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Taxes

What Method Should You Use to Prepare Your Tax Return?

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I hope that this is news to no one in the US: Grad student stipends are taxable and so is postdoc income, even if you don’t have taxes withheld or receive an official tax form! You may feel that it’s adding insult to injury to have to pay tax on a lower income, and it is possible that you will not owe any tax if your income is low enough and/or you have enough credits and deductions, but you should still prepare a tax return every year. You need to start from the assumption that all of your income is taxable and use your tax return to reduce your tax burden as much as you can. (This post focuses on US federal taxes for citizens/residents, though international students and postdocs paid in the US will benefit as well.)

A version of this post first appeared on GradHacker.

tax return method

Further reading:

Early-career PhDs can turn to one of four sources to prepare their tax returns: themselves, tax software, a relative or friend, or a professional tax preparer. There are pros and cons to each method, and the ultimate choice of which method(s) to use will depend on the complexity of your tax situation, the resources available to you, and your willingness to learn about this important subject.

Further reading: How Do I Prepare My Taxes during Filing Season?

One very important point to know about your tax return is that you are ultimately responsible for its accuracy. That means that whatever method you use, you must check your tax return through to make sure everything is correct. If you have no knowledge of taxes or have been misled by common tax lies told to graduate students, that will be very difficult; identifying all your income sources properly will be challenging and incompetence on the part of your tax preparer may slip by you.

Further reading: Grad Students, Don’t Believe these Tax Lies!

Your tax return is also only as good as the data you provide to it (GIGO!). If you overlook a part of your income, for instance because you received no official tax form for it, it doesn’t matter what method you use – your tax return will be inaccurate. This is particularly a problem for grad students. Take the time before you even choose your method to assess what sources of income you had and what forms you have or have not received for them. You can learn all about how to handle your various sources of grad student and postdoc income in my free tax webinar this week, which will be helpful no matter which method you ultimately use to prepare your tax return.

Further reading: How to Prepare Your Grad Student Tax Return

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Prepare Your Tax Return Manually

Believe it or not, often the quickest and easiest way to prepare your tax return is to just do it yourself, manually. This is particularly true if you have a simple tax situation, as many young people do. It will probably take an investment of several hours to understand the tax code at a high level and how your income and expenses fit into it the first time you prepare your own tax return. However, subsequent simple or slightly more complicated tax returns should be very quick! (Tip: Instead of using paper and ink, prepare your tax return with the IRS’s Free Fillable Forms.)

Pros:

  • If you learn about the tax code well enough to prepare a simple return (and really, all it takes is the ability to follow instructions and do arithmetic), you will go through your life with far more knowledge about income taxes than the average citizen. Taxes do not have to be mystifying.
  • Only costs your time.

Cons:

  • You don’t know what you don’t know. Without a knowledgeable source keeping an eye on your return, you may miss details such as a credit or deduction that you are eligible for.
  • You may make a mistake, either because of your lack of knowledge and experience or simply a math error.

Prepare Your Tax Return Using Tax Software

I’d bet that the majority of early-career PhDs use tax software (e.g., TurboTax, TaxACT, H&R Block) to prepare their returns. It’s a low-cost way of generating a meticulously prepared return. (Tip: The IRS provides free tax software to individuals who earned less than $66,000 in 2017.)

This is the trickiest method to use if you don’t understand your various sources of income well because without tax forms associated with some of the you may accidentally omit or misrepresent them. Software also tends to misinterpret some forms grad students commonly receive, such as categorizing grad students who receive 1099-MISCs as self-employed. Graduate students and postdocs will probably struggle the most with understanding how to enter their non-compensatory pay (fellowships and scholarships), depending on the documentation they receive.

Further reading: Grad Student Tax Lie #2: You Received a 1099-MISC; You Are Self-Employed

Pros:

  • Often free, and if not still relatively low-cost.
  • Generally thorough and trustworthy if you enter your data correctly.

Cons:

  • Can be more time-consuming to answer the software’s thorough questioning than just skipping to the relevant data entry points if you have a simple situation.
  • The software is not designed with grad student income in mind, so it can be difficult or confusing to enter non-compensatory pay, depending on the forms or lack of forms your university sends you.
  • Perhaps not sufficient for complicated tax situations.

Get a Relative or Friend to Prepare Your Tax Return

It’s fairly common for parents or relatives to (help) prepare children’s tax returns while they are dependents, and it may be tempting to continue that trend into grad school (or beyond!). However, this method suffers from the combined downsides of all the other methods while removing your direct oversight of the situation.

Pros:

  • Likely free and a low time investment.
  • He/she is probably more generally knowledgeable about the tax code than you are.

Cons:

  • While your parents may be competent in preparing their own tax returns as employees or business owners and yours as a college student, they have likely never been exposed to the unusual income reporting strategies employed by universities with respect to their grad students and postdocs.
  • You still have to know enough about the tax code to check their work.

Outsource Your Tax Return to a Professional Tax Preparer

I have to admit a bit of bias against using a professional tax preparer as a grad student, unless your life is so complicated that you need one and you have been assured that they know how to handle grad student income. For postdocs and early-career PhDs who receive compensatory pay, professional tax preparers should be quite competent, and probably more needed as your financial life gains complexity. As a person who speaks and writes about personal finance professionally, I have heard many, many horror stories of professional tax preparers bungling grad student income tax returns, causing the grad student to radically over- or underpay their taxes and forcing them to file amended returns once they catch the mistake – and those are just from the grad students who did catch the mistake (or who described the situation well enough for me to catch it)! I’m sure there are also many cases where everything went perfectly with the return, but I don’t tend to hear about those. The point is that grad students are not a common client type for professional tax preparers, so they are not necessarily knowledgeable about the special situation and may not notice the nuances or take the time to learn about them. Again, the responsibility is still on your shoulders to ensure the correctness of the return.

