I was like waiting the next day to get a phone call as though someone was just going to be there and call me. And so yeah, so July 1st, I do that. Six months, still not processed.

33:13 Matty: So, this is like right around Christmas now. So, I think the day after Christmas, I’m calling the IRS. Again, it’s intervening at all these different points throughout this last year of my life and making an agreement to pay them starting in February, $86 per month, until this thing is processed. Thankfully, the Valentine’s Day letter arrived and then it was in that letter where they made the adjustment to the taxes that I owed. And once they did that, the plan that I had agreed to pay was canceled, was sort of null. And yeah, so I received the February 14th letter, which reduces the tax burden by like $5,500, which is what I thought. It takes away the interest that I owed on that. It keeps, it doesn’t specify this, but it continues to say that I have like about $1,100 related to that tax year, which was the amount of the penalty.

34:11 Matty: So, I was wondering, okay, are they still keeping that penalty? Is that the right amount? Given that I didn’t underpay by as much as they thought. And so, I tried to get in touch with them over the phone, impossible. I’m like, I know how this goes, I’m just going to wait for the next notice. We’ll see. But then the ultimate resolution for 2018 came about a week later, which was I got a letter from the United States Treasury with a check <laugh> for $172 for the 2018 tax year. And then the next day, a notice from the IRS saying, we’ve adjusted totally for 2018. Like basically you’re closed out. We owed you $169 and $3 and 2 cents in interest. So, that was kind of how the 2018 resolution came about.

34:58 Emily: It’s amazing actually how much COVID impacted your story, right? From the move that made you not receive any of the notices, to the IRS being just incredibly backed up. Like I know the IRS gets, like, everybody loves to hate the IRS, but like they’ve had a lot to do <laugh> over the past couple of years, but like delayed deadlines and like the stimulus payments and then the advanced child tax credit payments, like that’s a whole new thing. Wow. Sending out like basic income to some people. They’ve never had to do that before. So like, yeah, it makes sense. They have been incredibly delayed. Maybe in a different year if COVID wasn’t impacting all of this, you would’ve gotten a response within a month or two or three months or whatever. Maybe the timelines would’ve worked out. But it’s good to know that you were patient <laugh>, you tried to get them to be as patient as possible with you. You agreed ultimately to that monthly plan, which is like, I mean, $86 a month is like not, I mean, whatever, it’s something, but compared to the amount that you actually owed, that’s a very small fraction. Or not actually owed, but they thought that you owed. Yeah.

Amended 2019 Tax Return

35:55 Emily: Okay. So, we know the 2018 resolution. For 2019, did the amended tax return work, or how did that play out?

36:02 Matty: No, so the 2019, they started sending me notices about it in June of 2021 before having processed the amended return. Which was obviously what I was trying to avoid, but in discussions then over the phone with the IRS, I was in a better position, I think, in terms of my discussions with them for being able to say, “Oh, I filed an amended return before you sent me this. I paid what I think I underpaid before you sent me this notice, and here’s all of the information.” And basically included, you know, sent a letter back to them, which included everything that I had on the amended return, and then how I came to those numbers. And so actually as we speak now, I’m still in the late stages of that. Yeah, so it was the same tax office dealing with the issue.

36:56 Matty: I think once they got to it, everything just kind of worked faster. So, it’s at the point now where the tax that I owe has been deducted for 2019, and I mean, unless something radical changes in the next few weeks, then I will have received either a check from the treasury for some kind of small amount, or maybe I’ll owe them a little bit more, something like this. But basically the same resolution of you listed the income as other income, you didn’t need to pay self-employment taxes on that. So, that’s where the 2019 stands. And I’ve heard nothing about 2020, which I think means actually, I don’t know, maybe I’ll hear something soon, but I did follow the workshop and I know what I’m doing much more than I did at that time. So, I feel pretty good about that year.

37:46 Emily: Yeah. And by the time we publish this, I mean, you can send me an update, everything went fine, it was resolved, you know, essentially in your favor or, oh, no bigger emergency. Let’s record a follow-up <laugh>. Okay. So hopefully it’ll all go through the way you expect it to.

38:01 Emily: Emily here, breaking in from post-production to give you Matty’s follow-up. Everything turned out exactly as he expected for 2019. The penalty was eliminated, and he actually ended up receiving a small refund.

Key Takeaway Points for Listeners

38:14 Emily: So, let’s kind of summarize a little bit. Key takeaway points for the listener who might be freaked out and facing a huge tax bill. By the way, I just want to say like a rule of thumb, on fellowship income, let’s say if you’re paying to the federal government more than like, I don’t know, much more than like a 10% effective tax rate, something has gone awry in this like process. So like, self-employment tax is going to be 15.3% of your income. So, if you have like 10-ish percent plus 15%, if you’re up at 25% of an effective tax rate, you know that you’ve been hit with self-employment tax. So, that’s my key takeaway of just like a sort of sanity check on how much tax do you actually owe? Don’t pay self-employment tax if you don’t actually owe it. But let’s go to your key takeaways.

39:00 Matty: So, I think my key takeaways, one of them is the “(Understand It, Too!)” parenthetical in your workshop title, because when I think back to why I got into that situation in the first place and how I sort of struggled in those early days to figure out what the problem was, I think really one of the major issues was that my approach to filling out the tax return was I was looking for a formula to just kind of input information, not have to really think about it. And then kind of hoping that everything went well and figuring that, okay, if I don’t hear anything from them, then it’s probably fine. And I didn’t hear anything for two years after starting to handle my tax return this way. So, I guess one major kind of lesson would be to really try to understand what it is that you’re doing.

39:52 Matty: And it is frustrating and I would say that most places, most websites, even the IRS website is not especially well suited to starting at a low level of knowledge of financial issues. This was one of the things that I appreciated about your website, Emily, was because I felt that it was not just how to file the tax return, but it was sort of talking about it in a way for people who aren’t used to doing that. And I think this maybe gets back to my going straight through my not having really had another full-time job apart from being a graduate student, not having a familiarity with this process in another setting that made me want to just not deal with it. I was a busy graduate student, I just figured I would be fine and I wanted the easiest way, which was that tax filing software.

40:40 Matty: So, I think once you get over the fear of not understanding the confusing nature of sort of filing taxes and paying these kinds of taxes, then it became easier to know what the problem was and know how to communicate about it. And then the second one, maybe a smaller takeaway, but again, it was just to be sort of cautious about where you get and how you get tax advice from people who don’t have experience specifically related to the types of issues that graduate students with this awarded income are facing. Because I got advice from, you know, reputable people, reputable websites that led me to the filing software to, you know, almost not that I was close to paying the initial tax penalty as I had been initially recommended to, but I mean, that’s thousands of dollars of difference if I’d just gone along and done that.

41:35 Matty: So again, maybe that returns to the first point of if you sort of know or have a better sense of of what you’re doing with a tax return and treat it that way as opposed to just, again, a chore you don’t want to deal with, or a formula that you’re looking to kind of take a shortcut with. That’s the better way to handle it. And I’ll say, I mean, I’m not an expert. I don’t mean to sound now that I have gone through this as though I know and understand everything about taxes, but at least you kind of know a little bit more and you know where the problems are, you know how to communicate. And I think that was really important for me in reaching the stage that I have at this point with the tax process.

