The various types of income that you have may be reported in different places on your tax return, depending on their type. You must first catalog all the different types of income you have had throughout the year. Income from outside jobs (W-2 or 1099-MISC box 7), investment income, etc. are not unique to graduate students, so you can determine how to properly report it by reading the instructions on the forms that you receive.
This page will cover only the typical types of income that graduate students receive for their roles as graduate students. However, you must include all your reportable income on your tax return.
1) Identify the Type(s) of Graduate Student Income You Received
There are several common sources of income for graduate students, but they will ultimately be able to be classified as compensatory or non-compensatory. (The description below is how universities generally treat the various types of graduate student pay, but exceptions are possible.)
Non-compensatory pay is an award you are giving that is (allegedly/officially) unrelated to your work.
Fellowships are examples of non-compensatory pay that provide your stipend. If you have taxes withheld, non-compensatory pay will likely be reported on a 1099-MISC in box 3. If you did not have taxes withheld from your stipend, you may receive a courtesy letter, a 1098-T or no documentation whatsoever to indicate your non-compensatory pay.
Scholarships are also non-compensatory pay and are generally used to pay tuition and fees on behalf of the student. You need to take your scholarship income into account when you calculate your taxable income for the year, even if you never received it in your personal accounts. If scholarships were posted to an account under your name at your university (e.g., Bursar account, Cashier’s account), they are part of your gross income for the year.
As you may not be explicitly told that you have received non-compensatory pay (for example, in addition to your compensatory pay), it is up to you to figure out if you received any and what the amount was.
2) Calculate Your Gross Income
After you identify whether you have received compensatory pay, non-compensatory pay, or both, you need to add up all your sources of grad student income. Keep your compensatory and non-compensatory pay separate for the time being.
All your compensatory pay should be reported on a W-2, so that should be easy to find. If you have more than one W-2, just add the gross pay together.
You can find your non-compensatory pay officially reported on a 1099-MISC (box 3) or a 1098-T (box 5). Since you need to look for the less well-documented sources as well, make sure you capture all the fellowship and scholarship income you may have received by looking at your courtesy letter (if any), your bank account statements, and your Bursar/Cashier’s account transaction history. (The 1098-T, if you receive one, may reflect the scholarships posted to your Bursar/Cashier’s account in box 5, or box 5 may be used only to report your non-compensatory stipend.) Add all these portions of your income together, being careful not to double-count any sources or to leave any out. At this stage, your gross non-compensatory pay may be very high as it will include the scholarships that paid your tuition and fees. (See IRS Publication 970 Chapter 1 for more information.)
3) Use Your Qualified Education Expenses to Reduce Your Tax Burden
If you have qualified education expenses, you have the opportunity at this stage to reduce your taxable income or the total amount of tax you will pay for the year. There are a few different mechanisms by which you might do so, some of which are mutually exclusive. You can’t double-count your qualified education expenses, even if you are able to use more than one of these mechanisms. If you take the Lifetime Learning Credit, you can’t also take the Tuition and Fees Deduction (Publication 970 p. 22-23).
1) Your non-compensatory pay can be considered tax-free if it was used to pay qualified education expenses (Publication 970 Chapter 1). Qualified education expenses include required tuition and fees and course-related expenses, but not room and board, travel, research, etc. See Publication 970 Worksheet 1-1 to calculate the taxable portion of your non-compensatory pay. Basically, you will subtract your qualified education expenses from your non-compensatory pay, and only report as taxable income any excess non-compensatory pay. If you received a 1098-T from your university, you should see (some of) your qualified education expenses for the year listed in box 2. Whether or not you received a 1098-T, look in your Bursar/Cashier’s account transaction history to find the qualified education expenses paid through that mechanism, and also add in your course-related expenses.
2) You may be able to take the Lifetime Learning Credit, which awards you up to $2,000 off your taxes for up to $10,000 in qualified education expenses. (The credit is worth 20% of the expenses.) See Publication 970 Chapter 3 for more details. You can choose to use the Lifetime Learning Credit to reduce the taxes you pay on your compensatory pay. You might also choose to include all of the scholarship and fellowship income that might otherwise be tax-free (point 1) in your gross income to use the Lifetime Learning Credit for your qualified education expenses. See the Publication 970 Chapter 3 section titled “Coordination with Pell grants and other scholarships” for more details and be aware of the effect on the rest of your tax return if you choose this option. To claim the Lifetime Learning Credit, you need to fill out and submit Form 8863 along with your 1040.
3) You can deduct up to $4,000 from your compensatory pay for tuition and required fees (not including health insurance premiums) using the Tuition and Fees Deduction. See Publication 970 Chapter 6 for more details. To claim the Tuition and Fees Deduction, you need to fill out and submit Form 8917 along with your 1040.
Tip: The simplest approach here is to exclude from your taxable income the portion of your non-compensatory pay that went to your qualified education expenses, then use the Lifetime Learning Credit or the Tuition and Fees Deduction for any of your remaining qualified education expenses. This is particularly true if your qualified education expenses exceed $10,000 since that is the limit for the Lifetime Learning Credit. However, you may end up paying less in taxes overall by reporting a higher amount of non-compensatory income (<= $10,000 higher) and then taking the Lifetime Learning Credit for your qualified fees instead of treating that income as tax-free. You need to delve into the details in Publication 970 or use tax software to determine which approach is more advantageous to you, as claiming a higher or lower income may affect other parts of your tax return.
Reporting Your Income and Education Credits and Deductions
Your compensatory and (net) non-compensatory pay, after you have calculated them, will both end up being reported in the same line on your 1040.
The instructions for Form 1040 (the basic tax return form) state that W-2 income in box 1 (wages, tips, and other compensation) should be reported in line 7 (source: 1040 instructions, page 10). (If you are using Form 1040-EZ, W-2 income goes to line 1 (source: 1040EZ instructions, page 8). If you are using Form 1040A, W-2 income goes to line 7 (source: 1040A instructions, page 11).)
You should report the taxable portion of your fellowship and scholarship income in line 7 of Form 1040 (or line 1 of Form 1040EZ or line 7 of Form 1040A) with the letters “SCH” to the left of the entry (source: Publication 970, page 6).
All of your income related to being a grad student should end up in line 7 of form 1040, with or without “SCH” next to it, depending on the source.
Related article: Where to Report Your PhD Trainee Income on Your Tax Return
If you decided to use the Tuition and Fees Deduction, report the deduction in line 34 of your 1040 or line 19 of Form 1040A. If you decided to use the Lifetime Learning Credit, report the credit in line 50 of your 1040 or line 33 of Form 1040A.
We at Grad Student Finances are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.