Further reading: How to Work with a Tax Preparer when You Have Fellowship and/or Scholarship Income

Pros:

  • Thorough, and possibly the best option for complicated tax situations.
  • Low time investment.

Cons:

  • Most expensive option unless you use some sort of free clinic.
  • As they are usually unfamiliar with grad student taxes (unless you screened for this), you still have to know enough about the tax code to check their work.

Free Tax Webinar for Grad Students and Postdocs

Emily Roberts presented a tax webinar for funded grad students and postdocs (US domestic) on March 9, 2018.

Register for the webinar to receive a replay!

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Conclusion

Everyone should know what information should be included in their tax returns, roughly how to calculate their taxable income, and where their income should be reported on a 1040 (or equivalent). This is the basic amount of information needed to generate and check a tax return with respect to your income. I’ll add on here that to be an informed citizen you should also know the difference between a deduction and credit and how marginal tax brackets work.

Further reading: Marginal Tax Brackets, Deductions, and Credits Explained Graphically

If you have a simple life (e.g., not itemizing deductions, not self-employed), it may be worthwhile to invest the time necessary to prepare your return manually this year, because learning that much will be a real time-saver in years to come. Alternatively, you can use tax software in an early year to help you learn about the tax code, and once you’ve grasped the concepts, use them in future years to prepare your return manually.

If you have a complicated life (e.g., itemizing deductions, marriage and children, home ownership, self-employment, investment income, traditional retirement accounts), it’s probably not worth your time to prepare your return yourself with confidence that you haven’t missed anything (unless you enjoy doing it yourself), so paying for tax software or a tax preparer is likely the better choice.

Whatever you do, don’t wait until April 16 to start preparing your taxes using any of these methods!

Further reading: How to Prepare Your Grad Student Tax Return

My Choice

My method of choice during grad school and since has been to prepare my tax return manually and using tax software each year. First, I draft my return myself, which necessitates learning a little something new about the tax code. Second, I use tax software to prepare my return, which alerts me to anything I overlooked that I could incorporate into my manual return. Third, I submit the manual return I prepared – I have more confidence in the correctness of that version!

How to Work with a Tax Preparer when You Have Fellowship and/or Scholarship Income

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When preparing your tax returns each year, you have three basic options: do it yourself (manually), use tax software, and employ a tax preparer (e.g., certified public accountant (CPA), enrolled agent, human worker at H&R Block). The least common approach for a grad student or postdoc is to hire a human professional tax preparer, but it is warranted in certain circumstances. If you do work with a tax preparer, it’s vital to make sure they properly account for the peculiarities of grad student (and sometimes postdoc) income, namely fellowship and scholarship income.

Please note that this article is relevant for the 2017 tax year only. With the tax overhaul starting in 2018, fellowship/scholarship income may be calculated slightly differently. I will update this article for tax year 2018 later in the 2018 calendar year.

Should I Use a Professional Tax Preparer?

My anecdotal observation is that grad students and postdocs most commonly use tax software to prepare their returns. I am actually a proponent of trainees with simple financial lives preparing their tax returns manually as I think there is less room for error and less effort required.

It is a good idea for you to consider using a professional tax preparer if you have a complicated financial life, need tax planning advice, and/or don’t want to spend time preparing your return manually or with software. Of course, a professional tax preparer comes with the highest price tag of all of the options, so the cost has to be worthwhile to you.

Indications that you have a complicated financial life that perhaps warrants using a professional tax preparer are:

  • You plan to itemize your deductions
  • You or your spouse owns a business
  • You have significant non-wage income (aside from fellowships), e.g., taxable investment income
  • You had a major life event this year, e.g., getting married, having a child, buying a home, receiving an inheritance

I do not think that a person whose only tax complexity is fellowship or scholarship income needs to use a tax preparer. This person would be better off preparing her return manually or with software. Fellowship and scholarship income at the graduate and postdoc level can appear confusing to tax software or professionals who are unfamiliar with it or only understand it with respect to college students. But in reality, incorporating into your tax return is very straightforward and a professional tax preparer is not necessary. As the recipient of the fellowship or scholarship income, you should know how to calculate and report your taxable fellowship/scholarship income whether you prepare your return manually or not. It is your responsibility to make sure your tax return is correct, and checking the work of the tax software or preparer that you engage goes a long way to ensuring that it is.

Interview Questions Your Potential Tax Preparer

If you decide to use a professional tax preparer, you should interview the people you are considering hiring. I would not walk into a tax preparation agency and have my tax return prepared by the first available worker. Naturally, you will vet the tax preparer regarding all the financial complexities that caused you to seek her out.

Further reading: 11 Questions to Ask When Hiring a Tax Preparer

In addition, incorporate a form of this set of questions regarding fellowship/scholarship income (as they apply to your situation):

  1. Have you ever prepared or do you regularly prepare tax returns for graduate students with scholarship income / graduate students or postdocs receiving fellowships?
  2. Are you familiar with how to calculate and report scholarship and fellowship income in excess of qualified education expenses?
  3. (If 2 is yes) Will you please briefly explain how you do that?
  4. (If 2 is no) Are you willing to learn about this issue prior to working on my return?