Building Tax Vocabulary and Communication Tools

42:21 Emily: I’m really, really glad to hear you say that, that my material reached you <laugh> in a way that made sense to you that other places weren’t, because that’s really what I have been striving to do with both, you know, what’s available free on my website, pfforphds.com/tax, and also through the tax workshops. I really do want to give you those, like the vocabulary and the communication tools because I’m sort of a fan of people preparing their own tax returns, like completely manually, but I understand that most people don’t do things that way. And so, I’m trying to give you the vocabulary to like translate between what you know about your own income and expenses as a graduate student, for example, and being able to talk to an accountant or being able to interface with tax software or talk to the IRS or whatever is needed to give you that like translation ability. Yes. So, I’m glad to hear that it worked out that way for you. Is there anything else that you’d like to tell us about this story as we’re concluding here?

43:13 Matty: I guess maybe to say, yeah, I hope this didn’t come off as, you know, me trying to sound like a victim of the IRS. I mean, I think there were some issues in terms of the timing, the way that it worked out, the really frustrating bureaucratic aspects of it. But I also, you know, I made some mistakes, too, throughout the process. And so yeah, I guess it was kind of yeah, I just hope it didn’t sound like me whining about the annoying, you know, scary IRS. There were some people that I talked to there who were quite helpful and, you know, I think the most important thing was just, as you said, kind of being able to find that language to communicate with them about the specific issues, and then kind of waiting out the process which you have to do when you’re dealing with something like this.

44:08 Emily: I think what we briefly mentioned earlier, but like we talked about this with respect to the accountant that you went to, but it’s also true for the people you talked to at the IRS. They’re way more familiar with self-employment income and small business income because there are so many small businesses in the United States who have, you know, some kind of trouble and turn to resources for filing their tax returns compared to graduate students and postdocs and other people with awarded income. It’s just such a more common situation. They want to fit you into a box, that’s what they’re familiar with. And so, you as a person receiving awarded income, I think should be kind of forewarned that that’s going to happen and be able to say to them, “No, I am very confident this is not contractor income. This is not self-employment income. I do not have a business. I received fellowship income or grant income or whatever it is.”

44:52 Emily: And so, to be able to firmly say that to them will help hopefully redirect them down the correct line of thinking and away from the most common scenario, which is this other self-employment stuff. So, I’m really glad that you brought that up. I also am glad that you mentioned that there is just a lot of waiting involved with these, you know, filling, you know, figuring out the transcripts and like submitting the amended returns and all of this stuff. Yeah, that’s kind of part and process with this whole process. So, we’re getting the very, very condensed version of the story, but obviously, it took like, well, it took multiple years for this to play out in total.

Best Financial Advice for Another Early-Career PhD

45:23 Emily: Okay, Matty, thank you so much for sharing this story. It’s really amazing. I hope it, you know, prevents people from going down the same, you know, the initial mistake and then the amplification of that mistake that you had to go through. So, I want to leave the listener with the question that I always ask my guests, which is what is your best financial advice for another early-career PhD? And that could be something that we’ve touched on in the course of this conversation, or it could be something completely new.

45:50 Matty: So, I’ll stick with a similar theme. I mean, part of me hardly feels in a position to offer financial advice after the story I told, but what I would say is that, and I think this is especially applicable maybe for PhD students, is that if you are learning about some kind of financial topic, taxes, things like this, that you should ask stupid questions if you don’t understand something. I think PhD students, I certainly am, are on guard against wanting to sound stupid in, you know, seminars around professors, you sort of keep to yourself, you hide the things that you don’t know and try to present yourself in as best a light as possible, which is understandable. I get that, but I don’t think it works well with dealing with some of these topics. And, you know, everyone says, well, there are no stupid questions or you’re probably not the only one with the question, which is probably true, but I would add that even if you are the only one with a question, and even if it is a stupid question, that it’s better to humble yourself at the stage of learning something than to risk kind of misunderstanding and creating a much bigger problem for yourself down the road.

47:00 Matty: So, I guess it’s a sort of maybe I wish that I’d had a little bit more humility to ask questions and rather than just go along and pretend that I understood something at different, you know, workshops about taxes or things that I had been privy to in the past to actually just ask. And, and from there, I would’ve been in a better position. So, that’s what I would say.

47:25 Emily: I really, really love that advice. And I’ll take one final opportunity to plug my workshop, How to Complete your Grad Student Tax Return (and Understand It, Too!), PFforPhDs.com/taxworkshop. What I really like about this format, which it’s now like all these prerecorded videos, that’s probably the version that you went through as well, is that you can watch these videos as many times as you want. You can pause them, you can Google a term if I didn’t define it properly or whatever. You can take your time to really understand what’s going on. And then if you still have a question, show up at one of the many live Q&A calls that I hold for this workshop and just ask it there, because frankly, like asking me what you consider to be like a stupid question, I can probably answer it in like five seconds and it might take you an hour of reading other material to figure out what it is about your, like, misunderstanding at base that made you have that question.

48:14 Emily: So like, it’s just so much more time efficient <laugh> to enroll in something like my workshop and have access to me to ask those kinds of questions or, you know, whatever, work with another professional, that’s fine. But to just as you said, be willing to do it and have a person you can go to to ask those questions. That’s what I’m trying to provide with this tax workshop. So again, Matty, thank you so much for this interview. I think it’s been a harrowing story but really, really illuminating. I know it’s going to help a lot of people, because you are not alone, as you said. I made the same error, like it just didn’t get amplified in the same way yours did, but I made the same error. A lot of people make the same error. So thank you so, so much for sharing this.

48:50 Matty: Yeah, thank you so much for having me and again, for the work that you do with the podcast and the website. It was obviously extremely helpful to me and I’m sure it is to many others. So, thank you.

49:00 Emily: Yeah, thank you for saying that.

Outtro

49:07 Emily: Listeners, thank you for joining me for this episode! I have a gift for you! You know that final question I ask of all my guests regarding their best financial advice? My team has collected short summaries of all the answers ever given on the podcast into a document that is updated with each new episode release. You can gain access to it by registering for my mailing list at PFforPhDs.com/advice/. Would you like to access transcripts or videos of each episode? I link the show notes for each episode from PFforPhDs.com/podcast/. See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing by Lourdes Bobbio and show notes creation by Meryem Ok.

How Fellowship Recipients Can Prevent Large, Unexpected Tax Bills

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In this episode, Emily details the steps that graduate students, postdocs, and postbacs who are switching onto non-employee fellowship funding should take to adequately prepare for next tax season. Fellows should set up a system of self-withholding starting with their first paycheck so they are prepared to pay their future tax bill(s). To avoid being fined for underpayment, fellows should assess whether they are required to pay estimated tax and do so if required. Emily has a workshop that walks fellows through these processes, which can be sponsored by your institutions.

Links Mentioned in this Episode

Image for S12E6: How Fellowship Recipients Can Prevent Large, Unexpected Tax Bills

Introduction

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance.

I’m your host, Dr. Emily Roberts, a financial educator specializing in early-career PhDs and founder of Personal Finance for PhDs.