Yes, I am suggesting that you quiz your tax preparer, especially if he claims he regularly prepares these types of returns. I think the answer to question 3 should sound something like this:

I add up all the amounts of fellowship and scholarship income. Often these are found on a 1098-T or courtesy letter, but I will also ask you to tell me about income not found there. Then, I determine if it is most advantageous to use your qualified education expenses [grad students only] from your 1098-T to make your scholarship/fellowship income tax-free or if it is better to use the Lifetime Learning Credit or Tuition and Fees Deduction. Your net taxable scholarship and fellowship income goes on the 1040 in the Wages line/Line 7, and if I used the Lifetime Learning Credit or Tuition and Fees Deduction I’ll prepare the appropriate forms.

I don’t think you need to eliminate from consideration a tax preparer who is not currently versed in how to handle scholarship/fellowship income, but in that case you need to believe that she is sincere in her promise to learn about it before diving into your return. I do think it’s dealbreaker if she gives a wildly incorrect answer (e.g., “scholarship/fellowship income isn’t taxable”) and expresses no uncertainty or willingness to devote time to understanding the issue when corrected.

A special note for those whose fellowship income is reported on a 1099-MISC: While rare, a few universities report fellowship stipends on Form 1099-MISC in Box 3. This can be confusing for tax preparers and software because Form 1099-MISC is more typically used for self-employment income (in Box 7). However, the use of the 1099-MISC does not mean that you as a grad student or postdoc are self-employed. Once you point this out to your tax preparer, he should confirm that he will treat it as scholarship/fellowship income as above.

Reference on Scholarship/Fellowship Income

If your tax preparer is not already familiar with how to handle excess fellowship/scholarship income, point her to Publication 970 Chapters 1, 3, and 6 (Chapter 1 being the most salient).

Check Their Work!

You should perform a super simple check when your tax preparer sends you your tax return to make sure the reporting of your fellowship/scholarship income went well. Your net scholarship/fellowship income should be added into the rest of your household wage income in Line 7 of your 1040, and “SCH” should be written next to it (possibly with that net scholarship/fellowship amount).

What I mean by net scholarship/fellowship income is your total scholarship/fellowship income less the qualified education expenses that your preparer used to make your scholarship/fellowship income tax-free. (For postdocs, the gross and net amount should be the same as you were not a student.)

For example: Let’s say you had a $25,000 fellowship and $25,000 of scholarship income that went toward paying $24,000 of qualified education expenses (tuition and required fees). The last $1,000 of scholarship income went to a non-required fee. Your net scholarship/fellowship income would be $26,000. (That is, unless your tax preparer decided to report a higher net scholarship/fellowship income in favor of taking the Lifetime Learning Credit. The addition to your net scholarship/fellowship income should equal the amount claimed for the Lifetime Learning Credit.)

Further reading: Grad Student Tax Lie #6: You Don’t Have to Pay Tax on the Scholarship that Pays Your Health Insurance Premium

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Parting Thoughts

I’m actually quite passionate about the issue of the use of professional tax preparers and scholarship/fellowship income.

In my position as a personal finance blogger-turned-speaker, I’ve heard at least a dozen personal anecdotes from graduate students who used professional tax preparers or services like H&R Block or VITA and caught major errors in how their scholarship and/or fellowship income was calculated and reported.

In many cases, the miscalculated amount of tax due was radically higher (e.g., paying self-employment tax, paying tax on income that should have been made tax-free) or radically lower (e.g., no tax form means no income to report) than the true amount of tax due. These mistakes, frequently caught years later, sometimes cost the student dearly in time and money spent to correct them. I shudder to think of all the mistakes that were not caught by the student, especially regarding overpayment.

I don’t share my observations with you to deter you from using a professional tax preparer, but only to caution you that the interview process and double-checking their work is very important. You can’t afford to be ignorant about how scholarship/fellowship income should be calculated and reported, even if you decide to outsource the tax return preparation process.

New Fellow? Pay Your Quarterly Estimated Tax for the First Time This Week!

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Did you start receiving a fellowship this academic year as a graduate student or postdoc? First, congratulations! Second, I must clear up a pernicious misconception about fellowships in the US: you do owe federal income tax (and probably state, too) on your fellowship income. If income tax is not being withheld from your stipend/salary (and the majority of universities do not offer withholding on this type of income), you may be responsible for making quarterly estimated tax payments throughout the year. The next payment is due tomorrow, January 16, 2018! This post will guide you through how to determine whether you owe quarterly estimated tax and how to pay it if so.

Do You Receive Your Gross Income?

The IRS expects to receive income tax payments throughout the year, not just each April. Employees almost always have income tax withheld from their paychecks; instead of receiving their gross (full) income, their employer sends approximately the amount of tax the employee owes from each paycheck to the IRS and the employee receives the rest (net income).

Fellowship recipients (when the term is used conventionally; perhaps not universally) have non-compensatory pay and are not considered employees of their universities. Most universities do not offer income tax withholding on fellowship stipends/salaries. Taxpayers who do not have income tax withheld from their salaries (or who have too little withheld compared to the amount of tax they owe) are sometimes responsible for manually sending money to the IRS. This is called making quarterly estimated tax payments.

If you are a fellowship recipient (e.g., the NSF GRFP), your first step is to confirm that you are in fact not an employee, and your second step is to check whether you are receiving your gross or net income.

Step 1: The easiest way to determine if you are an employee (or rather, confirm that you are not) is to check whether you receive a W-2 for your fellowship income. (If you had an assistantship in this calendar year, you will receive a W-2 for that position, so be sure to check specifically about your fellowship income.) However, if you just started your fellowship in the 2017-2018 academic year, you aren’t due to receive (or not receive) your tax forms until the end of January 2018, and the estimated tax payment is due in mid-January. Your next best option is to inquire into what tax form you will receive for your fellowship stipend/salary. Non-compensatory pay will appear on a 1098-T, 1099-MISC, or courtesy letter or will not be reported in any way. Compensatory pay (indicating that you are an employee) will appear on a W-2. You should try asking your departmental administrative assistant, university fellowship coordinator, Bursar’s Cashier’s office, and/or payroll office. You will most likely be told that they “cannot give tax advice,” but confirming what type of tax form your income generates is not advice.

Step 2: Having confirmed that you are not an employee (if you are, you don’t need this post!), double-check the stipend/salary amount that hits your bank account. If you multiply it by the number of pay periods over which you will receive it, is it equal to the gross fellowship stipend/salary you were told you would receive or is it less? If it is less, did you at any point file a W-4 (e.g., when you had an assistantship)? You may be one of the few students/postdocs who has income tax withheld from a fellowship stipend/salary. As stated earlier, a small minority of universities do offer withholding on fellowship income, and they should use a W-4 to determine the amount of withholding.

If you are not an employee and are not having income tax withheld from your fellowship stipend/salary, you may need to make quarterly estimated tax payments.

Are You Responsible for Paying Quarterly Estimated Tax?

The IRS explains who is responsible for filing quarterly estimated tax on Form 1040-ES p. 1.

Right off the bat, you are not required to pay quarterly estimated tax if in the previous tax year your total income was zero or you did not have to file a tax return (and your return covered all 12 months). For example, if you were a student for all of 2016 and either didn’t have an income or your income was so low that you didn’t have to file a tax return, you aren’t required to make quarterly estimated tax payments.

If that first provision doesn’t apply to you, the IRS has a helpful flow chart on Publication 505 p. 24.

Publication 505 Figure 2-A

At this point, you’re going to have to do a few calculations to determine what amount of additional tax you owe for the year (additional to any withholding you already had). You simply need to fill out the worksheet on Form 1040-ES p. 8 for your household. It looks sort of involved but if you have a simple financial life you won’t actually need to put very many entries into the worksheet. You will need at your fingertips your 2016 tax return (or at least the total amount of tax you paid), your gross income for 2017, the amount of income tax you had withheld in 2017 (if any) and an educated guess as to your 2017 deductions and credits (your 2016 return will be helpful for this).

Once you calculate the amount of tax you owe in total for 2017 (Form 1040-ES line 13c), you can determine whether you are responsible for paying quarterly estimated tax.

First, look up the total amount of tax you paid in 2016. Second, take your total tax due for 2017 and multiply it by 90%. The smaller of these two numbers is the amount of tax you need to pay throughout 2017 to avoid a penalty (Form 1040-ES Line 14c).

Subtract the amount of income tax you had withheld in 2017 (Form 1040-ES Line 15) from the amount you need to pay to avoid a penalty. If the result (Form 1040-ES Line 16) is less than $1,000, you are not required to make a quarterly estimated tax payment. If the result is greater than $1,000, you are required to make a payment.

Please note that just because you are not required to make quarterly estimated tax payments does not mean you will avoid paying tax the whole year, only that the additional tax due does not have to be paid until you file your 2017 tax return this spring. Now that Form 1040-ES has given you some warning, use the next few months to prepare to make that lump sum income tax payment.

How to Pay Quarterly Estimated Tax

If you are required to make a quarterly estimated tax payment, the calculation is pretty simple since this is the last payment due for 2017! You should make a payment for all the additional tax due that you calculated you owe (Form 1040-ES Line 16a). If your calculations were exact, when you file your 2017 tax return in the spring, you won’t receive a refund or owe any additional tax. More likely, filling out your full tax return will bring to light a few adjustments in your calculations, so you may end up receiving a small refund or paying a small amount of additional tax.

The easiest way to make your quarterly estimated tax payment is online at www.IRS.gov/payments (find all your payment options on Form 1040-ES p. 3-4 or Publication 505 p. 32-33).

If you were unaware that you had any income tax liability on your fellowship income and are unprepared to pay what you owe by January 16, 2018, don’t avoid the issue! Give the IRS a call and they may be able to work with you to minimize the penalties you owe (though not the interest).

Calculating your quarterly estimated tax is not very difficult; the most challenging aspect is knowing that you’re supposed to do it! If you are a new fellow and this is your first time making a quarterly estimated tax payment, rest assured that it will be easier going forward. You first quarterly estimated tax payment for 2018 is due on April 17, 2018. You’ll want to freshly fill out the 2018 1040-ES once it’s available, but it should be similar to the form you just worked through.

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How Will Taxes for Grad Students and Postdocs Change Under the New Tax Law?

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The Tax Cuts and Jobs Act has been passed by both the House and Senate and signed by the president, and grad students are rejoicing that their tuition benefits were preserved in the final version. This is really the first opportunity we’ve had to figure out what the changes to the tax code will mean for graduate students and other individuals. In this post I’m running some numbers for a few different income levels and family configurations that are relevant to grad students and postdocs (similar to this article but for lower incomes). The good news is that it does seem that taxpayers at these lower income levels will see a reduction in their tax burdens as long as they take the standard deduction (or their itemized deductions are within about double of the standard deduction).