This podcast is for PhDs and PhDs-to-be who want to explore the hidden curriculum of finances to learn the best practices for money management, career advancement, and advocacy for yourself and others.

This is Season 12, Episode 6, and today I don’t have a guest, but instead will detail the steps that graduate students, postdocs, and postbacs who are switching onto non-employee fellowship funding should take to adequately prepare for next tax season. Fellows should set up a system of self-withholding starting with their first paycheck so they are prepared to pay their future tax bills. To avoid being fined for underpayment, fellows should assess whether they are required to pay estimated tax and do so if required. I have a workshop that walks fellowship recipients through these processes, which can be sponsored by your institution.

You can find the show notes for this episode, including a full transcript, at PFforPhDs.com/s12e6/.

This episode is for you if all of the following are true:

  • You are a US citizen, permanent resident, or resident for tax purposes.
  • You are a graduate student, postdoc, or postbac at an institution in the US.
  • You recently switched or will soon switch to being funded by a fellowship or training grant that will pay your stipend or salary in full or in part. More specifically, because the name of this type of funding does vary by institution and funding source, this is income that will not be reported at tax time on a Form W-2. You are not considered an employee of your institution, at least with respect to this funding source.
  • Once you switch funding sources, you will not have income tax withheld from your paychecks. This is typically what happens for non-W-2 income, though there are rare exceptions.

If all those points describe you, please keep listening as what I’m about to explain is super important to your financial health! However, this podcast episode is for educational purposes only and should not be considered tax, legal, or financial advice for any individual. I am not a Certified Public Accountant or Certified Financial Planner. In this episode, I’m going to focus only on federal income tax, although in most cases what I’m saying applies at the state level as well.

I’ve just outlined the problem. You’re receiving income, but income tax is not being withheld from your paychecks. If you are not aware that this is happening or don’t know how to address it, you might be hit with a large, surprise tax bill and even a penalty once you prepare your tax return next spring. Every single tax season, I hear from graduate students and postdocs facing large, unexpected tax bills and they are desperate and panicking and it’s a really hard situation to be in. This podcast episode is one of my efforts to spread awareness of the tax complications that come with being a non-employee fellow so that no one else gets blindsided in this way.

Standard Employee Tax Liability

I want to back up for a moment to explain what most Americans experience with respect to their paychecks and define some terms so that we are on the same page about the unique situation that non-employee fellowship recipients are in.

If you are an employee, as you very likely have been at some point in your life, and you earn an income, you likely have a tax liability associated with that income. Your tax liability is the amount of money that you owe the IRS and possibly state and local tax agencies based on your income and some other factors like deductions and credits. Now, if you have a small income and/or lots of deductions and credits, you might have zero tax liability or even a negative tax liability. Pre-pandemic, 56% of Americans had a positive federal income tax liability.

Your employer helps you pay that income tax liability by withholding income tax on your behalf. So when you receive a paycheck, you don’t receive your full gross income, you receive your income less the applicable income taxes, payroll taxes, etc. Your employer sends this money to the IRS and it’s counted against your total tax liability for the year.

Each tax season, we prepare our income tax returns. That’s when you or your tax preparer or your tax software of choice fill out IRS Form 1040 and other forms to precisely calculate your tax liability for the year that just ended. The tax liability that you calculate on your tax return is compared to the amount of income tax that was withheld and sent to the IRS on your behalf. If the amount withheld exceeded your tax liability, the excess amount is refunded to you. If your tax liability exceeded the amount withheld, you will pay the balance when you file your tax return.

That’s the normal employer withholding situation that most Americans experience. But what if you are paid by a fellowship or training grant and your university or institute, who is not your employer, doesn’t withhold any income tax on your behalf?

Non-Employee Fellowship Recipient Tax Liability

Some fellows, upon seeing that no income tax is being withheld from their paychecks, think that their income is exempt from income tax. This is not the case. Fellowship income of the type I describe is taxed as ordinary income. Prior to tax reform in the 1980s, it was not subject to income tax, and I’m sure that’s part of where the confusion comes from. If you want a deeper exploration of the taxability of fellowship income, please listen to Season 2 Bonus Episode 1, “Do I Owe Income Tax on My Fellowship?”

So, your income is subject to income tax, but no income tax is being withheld from your paychecks. The natural outcome of this situation is that when you fill out your tax return next spring, you are likely to find that you owe some money to the IRS. How large or small the amount of money is depends a lot on your personal circumstances, but somewhere in the $1,000 to $4,000 range is pretty typical.

However, the IRS actually isn’t too keen on people owing large bills at tax time. They’d rather receive their pound of flesh gradually throughout the year. And, frankly, a lot of people simply wouldn’t be able to pay their tax owed if presented with a large, one-time bill. That’s why employers withhold income tax on behalf of their employees and send it off to the IRS incrementally throughout the year.

To resolve this issue for people who don’t have employers, like fellows, the IRS deployed the estimated tax system. The estimated tax system is a mechanism by which the IRS accepts income tax payments four times per year from anyone who might otherwise have one of these large outstanding bills at tax time.

PF for PhDs Tax Resources

With that background, what should a new fellow do to stay on top of their unique tax situation? There are two important steps to take.

We will dive deep into those answers momentarily, but first I want to point you to additional resources on this topic.

You can find all my free articles and podcast episodes on this topic linked from PFforPhDs.com/tax/. Most notably, check out my article “The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients.” It covers a lot of the same ground as this episode.

If you want some additional assistance, I recommend joining my paid workshop, Quarterly Estimated Tax for Fellowship Recipients. It takes you step-by-step and in great detail through the processes I’m about to describe, plus you have the opportunity to ask me questions during live Q&A calls.

If you would like to take this workshop, you can purchase it as an individual from PFforPhDs.com/qetax/. However, I also make it available to university clients at a discounted bulk rate. Please ask your graduate school, graduate student association, or postdoc office if they will sponsor this workshop for you and any interested peers, and point them to the link PFforPhDs.com/sponsorQEtax/.

Finally, if you are discovering this episode during the 2022 tax season or a subsequent tax season and you’re already facing a large, unexpected tax bill due to your fellowship, I recommend viewing two of my videos, “Why Is My Fellowship Tax Bill So High?!” and “What to Do When Facing a Huge Fellowship Tax Bill.”

You can find all of those pages linked from the show notes, PFforPhDs.com/s12e6/.

Step #1: Estimate Your Tax Liability

Now back to the two vital steps you should take at the point that you switch over to receiving paychecks with no income tax withholding.

Step #1 is to estimate your tax liability for this year and set up your system of self-withholding. “Self-withholding” is what I call this process, not necessarily what anyone else calls it. Basically, you are going to set aside the fraction of each of your paychecks that you expect to ultimately pay in income tax and save up those sums for when you have to pay your tax bills.

The first part of this step is to estimate your tax liability for this year so you know how much you’ll owe to the IRS and your state and local tax agencies, if applicable. Again, I’m just focusing on federal income tax in this episode. I know of two good ways to make such an estimate.

Method A: Form 1040-ES

Method A is the most accurate, and that is to fill out the Estimated Tax Worksheet on page 8 of IRS Form 1040-ES. I’m going to talk more about the Estimated Tax Worksheet in Step #2, but for now all you need to know is that it helps you estimate your tax liability for the current tax year. If you’re listening to this in real time, the 2022 Estimated Tax Worksheet is basically a high-level draft of your 2022 tax return. It will take into account the income and income tax withholding you had in the former part of 2022 and well as the income you expect to receive in the latter part. You will also factor in your expected tax deductions and credits for 2022, if any. The worksheet processes all of this information and in Line 14b presents the amount of your 2022 tax bill above whatever might have been withheld earlier in the year. If you’re married filing jointly, the worksheet incorporates both your information and your spouse’s. In a typical fellowship case, though certainly not every case, the fellow has some additional tax liability there in Line 14b, as I mentioned earlier, usually in the low 4-figures. Keep in mind for Method A that it is the most accurate estimate of the size of your tax bill, but it’s specific to the tax year you filled it out for. Once we roll into 2023 and subsequent years, if you’re still not having income tax withheld from your paychecks, you’ll need to fill out that year’s version of the Estimated Tax Worksheet for what specifically is going on for you in that tax year as soon as it’s available.

Method B: Income Tax Calculator

Method B is the fastest, and that is to use an income tax calculator. This is a good approach if you expect to have a super simple tax return, for example taking the standard deduction and no tax credits. I’d also say this method is better for single people, not married couples. The calculator I like best is from smartasset.com. Just search ‘smartasset income tax’ and it should be the first result. Because I’m keeping this approach really fast and simple, I actually suggest that you plug your 12-month fellowship income into the Household Income field. For example, if you’re starting to receive the NSF GRFP award in fall 2022, that’s $34,000 paid out throughout the 2022-2023 academic year. So even though you’re only getting part of that in 2022 and maybe you had some other income level earlier in the year, just put $34,000 in that household income field to get an idea of how much tax you can expect to owe over the first 12 months of receiving that award. Then, fill in the remaining details the calculator asks for and scroll down to the populated table. Looking at the federal income tax line will show you an estimate of your federal income tax liability due from your next 12 months of income. Method B is not going to be very accurate for your actual 2022 tax liability—Method A is better for that—but it is an easy way to get a decent number to use in the second part of Step #1.

Start Saving for Future Tax Bills

The second part of this step is to start saving for those future tax bills. If you used Method A, take that estimated tax bill and divide it by the number of fellowship paychecks you expect to receive in 2022. For example, if you’re paid monthly starting in August, that’s 5 paychecks, so divide your estimated tax bill by 5. If you used Method B, divide that 12 month expected tax liability by the number of paychecks you expect to receive over those 12 months. This is the dollar amount that you should set aside from each paycheck to go toward your future tax bill.

To actually, mechanically, set up your system of self-withholding, I recommend opening up a savings account that is solely dedicated to housing money that you expect to pay in tax in the future. Yes, you could keep this money in your checking account or a multipurpose savings account, but in my opinion it is way too easy to dip into this savings balance for another expense, whether intentionally or accidentally. When you open this account, make sure that you aren’t paying any fees and there are no minimum balance requirements, because you are expecting to pretty much drain this account at some point or points in the future. Online-only banks like Ally offer these kinds of savings accounts in case your current primary bank does not.

Once you have the savings account open, set up an automatic contribution. For example, if you are paid on the first of every month into your checking account, set up a recurring transfer in the proper amount for the 5th of the month from your checking account into this dedicated savings account. And when you set up the amount, round up on that calculated transfer amount in case your estimated tax liability was a bit low. Better to have a little money left in this account that you can transfer out and use for another purpose after you pay your tax bill than to come up short. If you do have savings left over, this is what I call a self-tax refund. It’s like receiving a refund from the IRS after filing your tax return, but better because that money was in your account gaining interest that whole time instead of in the IRS’s coffers.

If you would like to hear more about this system of self-withholding, listen to my Season 6 Episode 9 podcast interview with Lucia Capano titled “How This Grad Student Fellow Invests for Retirement and Pays Quarterly Estimated Tax.” 

Step #2: Determine Tax Bill Due Dates

Now that you are all set up to pay your future tax bill or bills, we can move on to Step #2, which is to figure out when those tax bills are actually due.

Step #2 is to figure out if you owe estimated tax and to pay it quarterly if so. If you are expected to pay estimated tax and fail to, you may be assessed a fine after you file your tax return.

Earlier, I mentioned that the IRS expects to receive tax payments throughout the year via the estimated tax system if you aren’t having income tax automatically withheld. While that is a blanket true statement, there are exceptions. Certain graduate students, postdocs, and postbacs may not be required to make estimated tax payments.

One of the exceptions is if you owe less than $1,000 in a tax bill at tax time. So for example, if you started receiving fellowship income really late in the calendar year and it didn’t add up to all that much or if your tax withholding in the earlier part of the year was rather excessive, your additional tax liability above the level of your withholding might not rise to $1,000. In that case you wouldn’t be required to make any estimated tax payments. Keep in mind that you still have that tax liability though, and you’ll pay all your tax due when you file your income tax return during tax season.

Estimated Tax Worksheet

To figure out for sure whether you’re required to pay estimated tax, you have to fill out the Estimated Tax Worksheet on page 8 of Form 1040-ES. I said for Step #1 Method A that the Estimated Tax Worksheet will give your most accurate estimate of your tax liability for the current year, and its other function is to answer this question about the requirement to pay estimated tax. There are multiple ways you can be exempted from this requirement, not just the one I outlined a moment ago, so it really behooves you to fill out this worksheet in its entirety.

If you get all the way to Line 15 of the worksheet, it tells you your expected quarterly payment amount. Now, this part is a little tricky for people who switch onto fellowship mid-calendar year because you aren’t going to make four quarterly payments in the current calendar year, only the 1-2 remaining payments, so you need to recalculate your payment amount using the number in Line 11c.

If I’ve lost you a little bit with this discussion of the Estimated Tax Worksheet in Form 1040-ES, don’t worry. It’s hard to understand just from listening to a podcast episode. I expect it will make much more sense once you’re looking at the worksheet. But if it doesn’t, you can join my workshop, Quarterly Estimated Tax for Fellowship Recipients, which walks you line by line through the worksheet and answers the most common questions I receive from PhD fellows about things like switching funding sources mid-calendar year and being married to someone with automatic income tax withholding.

The important takeaway from this Step #2 is that you should use the Estimated Tax Worksheet to determine whether you are required to pay estimated tax.

If you are required to pay estimated tax, make the payments using the money that’s built up in your dedicated savings account. You can view your payment options at IRS.gov/payments. The payment deadlines are typically April 15, June 15, September 15, and January 15 unless a holiday pushes one back. Yes, you heard me correctly! Confusingly, the so-called quarters are not all 3 months in length.

If you are not required to pay estimated tax, you don’t need to take any further action until tax season. You can draw upon your earmarked savings to pay your tax balance due when you file your tax return.