2018 tax for grad students and postdocs

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Tax Concepts and Terms

Many Americans don’t realize that our income tax structure is tiered. If your income falls in the 15% marginal tax bracket, for instance, it’s not the case that you pay 15% of your gross income in income tax. Part of your income (the amount that goes into your deductions and (currently) exemption) is not taxed at all. The next chunk of your income is taxed at 10%, and the last chunk is taxed (currently) at 15%. This would continue up the tax brackets if your income were higher.

Further reading: Marginal Tax Brackets, Deductions, and Credits Explained Graphically

A deduction is an amount of money that is excluded from your taxable income. You will choose to take the standard deduction or to itemize your deductions, whichever will give you the larger deduction. There are other deductions that fall outside of the standard/itemized deduction (above-the-line deductions), such as interest paid on student loans (up to $2,500), qualified education expenses if paid out of gross income, and contributions to a traditional IRA. The amount of the deduction multiplied by your marginal tax bracket is the amount that your tax will be reduced due to the deduction. For example, if you are in the 15% tax bracket and apply a deduction worth $1,000, your tax will be reduced by $150.

A credit is an amount of money by which your tax is directly reduced. A credit is worth the same amount no matter what marginal tax bracket you fall in, e.g., a $1,000 credit takes $1,000 off your tax bill. Examples of credits are the child tax credit, childcare expenses credit, and the saver’s credit. Your tax may even be reduced to zero due to credits, and refundable credits allow you to pay negative tax, i.e., receive money instead of paying money at tax time (non-refundable credits stop at a tax liability of $0). Sometimes a credit is applied at a certain percentage, e.g., a 20% credit on an amount up to $1,000 if worth at most $200 but would be less if you spent less on the expense in question.

Changes to the Tax Code in the GOP Bill

There are a few tax policy changes that will affect every American taxpayer, and many more that affect only high-income individuals or individuals in specific scenarios (e.g., taxpayer who previously had a large amount of certain itemized deductions, owners of pass-through businesses). In this post, I’m focusing on changes that will apply to all or many graduate students and postdocs. I have omitted noting at what income levels most of the benefits phase out, instead assuming that graduate students and postdocs will fall under those limits.

In creating this post, I have largely leaned on this great summary of the changes proposed in the GOP tax bill placed side-by-side with the current tax policies. Please note there is a typo in the individual tax rates table ($19,050 is correct, not $19,500).

Standard Deduction

The standard deduction is a set amount of your income that is tax-free. The alternative to the standard deduction is to itemize your deductions, which means documenting one or more types of deductible expenses throughout the year and choosing this deduction type if they add up to more than the standard deduction. (Some of common itemized deductions as of 2017 are medical and dental expenses if over 10% of your adjusted gross income, state and local income or sales tax, property tax, mortgage interest, charitable gifts, and unreimbursed employee expenses.)

One of the stated goals of the GOP with respect to this tax plan was to simplify the tax code, and itemizing deductions is one of the headache-inducing activities that is part of preparing a tax return for some taxpayers (less than 1/3 of households). Raising the standard deduction means that a larger amount of everyone’s income will be tax-free and that many fewer households will have to itemize to receive their largest deduction. However, some types of deductions that previously could be itemized have been eliminated or capped, which could negatively affect taxpayers who heavily relied on them to reduce their tax due. Two of these types of deductions are:

  • the state and local income/sales/property tax deduction is limited to $10,000 and
  • the mortgage interest deduction is now for loan sizes under $750,000.

Exemptions

In 2017, another amount of income was tax-free for each member of your household, which was your personal exemption. If you are single, you receive one exemption; if you are married filing jointly, you receive two exemptions; you also receive one exemption per dependent child. In 2017, each exemption is worth $4,050.

The GOP tax bill eliminates exemptions in favor of the larger standard deduction discussed above. Because the exemption amount scaled with the number of people in the household whereas the standard deduction is only applied once per household, this change is advantageous for smaller households (single, married couple) and disadvantageous for larger households (married couple with two or more children). However, the expansion of the child tax credit, discussed below, offsets this disadvantage for children up through age 16.

Tax Brackets

The lowest three tax brackets shift slightly under the new GOP plan. Their income ranges remain similar though not exactly the same (they change slightly every year anyway). The 10% bracket will still be taxed at 10%, the 15% bracket will be taxed at 12%, and the 25% bracket will be taxed at 22%.

source
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Keep in mind that when you find your marginal tax bracket (the highest tax bracket your income falls into) in these tables, you will use your taxable income less deductions and exemptions.

Child Tax Credit

The 2017 child tax credit is $1,000 per child for households under certain income limits and is partially refundable for some low-income households. In 2018, the child tax credit will be $2,000 under higher income limits and is fully refundable up to $1,400. The child tax credit applies to children up through age 16.

Income Tax Charts

For Single People and Married Couples Filing Jointly

I have created charts of the tax due for individuals and couples with various incomes under the 2017 and 2018 tax laws (assuming no children for now). I assumed the filers would take the standard deduction and no additional deductions (such as student loan interest or qualified education expenses).

Keeping in mind the income ranges of graduate students and postdocs, the ‘single’ table incomes range from $15,000/year to $50,000 with increments of $5,000, and the ‘married’ table incomes range from $30,000 to $110,000 with increments of $20,000.