One last note about the Estimated Tax Worksheet. It is specific to each tax year, so if you’re still on fellowship at the start of next calendar year, please fill that year’s version out when it becomes available, which is usually around March. Your 2022 Estimated Tax Worksheet might have concluded that you weren’t required to pay estimated tax in 2022, but you can’t assume that’s going to be the case for 2023 as well. Even if you are required to pay in both years, your quarterly payment amount might change. I suggest filling out a new Estimated Tax Worksheet at the start of every calendar year and every time your income changes until you once again have automatic tax withholding on your paychecks.

Conclusion

We have come to the conclusion of this episode. Here are your action steps if you switched or will switch onto fellowship income without automatic income tax withholding near the start of this academic year: 1) Estimate your future tax bill and start saving for it. 2) Determine whether you are required to pay estimated tax and follow through if so.

If you found this episode valuable, please share it with your peers over social media or an email list-serv. Know that probably every time you do so, you are playing a role in preventing a severe financial hardship from occurring in someone’s life.

If you would like to take my workshop, Quarterly Estimated Tax for Fellowship Recipients, please attempt to find a sponsoring office or group at your university before purchasing it yourself. Even if you don’t need the workshop now but you wish you had taken it in a prior year, please recommend it. The potential sponsor can find more information at PFforPhDs.com/sponsorQEtax/. The workshop includes 1.75 hours of pre-recorded video content, a spreadsheet, and invitations to live Q&A calls with me leading up to each quarterly deadline for the current tax year. I’m here to help anyone who needs assistance with these matters. Thank you in advance for making that recommendation and helping to prevent large, unexpected tax bills and penalties among your peers.

Why Is My Fellowship Tax Bill So High?!

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Hi! I’m Dr. Emily Roberts, the founder of Personal Finance for PhDs. I’m a financial educator specializing in graduate students, postdocs, and PhDs in their first Real Jobs. My website is P F f o r P h D s dot com. The contents of this video are for education purposes only and should not be considered tax, legal, or financial advice for any individual. This video answers the question: why is my fellowship tax bill so high?

Introduction

I’m assuming that you found this video because your tax software or tax preparer has delivered some really, really unwelcome news, which is that you owe a large amount of tax this year, perhaps $1,000, $2,000, $3,000 or even more. And you are panicked because that is a huge amount of money for a graduate student or postdoc to come up with!

This is unfortunately a very common occurrence for graduate students and postdocs whose stipends or salaries are paid from fellowships or training grants and not reported on a Form W-2.

Specifically, this video is for postbacs, graduate students, and postdocs who are US citizens, permanent residents, and residents for tax purposes who are attending a university or training program in the US. Furthermore, all or part of your income is not reported on a Form W-2. I’m going to refer to you as a “fellow” in this video, although that might not be exactly the term that your university uses.

In this video, I will explain why graduate student and postdoc fellows often face these large tax bills. I’m going to focus on federal tax alone. In the companion video, What to Do When Facing a Huge Fellowship Tax Bill, linked in the description below, I step through what you should do if you are facing a high fellowship tax bill.

In all likelihood, the reason that you have a high tax bill due is that your fellowship is taxed as ordinary income but you were not having income tax withheld from your paychecks. I’m going to break that statement down now so that you can fully understand it.

Links Mentioned

Point #1: Your fellowship is taxed as ordinary income.

Point #1: Your fellowship is taxed as ordinary income. What this means is that the federal government taxes fellowship income that you receive as your stipend or salary at the same rate that it taxes employee income.

I’m hand-waving a little bit here and making some assumptions, but this is roughly correct. I’ll point you to a resource in a moment to help you get this exactly right if you’re interested.

The general point is that your stipend or salary is subject to income tax in the same way that employee income is. That is to say, part of it tax-free thanks to your deductions, part of it is taxed at 10%, part of it is taxed at 12%, and if you were particularly well-paid, perhaps some is taxed at one or more even higher rates. These are the ordinary income tax rates.

The taxability of your fellowship income may come as a surprise to you, because there are endemic rumors running around universities that fellowship income is not subject to income tax. Sometimes even tax professionals say the same thing, although they are mistaken. Fellowships used to be exempt from tax, but that changed with tax reform in the 1980s.

If you want more discussion about the taxability of fellowships, I encourage you to listen to my previous podcast episode on the subject, titled Do I Owe Income Tax on My Fellowship?, which you can find linked in the description below.

One additional quick note is that you should not pay self-employment tax on your fellowship income. Assuming that you’re not otherwise self-employed, if you see that your tax return includes a Schedule C for your fellowship income and/or there is an amount listed on Schedule 2 Line 4, that means that something has gone dramatically wrong with the tax preparation process. It is vital that you correct that error before filing your return.

I told you a moment ago that I was hand-waving over some details about how fellowship income is taxed. Your taxable income from a fellowship might not be exactly the same as your stipend or salary. It could actually be slightly more or less, depending on your individual circumstances. If you are a graduate student and want to go really in depth with this material or are trying to correct the self-employment mistake I just mentioned, I encourage you to join my paid tax workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), which is linked in the description below.

Point #2: You weren’t having income tax withheld from your stipend or salary.

Point #2: Despite the fact that your fellowship income is taxable, you weren’t having income tax withheld from your stipend or salary. The vast majority of universities and institutes do not withhold income tax on fellowship income.

Universities are required to withhold income tax on behalf of their employees. Employee income is reported on a Form W-2. But you are not an employee with respect to your fellowship income, so the university has no obligation to withhold income tax on that income, and the majority do not.

Here are some common scenarios that graduate students and postdocs face:

1) You were an employee, either at your university or elsewhere, in the first part of the calendar year, but then you switched onto fellowship income with the new academic year. In that case, you had income tax withholding on your income in the earlier part of the year, but it stopped when your funding source changed. Also vice versa, you could have switched from fellowship income to employee income mid-year.

2) You received fellowship income for the entire calendar year, and you had no income tax withholding during the year.

3) You had two concurrent sources of stipend or salary income, one from an employee position and one from a fellowship. You had income tax withheld on the employee portion, but not the fellowship portion. Even though you had withholding through the entire calendar year, it wasn’t enough to cover both sources of income.

I understand that you may be frustrated that your university or institute did not withhold income tax on your behalf. I wish that they all would offer this benefit. The very least they could do would be to give you a heads up that they’re not withholding income tax but that you still may have a tax liability, but I’m guessing because you found your way to this video that they did not. And I’m really sorry that you’re in this situation.

Point #3: Your tax return compares your calculated tax liability for the year with the income tax withholding that the IRS received during the year.

Point #3: Your tax return compares your calculated tax liability for the year with the income tax withholding that the IRS received during the year.

For most households in the US, their income tax withholding exceeds their income tax liability, so after they file their tax returns they receive a tax refund. That’s the excess money that they paid in through the year being refunded to them.

The opposite can also happen. When your tax liability exceeds your income tax withholding, you are expected to pay the balance when you file your tax return.

Conclusion

Now you can see why you’re facing this large income tax bill. You had taxable income, but no tax was withheld or not enough was withheld, and the IRS now expects you to pony up the difference.

After you finish this video, I encourage you to watch the companion video linked below, What to Do When Facing a Huge Fellowship Tax Bill, especially if you are unable to pay the entire bill right away.

If you would like to learn more about income tax on fellowships, I please register for my free email course on the subject, linked below. You can also find it at PFforPhDs.com/fellowshiptax. It is going to explain the previous points in even more detail and point you to lots of additional resources.