 Income (x $1,000) 15 20 25 30 35 40 45 50
2017 Tax Due ($) 460 974 1,724 2,474 3,224 3,974 4,724 5,639
2018 Tax Due ($) 300 800 1,370 1,970 2,570 3,170 3,770 4,370

Income (x $1,000) 30 50 70 90 110
2017 Tax Due ($) 920 3,448 6,448 9,448 13,778
2018 Tax Due ($) 600 2,739 5,139 7,539 10,799

Income (x $1,000) 15 20 25 30 35 40 45 50
Single Absolute Reduction ($) 160 174 354 504 654 804 954 1,269
Single % Reduction 35 18 21 20 20 20 20 23
Income (x $1,000) 30 50 70 90 110
Married Absolute Reduction ($) 320 708 1,308 1,908 2,978
Married % Reduction 35 21 20 20 22

Under the above assumptions, graduate students and postdocs across these income levels will see a reduction in their tax burdens between 20 and 35%.

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Adjustments for Children

In 2017, if you have a dependent child under the age of 17, you can take the child tax credit for $1,000 per child. A credit is worth the same across the tax brackets because it directly reduces your tax due. In addition, you can also take an exemption for your dependent child (possibly up to age 23). In terms of the effect on your final tax burden, if you are in the 10% tax bracket the exemption is worth $405.00, if you are in the 15% tax bracket the exemption is worth $607.50, and if you are in the 25% tax bracket the exemption is worth $1012.50.

In 2018, the child tax credit has been expanded to $2,000 per child, but only up through age 16.

Download My Spreadsheet

You can download the spreadsheet I used to make the above charts with the complete tables. I have also included a sheet where you can estimate your own tax due by answering three questions.

Download the Tax Spreadsheet

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Do Your Own Calculations

This post skips over many of the nuances of the current and new tax law, so it does not substitute for plugging your numbers into a calculator (once full ones become available) or the math you will do in preparing your tax return. It is only intended to give an estimate of the tax due for ordinary wage earners (and, I presume, fellowship recipients) in the income ranges relevant to graduate students and postdocs. If you have automatic withholding on your paycheck, you should see changes to your take-home pay in early 2018. If you file quarterly estimated tax, your first payment is due in mid-April, so you have a few months for the IRS to adjust Form 1040-ES and to calculate your new tax burden.

Does Your University Use Section 117(d)? Please Take Our Survey!

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There have been more developments with the GOP tax plan (the Tax Cuts and Jobs Act) with respect to graduate students’ tuition benefits.

Last week, I gave my interpretation of how the House bill selectively eliminates one form of tuition benefit (tuition reductions) while leaving in place another (tuition scholarships).

Since my writing, an amendment was proposed to maintain the tuition benefits as they currently are, but it was defeated. The House bill is expected to be voted on tomorrow (Thursday, November 16, 2017).

You can find more information and action steps on the NAGPS website.

The Senate version of the tax bill has also been released in the last week, and it apparently does not include the same changes to graduate student tuition benefits that was in the House bill.

If both bills pass as currently written, they will go to a conference committee to create a compromise between the two versions. Then, the agreed-upon version will go back to the House and Senate to be voted upon. It is still important to voice your opinion about this particular provision of the bill to both your representatives and senators so that either the conference committee does not include changes to the tuition benefit in the final version of the bill or your Congresspeople vote against the bill if it does.

tuition tax survey

In the meantime, I am collaborating with two current graduate students, Andrew McCubbin and David Dixon, to figure out which universities are using section 117(a-b) vs. 117(d) for their tuition benefits. My purpose is not to discourage anyone from taking action opposing the TCJA but rather to help students with their personal financial planning and advocacy at the state, university, and department level, should the TCJA pass with the tuition benefit cut in place.

We have a survey up right now; would you please fill it out to the best of your ability and share it with your peers? In the next few days, we’ll start sharing our determinations from the survey on this results page. Also, feel free to comment on this post or email me if you have relevant information but don’t want to fill out the survey!

Which Graduate Students Will Lose Tuition Benefits Under the Proposed House Tax Bill?

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Update: Please fill out this survey on how your university handles your tuition benefit. I and some colleagues are trying to determine which universities use the method slated for elimination in the House bill.

The House GOP released their proposed tax bill (The Tax Cuts and Jobs Act) last week. Over the last several days numerous media outlets have covered the effect the bill would have on graduate students who receive “tuition waivers,” and graduate students have started organizing responses. Students at Carnegie Mellon, for example, calculated how much more tax students in various schools would have to pay if they lost their tuition tax benefits.

Here are articles I read that are most focused on the bill’s effect on graduate students:

lego tuition waiver tax
An excellent illustration of the possible impact of the Tax Cuts and Jobs Act on some graduate students from Lego Grad Student.

When I first started reading about this issue, I got the impression that under the bill all graduate students would see a large increase in their tax burden based on the reversal of their previously untaxed tuition benefits. The strongly worded headlines above certainly imply that graduate students would see such an increase in tax that continuing their educations would be impossible.

However, after spending many hours reading the current tax code, Publication 970, the proposed bill, university websites, news articles, and social media, I think that there is some confused information and hyperbole in the early reports, or at least what the articles are saying is being taken out of context by scared graduate students. However, I haven’t fully figured out what the implications of the new bill are, and I have several questions that are still outstanding. This post details my current thoughts on the issue. My intention is to calm some of the extreme fear I’m observing (in those who do not need to be so fearful), while still imploring you to voice your opposition to the proposed changes to tuition benefits and other effects on higher education funding.

To be clear, I don’t wish to see the net (after-tax) income of any graduate students drop as a result of tax reform. I believe all graduate students who have assistantships or who receive fellowships should be paid at bare minimum a living wage. Honestly, that’s a pretty low bar that not all universities currently meet. If a new tax bill is passed that increases the tax burden on graduate students, the universities should take steps to ensure that current graduate students’ net pay does not decrease. Otherwise, they do risk losing students they have already invested in or putting the students who remain in such a precarious financial position that they are distracted from their research.