Again, I’m very sorry that you’re facing a high fellowship tax bill. I wish things hadn’t played out the way they have, but please know that you will get through this, and ultimately this will be just a small hiccup in your financial journey.

What to Do When Facing a Huge Fellowship Tax Bill

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Hi! I’m Dr. Emily Roberts, the founder of Personal Finance for PhDs. I’m a financial educator specializing in graduate students, postdocs, and PhDs in their first Real Jobs. My website is P F f o r P h D s dot com. The contents of this video are for education purposes only and should not be considered tax, legal, or financial advice for any individual. This video will show you the steps to take when you are facing a high tax bill due to your fellowship income.

Introduction

I’m assuming that you found this video because your tax software or tax preparer has delivered some really, really unwelcome news, which is that you owe a large amount of tax this year, perhaps $1,000, $2,000, $3,000 or even more. And you are panicked because that is a huge amount of money for a graduate student or postdoc to come up with!

This is unfortunately a very common occurrence for graduate students and postdocs whose stipends or salaries are paid from fellowships or training grants and not reported on a Form W-2.

Specifically, this video is for postbacs, graduate students, and postdocs who are US citizens, permanent residents, and residents for tax purposes who are attending a university or training program in the US. Furthermore, all or part of your income is not reported on a Form W-2. I’m going to refer to you as a “fellow” in this video, although that might not be exactly the term that your university uses.

In this video, I will share with you the steps you should take when facing a high tax bill, both to address the current bill and also avoid getting into the same situation again next year. In the companion video, Why Is My Fellowship Tax Bill So High?!, linked in the description below, I explain why PhD fellows often face high tax bills.

Links Mentioned

Step 1

Step 1: Don’t panic! IRS agents are not going to break down your door and haul you off to jail over this tax bill. You can manage this. Take a deep breath. I’ve interviewed several graduate students and PhDs on the Personal Finance for PhDs podcast who were in this exact situation, and they all found that the IRS was pretty reasonable to work with.

Part b to this step, which I want you to keep in mind throughout this whole process of resolving your bill, is to stay in contact with the IRS. Don’t stick your head in the sand about this matter. File your return on time, respond to the letters they send you, even if you can’t pay right away. Falling out of communication is tempting, but it’s kind of the worst thing you could do.

Step 2

Step 2: Double-check your tax return. I want you to be sure that it’s correct and that you really do owe that much income tax.

I told you in the companion video, Why Is My Fellowship Tax Bill So High?!, that fellowships are taxed as ordinary income. That means that you should pay the same amount of tax on your taxable fellowship income that you would on that amount of employee income.

Use an income tax calculator like the one pictured from smartasset.com. It’s not going to be super precise in calculating your tax liability, but it should get you in the right ballpark. If you have one or more dependent children, choose a calculator that takes that into account. Enter your pertinent details.

Take a look at the calculated federal income tax.

Compare that amount to the total tax line on your Form 1040. Are they fairly close, maybe within 10%? If that’s the case, your tax return passes this quick check, and it’s likely that you do owe that large tax bill.

However, if your tax liability from your tax return is much higher, like double or more, what the calculator said, that’s a major red flag. You need to go through your return with a fine-toothed comb to figure out whether something went awry in the preparation process. I would be suspicious that your fellowship income has been confused with self-employment income.

If you are a grad student and would like to learn more from me about how to prepare an accurate tax return, join my paid tax workshop, How to Complete Your Grad Student Tax Return (and Understand It, Too!), which is linked in the description below.

Step 3

Step 3: File your tax return and pay what you can. You can wait until Tax Day if you like, but do file by the deadline. Pay as much as you comfortably can, but do not put your bill on a credit card or anything similar.

If you have existing savings, how much should you put toward this bill vs. keep for yourself? My opinion is that you should treat IRS debt, which is what this bill is on the verge of becoming, similar to how you should treat credit card debt. That is to say, keep a small emergency fund of $1,000 to 2 months of expenses, and put any cash savings above that level toward paying this bill. That means forgoing investing and repaying lower-priority debts until it is paid. If you are familiar with my 8-step Financial Framework, I would place this bill in Step 2.

If you can completely pay the bill without dipping into your small emergency fund, that’s great! You’ll still need Step 4, though, so keep watching the video.

If you can’t pay the bill in full, keep working the steps.

Step 4

Step 4: Update your budget.

Your next step is not to get in touch with the IRS regarding paying your outstanding balance, although you should do that soon. First, you need to figure out your budget for this year.

In Step 4a, I want you to figure out how to stave off a large, surprise tax bill at this time next year.

If you are still on fellowship and still not having income tax withheld from your paychecks, I actually recommend that you figure out your tax bill for the current tax year before you commit to a payment plan for the tax year that has already ended.

That starts with estimating how much tax liability you will accrue on your fellowship income in this tax year.

You can use a calculator that I made, which you will receive after registering for my short, free email course at PFforPhDs.com/fellowshiptax/. Alternatively, you can use a calculator like the one I referenced in Step 2.

Figure out how much money you will need to set aside from each of your current fellowship paychecks to pay your tax bill for the current year. Build that number into your budget.

I recommend opening a separate savings account nicknamed Tax and setting up an autodraft from your checking account into the savings account for the correct amount of money immediately after you receive each paycheck. Then, when it comes time to pay your tax bill for the current year, you’ll have the money ready. This is what I call a system of self-withholding.

In Step 4b, you should determine if you are required, in the current tax year, to make estimated tax payments on a quarterly basis.

You do this by filling out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. The worksheet is a high-level draft of your tax return. At the end, it will tell you whether you are required to make estimated tax payments and if so in what amount. The payment deadlines for each quarter are in mid-April, mid-June, mid-September, and mid-January of each year. If you are required to make these payments, your system of self-withholding will keep you on track to be ready to make them.

If you would like my teaching and support in how to fill out the Estimated Tax Worksheet and handle common scenarios that PhD trainees encounter, join my paid tax workshop, Quarterly Estimated Tax for Fellowship Recipients, which is linked in the description below.

In Step 4c, you will reassess your budget. You need that savings rate to go toward your current year’s tax bill, but you also need to know how much you can feasibly put toward your previous year’s tax bill on a monthly basis going forward. It’s vital to know the maximum that you can realistically pay to the IRS on a monthly basis for that bill prior to setting up a payment plan with them.

Specifically, there are two types of plans, short-term and long-term. If you can adjust your budget so that you will pay off your entire past year’s bill within 120 days, you can opt for the short-term plan. If you can’t, you’ll opt for the long-term plan.

Sidebar here: I said earlier that you shouldn’t put your tax bill on a credit card. That is generally speaking good advice, because the typical interest rate on a credit card is far higher than the interest rate the IRS will offer you.

The one maybe-possibly exception would be to put the bill on a promotional 0% interest rate credit card. You should only consider this if you’re 1,000% confident that you will pay the entire bill before the promotional period ends and the interest rate jumps up. Compare the fees for using such a card, if you qualify for one, with the fees and interest the IRS will charge you over the period you expect to hold the debt.

I don’t love the option of using a credit card to pay this bill, but I also don’t love you being in debt to the IRS. Either way, it’s a high-priority debt that you should strive to pay off quickly.

Step 5

Step 5: Make a plan with the IRS. Now that you know how much you can afford to pay toward your previous tax bill and whether you’re able to opt for a short-term plan, you’re ready to set up a payment plan with the IRS. Make sure that the required amount of payment is set at less than what your budget tells you that you can afford.

The best website I’ve found to help with this process is the Taxpayer Advocate Service, which is linked in the description below. It explains all of the options the IRS will give you so you can decide which is the best fit. For example, if you owe less than $10,000, the guaranteed installment plan gives you three years to pay the debt. Once you have assessed all your options, get in touch with the IRS to set up your payments. If this is your first time being late on paying your tax bill, you can ask to have any penalties waived.

Step 6

Step 6: Follow through. Pay the IRS on the schedule you agreed to, and in fact try to pay them even sooner! Again, following my Financial Framework, I recommend that you get creative with your budget to funnel as much money as you can toward your IRS debt and any other high-priority debts you may have. Consider this a financial sprint with a definite end point, after which you can take your foot off the gas a smidge.

Conclusion

I hope hearing those steps helped calm you down and show you that there is a path through this situation. You are not the first nor will you be the last graduate student or postdoc to get on a payment plan with the IRS, if it comes to that.

If you haven’t yet, I encourage you to watch the companion video linked below, Why Is My Fellowship Tax Bill So High?!, to understand how this situation came about.

If you would like to learn more about income tax on fellowships, I please register for my free email course on the subject, linked below. You can also find it at PFforPhDs.com/fellowshiptax. This will really help you if you are continuing on fellowship in the current year.

Again, I’m very sorry that you’re facing a high fellowship tax bill. It may take you some time to completely resolve the issue, but you will get through it and nothing terrible is going to happen in the meantime. The IRS is fairly reasonable to work with. Good luck to you.

What to Do at the Start of the Academic Year to Make Next Tax Season Easier

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In this episode, Emily teaches what various types of PhD trainees can do at the start of the academic year to make next tax season go more smoothly. She covers tracking qualified education expenses, quarterly estimated tax, the Kiddie Tax, and state residency. Please consider sharing this episode on social media or with an email list-serv so your peers have access to this information as well!

Links Mentioned in the Episode

easier tax season

Introduction

Welcome to the Personal Finance for PhDs Podcast: A Higher Education in Personal Finance. I’m your host, Dr. Emily Roberts.

This is Season 10, Episode 2, and I don’t have a guest today, but rather I will tell you what various types of PhD trainees can do at the start of the academic year to make next tax season go more smoothly. We will discuss tracking qualified education expenses, quarterly estimated tax, the Kiddie Tax, and state residency. Please consider sharing this episode on social media or with an email list-serv so your peers have access to this information as well!

We are at or near the start of a new academic year, which means it’s time to take a moment to think about taxes. A few minutes of consideration at this time of year can save you a big headache and wallet-ache during tax season, so it’s worth it.

This episode has four sections, and I’m going to clearly identify at the beginning of each section who the information is for, because it will switch around. Overall, this episode is for US citizens, permanent residents, and residents for tax purposes living in the US. The various intended audiences for the sections are full-time graduate students; postbacs, grad students, and postdocs receiving non-W-2 stipends or salaries; full-time graduate students age 23 and younger; and grad students who either moved states in 2021 or whose income is coming from a new state. Our overarching topic is what you can do now to make next tax season easier.

Please note that I am not a Certified Public Accountant or Certified Financial Planner. This content is educational in nature only and should not be considered tax, financial, or legal advice for any individual. You are entirely responsible for your own financial decisions.

Tracking Education Expenses

Section A is for full-time graduate students.

In early 2022, once you get into preparing your annual tax return, you are going to need to use your so-called “qualified education expenses.” You can use these expenses to reduce your tax liability. Depending on which higher education tax benefit you employ, your qualified education expenses will either be used as a deduction or a credit. I’m not getting into all the details now because you will figure that out during tax season, but if you want to read more, go to PFforPhDs.com/prepare-grad-student-tax-return/ for my article updated for 2020.

The action step for you at this point in the year is to keep track of any education expenses that you suspect might be qualified education expenses. Now, the education expenses that are paid through your student account are already tracked for you, and you should be able to access your 2021 statement during tax season to look at all of the transactions for items like tuition and fees. What I’m suggesting that you manually track is any education expense that you transact outside of that student account, such as textbooks, course-related expenses, and computing purchases.
What I mean by tracking is to save two types of documents: 1) The receipt of the purchase showing the price paid. 2) The document stating that the purchase was required by your course instructor, your department, your school, or your university. The document could be a course syllabus, an email, or a screenshot from a webpage. You can choose how you want to save these records, but I suggest a digital copy maintained in cloud storage.

Now, not every education expense that you track may turn out to be a “qualified education expense” as that will depend on which higher education tax benefit or benefits you choose to use for your tax return. I suggest you leave the task of figuring out what is qualified and what is not to Future You. Present You only has the responsibility to track the expenses, and Future You will thank you for that.

Awarded Income and Estimated Tax

Section B is for postbacs, grad students, and postdocs receiving non-W-2 stipends or salaries.

Right up front, I need to define what I mean by a non-W-2 stipend or salary. I use a framework wherein there are two basic classifications for a stipend or salary that a PhD trainee might receive: employee income and awarded income. These are my own terms, so you won’t find ‘awarded income’ in IRS documentation or used by universities.

Employee income comes from the work than an employee performs for their employer. At the graduate student level, employee positions are often but not exclusively called assistantships, e.g., research assistantship, teaching assistantship, or graduate assistantship. If you have employee income and are a US citizen, permanent resident, or resident for tax purposes, this income will be reported on a Form W-2 at tax time.
The other type of income, awarded income, is more difficult to define. It is given as an award rather than for work performed. At the postbac, grad student, and postdoc levels, awarded income is often but not exclusively called fellowship income. If you are a US citizen, permanent resident, or resident for tax purposes, this income could be reported on a Form 1098-T, a Form 1099-MISC, a Form 1099-NEC, or a courtesy letter. However, there is actually no IRS reporting requirement for this type of income, so many PhD trainees receive absolutely no documentation whatsoever.

If you want to understand this framework more fully, I suggest listening to Season 8 Episode 1 of this podcast, which is titled “What Your University Isn’t Telling You About Your Income Tax.”

Now, the important things to know about awarded income, which I also call non-W-2 stipends or salaries, at this time of year are that 1) this is taxable income and 2) your university is likely not withholding income tax from your paychecks.

There are endemic rumors running around universities that this non-W-2 type of income is not taxable. While it is very tempting—and self-serving—please do not believe these rumors. Listen to Season 2 Bonus Episode 1 of this podcast, titled “Do I Owe Income Tax on My Fellowship?”, in which I clearly delineate which portion of your awarded income is taxable and which is tax-free.

One of the reasons these rumors sound believable is that, with rare exceptions, universities and institutes do not withhold income tax on behalf of their non-employees.