But before you panic about your own personal finances, I think you should look carefully at how exactly you are paid. Not all graduate students will be negatively affected by this direct changes made by this bill (should it pass); I think the effects are going to be less widespread and less extreme than what the current coverage and conversations imply.

However, I do think you should lobby your representatives to maintain (more of) the current education benefits. (You just may not be able to use yourself as an example.) This is a moment in which graduate students and academics can band together to advocate for ourselves and academic research in general, whether or not we will be affected in our individual finances. The end of this post lists a few action steps. If the bill does pass, there will be more advocacy to be accomplished within your state and at your university to mitigate the bill’s effect on your and your classmates’ bottom lines.

grad student tuition tax bill

A disclaimer: I’m using a lot of secondary source information for this post. I did read sections of the current tax code and the proposed bill, but as I’m not a policy wonk or lawyer I freely admit that they are difficult for me to parse. If you find any mistakes, wrong conclusions, or omissions, please let me know so I can update the post. Accuracy is very important to me.

What Tuition Benefits Do Graduate Students Currently Receive?

We have to get technical for a bit here because the devil is in the details. I’ve seen students and articles using the terms “tuition waiver” and “tuition remission,” which do not appear in the proposed bill, Publication 970, or (as far as I’ve read) in the current tax code. So I’m going to avoid drawing conclusions from the common terms that are used in academia in favor of figuring out what is actually in the current tax code and bill.

There are three broad tuition benefits that I’ve known graduate students to use:

  • tax-free scholarships, fellowships, and tuition reductions (the most common)
  • the Lifetime Learning Credit
  • the Tuition and Fees Deduction

Basically, if you have any qualified education expenses such as tuition and required fees (the precise definition is not consistent), you can get some kind of tax break.

The proposed tax bill eliminates the Lifetime Learning Credit and the Tuition and Fees Deduction in favor of an expanded American Opportunities Credit (which can only be used in the first five calendar years of post-secondary education and therefore pretty much doesn’t apply to graduate students). This change will increase the tax burden on the students who previously used the Lifetime Learning Credit or Tuition and Fees Deduction, but that hasn’t been the main concern I’ve seen expressed by graduate students in the media.

The big kahuna here are the tax-free scholarships, fellowships, and tuition reductions. There are no monetary limits on these benefits like there are on the Lifetime Learning Credit and Tuition and Fees Deduction. Currently, any scholarship or fellowship that goes toward paying your tuition or qualified fees is not taxed. Also not taxed is any “tuition reduction” you receive. A tuition reduction is the difference between the sticker price tuition and the tuition you are charged.

Scholarships, fellowships, and tuition reductions are all lumped together in Chapter 1 of Publication 970 and Section 117 of the tax code, so I’ve never paid much mind to which is which exactly since they were all tax-free. But the proposed tax bill specifically targets one benefit and not the other.

Which Tuition Benefits May Be Lost and Which May Be Maintained?

The benefits are delineated in Section 117 of the tax code as qualified scholarships (117(a-b)) vs. qualified tuition reductions (117(d)). The tax bill proposes “striking subsection (d) of section 117” (p. 96), presumably leaving intact the other sections.

117(a-b): Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii). The term “qualified scholarship” means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.

117(d): Gross income shall not include any qualified tuition reduction. For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization… In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, [the above] paragraph shall be applied as if it did not contain the phrase “(below the graduate level)”.

How Can You Tell What Type of Tuition Benefit You Receive?

Section 117(d) explicitly applies only to university employees, which in the case of graduate students means teaching or research assistants. So if you are currently not a student-employee, i.e., you do not receive a W-2 at tax time, your tuition benefit should not change (which further argues for the superiority of fellowship funding over assistantship funding). (An analysis from a Berkeley student concurs this point.) However, I think it’s pretty unusual for a PhD student to complete her degree supported only by fellowships and training grants; most students serve as TAs or RAs for at least a few (if not all) of their semesters.

For student-employees, the question becomes: How do you know if your tuition and fees are paid by a qualified scholarship or a qualified tuition reduction? I do not have a good answer, and I’m hoping a reader can provide one. I don’t know that there is a different reporting mechanism, for example, for qualified scholarships vs. tuition reductions. (The 1098-T, if one is issued, should reflect the required tuition and fees charged to the students and the scholarships applied, but I don’t know if or how a tuition reduction would be reflected in that document. A qualified tuition reduction would not appear on a W-2.)

The best suggestions I can make at this point to figure this out for your situation are:

  • Re-read your offer letter and any employment contract you have with your university for the keywords “tuition reduction” vs. “scholarship,”
  • Check your Bursar/Cashier’s/Financial Aid account for the term “reduction,” and
  • Ask administrators at your university whether you receive a tuition reduction (e.g., the Bursar/Cashier’s office), pressing them to consult the university attorneys if they can’t point you to an answer.

How Common Is the Use of Section 117(d) for Graduate Students on Stipends?

One of the popular articles circulating by Vox pulled a figure from an infographic sheet the College and University Professional Association for Human Resources. (CUPA-HA also created this summary bulletin on Section 117, which makes it clear that section 117(d) is used by many types of university employees beyond TAs and RAs). In turn, the infographic is based on the 2011-12 National Postsecondary Student Aid Study.

vox 117d impact
An infographic from Vox on the number of students taking advantage of the tuition tax benefit in section 117(d).