If your stipend or salary recently switched to an awarded income source or this is the first time you’re learning about this income tax issue, you have a few action items:

1) Figure out if income tax is being withheld from your paychecks. If it is, you’re done until tax season.

If income tax is not being withheld:

2) Fill out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. Essentially, you will do a high-level draft of your 2021 tax return, and the worksheet will tell you whether you are required to pay estimated tax and if so in what amount. The principle behind estimated tax is that the IRS expects to receive income tax payments from each taxpayer throughout the year as they receive their paychecks. If your employer does not withhold income tax on your behalf, this becomes your responsibility. However, there are some situations in which estimated tax is not required, and the Estimated Tax Worksheet will tell you if you fall into one of the exception categories. If you are required to pay estimated tax, please be aware that the next due date is September 15, 2021. The due dates typically fall in mid-April, mid-June, mid-September, and mid-January of each year. If you are required to pay estimated tax and fail to, you may be fined by the IRS.

3) Whether you are ultimately required to pay estimated tax or not, the Estimated Tax Worksheet will tell you how much you can expect to pay in tax above your withholding for the year. I strongly encourage you to start saving up for your eventual tax payment or payments. Divide your additional tax liability in Line 14b by the number of remaining paychecks you’ll receive in 2021 and start saving that amount of money from each paycheck. Personally, I have a dedicated savings account named Taxes into which I transfer money from each paycheck. Then, when my quarterly bills are due, I have the money ready to go, and the payment doesn’t strain my cash flow at all.

Please keep in mind that if you have a state tax liability in 2021, you may be required to pay estimated tax to your state as well.

If you want some help with filling out your Estimated Tax Worksheet, please check out my workshop, Quarterly Estimated Tax for Fellowship Recipients at PFforPhDs.com/QEtax/. The workshop explains how to fill out every line of the Estimated Tax Worksheet plus how to handle common scenarios that PhD trainees encounter, such as switching onto or off of fellowship mid-year and being married to someone who has income tax withholding. The workshop comprises numerous pre-recorded videos, a spreadsheet, and an invitation to the next live Q&A call, which will take place on September 12, 2021. To join the workshop, go to PFforPhDs.com/QEtax/. That’s q for quarterly, e for estimated, t a x.

By the way, I give a discount for bulk purchases of this workshop, and it’s not too late to ask your department, graduate school, graduate student association, postdoc office, etc. to buy it on behalf of a group of graduate students, postdocs, or postbacs. Simply email me at emily at PFforPhDs dot com to get the ball rolling on that purchase.

Commercial

Emily here for a brief interlude!

We have a special event coming up on Friday, August 27, 2021! It’s the fourth installment of my Wealthy PhD Workshop series. The subject is debt repayment.

This workshop is for you if you are in debt of any kind and want to learn the best strategies for getting out of debt. These strategies are tailored to the PhD experience, particularly that of graduate students. We will cover student loans, of course, which are such a complex topic, as well as mortgages, credit card debt, auto debt, medical debt, etc. I’ll give you a spreadsheet that will help you work through in which order to tackle your debts, taking into account the type of debt, the interest rate, and the payoff balance. We’ll also discuss how to sustain your motivation through a long debt repayment process.

This is going to be a value-packed session, so please join us on August 27th. You can register at PFforPhDs.com/WPhDDebt/. That’s PF for PhDs dot com slash W for Wealthy P h D D e b t.

Now back to our interview.

The Kiddie Tax

Section C is for full-time graduate students age 23 and younger.

I want to give you a heads up that a higher tax rate might apply to you if you meet the following criteria:

  1. You are age 23 or younger on 12/31/2021.
  2. You are a full-time student.
  3. You receive a non-W-2 stipend or salary for at least part of 2021.

If you checked all of those boxes, you might be subject to the Kiddie Tax, which means that part of your income may be taxed at your parents’ marginal tax rate instead of your own. The Kiddie Tax can apply even if you aren’t being claimed as a dependent.

I can’t say for sure that you will or will not be subject to the Kiddie Tax as there are more calculations that have to be performed, but I suggest that you look into this before the end of the calendar year and possibly take some mitigation measures if your parents’ marginal tax rate is higher than yours. You may need to engage a professional tax preparer to help you and your parents with tax planning and preparation for 2021. You may need to save more from each paycheck for your eventual tax bill than I laid out in Section B.

I have an article about how the Kiddie Tax affects funded PhD students at PFforPhDs.com/kiddietax/. That P F f o r P h D s dot com slash k i d d i e t a x.

State Residency

Section D is for graduate students who moved states in 2021 or are receiving income from a new state.

I find that people get rather mixed up about state residency and taxes, especially when they are in graduate school. For a traditional college student who is a dependent of their parents, it is common to maintain your residency in the state your parents live in even while you attend college in another state. However, I rarely come across a compelling reason that a graduate student should do the same.

The pandemic has also thrown a wrench into the question of state residency due to how common remote work is now. So even if you lived in only one state in 2021, if your income comes from a different state, that’s something to contend with.

What I think you should do at this time of year to make tax season easier is to figure out and/or decide in which state or states you will be a resident, part-year resident, or non-resident in 2021. This will require you to read about how your new state and your old state define residency and how they tax residents, non-residents, and part-year residents.

My totally generic, blanket recommendation if you have moved states to start grad school is to consider yourself a resident of your new state, even if technically your former state allows you to still be considered a resident due to your student status. You’re a full-fledged adult with a more-or-less proper income now. Why would you want to keep close ties to your parents’ address? In almost all cases, there is no financial advantage to doing so plus you’ll likely have to file two state income tax returns, one as a non-resident in the state you live and work in and one as a resident in the state you don’t live or work in. For how long do you want to keep that up?

If you agree that you don’t want to keep filing two returns indefinitely if there’s nothing in it for you, take a few steps this fall to firmly establish your ties to your new state. Reference how your new state defines a resident for the definitive word on how to do so, but for some starting ideas you should get a new driver’s license, register to vote, change your address with your car insurance, and update your mailing address with all your financial institutions.

Now, if you really do have a compelling reason for maintaining your residency in your old state while you’re a student, by all means try to do so. You still have to read all the material I mentioned before, but this time with the goal to maintain your residency in your old state and avoid being considered a resident in your new one. By the way, in all my conversations with grad students about taxes, I’ve only ever heard one reason that I considered compelling: A resident of Alaska who was attending graduate school in another state wanted to maintain their Alaska residency so they could continue to receive universal basic income. Please remember that even if you do have a great reason to want to maintain residency in your old state, you have to cross all your ts and dot all your is to make sure you meet the requirements.

Conclusion

That it for this episode! I hope you’ll check in with me during next tax season for more tax education and support for PhD trainees. I offer a workshop titled How to Complete Your Grad Student Tax Return (and Understand It, Too!) during each tax season, which can be purchased by individuals or groups at a discounted rate. I’m making plans for how I can help PhD trainees with their tax returns in brand-new ways in the upcoming tax season. Join my mailing list at PFforPhDs.com/subscribe/ to stay in the loop! You can expect to receive 2-3 emails per week from me on various personal finance topics.

Before you go, would you please share this episode with your peers, especially new graduate students? Join me in helping to make next tax season go smoothly for all PhD trainees!