The relevant number that the Vox article and CUPA-HA cite is that 145,000 graduate students benefit from section 117(d). (I was very curious about how they determined this number as it seems so wonky and specific to help with the unanswered question above, but the version of the 2011-12 National Postsecondary Student Aid Study that I could access did not contain this data. So I would like to dive further into those numbers, but I’m stuck for now.)

Taking the 145,000 students at face value (50% of whom earn more than $50,000/year, so not exactly traditional graduate students who would be unable to continue their studies due to an increased tax bill), what fraction of the total graduate student population is that?

I couldn’t find the answer directly, but the recent NSF survey of earned doctorates cites 54,070 doctorates awarded in 2014. Approximately 50% of PhD students never complete their degrees, so I would peg the current number of doctoral students in the US between 250,000 and 500,000. The 145,000 figure probably also includes master’s students, making the relevant pool of graduate students in the US even larger.

145,000 students using section 117(d) is certainly a large fraction of that total, but definitely not everybody as was my first impression. (Keep in mind, though, that an individual student may use section 117(d) during part of her time in graduate school, so the number using it at any given time is less than the total number who use it at any point.)

As far as how the proposed legislation will affect students at individual universities goes, I have two data points so far (please let me know if you’ve received a definitive answer from your university!):

The Dean of the Graduate School at Cornell released a statement regarding their policies. It reads in part:

 

Cornell University does not rely on 117(d) for favorable tuition-related tax treatment of funded graduate students, who are considered students, not employees, at Cornell.

Because Cornell pays graduate students reasonable compensation for teaching, research, or other services they provide to the university, Cornell graduate students receiving a tuition scholarship are receiving a qualified scholarship as described under sections 117(a), 117(b), and 117(c) of the current tax code, provisions which are not proposed for repeal in H.R. 1.  Thus, the proposed repeal of section 117(d), if passed into law, will not have an impact on how Cornell graduate students’ tuition scholarships are handled.

While the stipend for graduate students may be taxable under the current tax code, the tuition scholarship is not, and would not be affected by repeal of 117(d).  As H.R. 1 is written, Cornell graduate tuition scholarships will continue to be treated as qualifying (tax free) scholarships under 117 (a), thus, there would be no change from current tax law that treats these tuition scholarships for students as tax free.

I graduated from Duke University three years ago, and my understanding was that my tuition and fees were paid by scholarship. In my Bursar account, for example, I would see a tuition charge posted and then a payment posted on my behalf. I assume that payment was a scholarship, and I don’t know how a tuition reduction would have appeared. My recollection was (I think) confirmed by this page that discusses how graduate students are supported: “Full or partial scholarships: Cover tuition and fee expenses.” Tuition reductions are not mentioned. So I think that Duke students, like Cornell students, also do not depend on section 117(d) for their tuition tax benefit.

A Tentative Guess as to the Impact of the Proposed Bill

Here is my intuition on the matter, and I’m curious if it bears out or not. I formed it based on the scantest impressions and it involves far too much extrapolation.

I think perhaps tuition reductions are used mostly by public institutions, whereas qualified scholarships more so by private institutions. Therefore, eliminating the non-taxable status of tuition reductions may disproportionately affect public school students.

However, the large numbers I’ve seen in the media of the “devastating” effect of the tax bill on graduate students are based on tuition charged at private universities and by public universities for out-of-state students. (State policies regarding residency status for the purpose of in-state tuition vary. In some states, students are eligible for in-state residency after the first year. In others, such as Georgia, out-of-state students maintain their status for the duration of their degree.) Public, in-state students might see their taxes increase by hundreds of dollars or a thousand dollars, not the multiple thousands or $10,000+ I’ve seen quoted (except perhaps in the year when they are considered out-of-state students), which is if the full tuition and fees at some private universities were taxed at 12 or (partially) 25%.

I think that if tuition reductions are being used by private universities, they will have more wiggle room to pivot to either compensate their students differently or to pay them more. Well-funded departments and universities may also be able to increase their students’ pay to make up for the additional tax due (perhaps a one-time grant in the first year for out-of-state public university students). Therefore, I hope that the negative effects of the bill will be smaller and more limited in scope than currently anticipated.

Steps You Can Take to Advocate for Higher Education

All that notwithstanding, this is the time for advocacy. I fear that if the proposed tax bill passes as written, the additional tax burden will fall largely upon the students who are least financially secure, namely students in underfunded departments at public universities (earning, for example, less than $20,000/year). A $1,000 increase in their tax bill could easily push them into (further) credit card or student loan debt because their finances are so precarious to begin with. Even if your university does not rely on section 117(d) or you have a fellowship, please stand up for your fellow PhD students who are at risk.

  1. The NAGPS Call Congress Day is TODAY, November 8. You can find all the details about action steps on their Facebook event and website. You can still use their talking points as guidance after November 8.
  2. If you are represented by a union, participate in their lobbying efforts, or consult them on how to organize your own.
  3. Talk with your peers about advocacy steps you can take as a group at the national level and, if this provision of the bill passes, at the state, university, and department levels.
  4. Tell your family members, neighbors, college friends, mentors, etc. about this issue and ask them to advocate for PhD students as well.

In all of this, if you are currently taking advantage of a tuition reduction I encourage you to use your personal numbers (by what absolute amount and percentage your tax bill would increase) like this student did. These numbers are shocking and powerful.

Do you benefit from a tuition reduction or is your tuition paid by scholarship (or both)? Do you expect your tax burden to increase or decrease if the Tax Cuts and Jobs Act passes as written and by how much? How are you advocating for section 117(d) to remain in the tax code?