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Fellowship Income Can Trigger the Kiddie Tax

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

Kiddie Tax fellowship graduate student

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

What is the Kiddie Tax?

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

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

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

How Does the Kiddie Tax Affect PhD Students?

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

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

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

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

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

Who Has to Pay the Kiddie Tax?

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

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

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

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

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

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

2) You are required to file a tax return.

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

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

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

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

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

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

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

3) You are a student under age 24

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

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

Full-Time Student Status

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

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

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

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

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

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

Support Test

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

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

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

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

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

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

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

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

5) You don’t file a joint return

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

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

How Is the Kiddie Tax Calculated?

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

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

Line 1

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

Line 2

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

Line 3

Line 3 = Line 1 – Line 2

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

Line 4

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

Line 5

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

Line 7

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

How to Avoid the Kiddie Tax

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

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

How to Minimize the Kiddie Tax

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

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

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

Remarks

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

Where to Report Your PhD Trainee Income on Your Tax Return (Tax Year 2021)

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

This article was most recently updated on 2/7/2022.

PhD where tax return

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

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

Your gross yearly employee income will appear in Form W-2 Box 1, and the income tax that has been withheld from you pay will appear in Boxes 2 (federal), 17 (state), and 19 (local).

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

The wages line of your tax return is Form 1040 Line 1, which is labeled: “Wages, salaries, tips, etc. Attach Form(s) W-2.”

The Form 1040 instructions for Line 1 (p. 21) state: “Enter the total of your wages, salaries, tips, etc. If a joint return, also include your spouse’s income. For most people, the amount to enter on this line should be shown in box 1 of their Form(s) W-2.”

Where to Report Awarded Income

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

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

Further reading:

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

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

Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1.

The Form 1040 instructions for Line 1 (p. 24) state: “The following types of income also must be included in the total on line 1… Scholarship and fellowship grants not reported on Form W-2. Also, enter “SCH” and the amount on the dotted line next to line 1.”

The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients

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If you’re reading this article, you’ve already done the hard part: You know (or suspect) that you’re supposed to pay quarterly estimated tax on your fellowship using Form 1040-ES. Whether you’re a graduate student, a postdoc, a postbac, or some other kind of fellow or trainee, if you’re not having tax withheld from your income, it’s pretty likely that you have the responsibility of paying quarterly estimated tax. The main obstacle to PhD students and postdocs paying quarterly estimated tax is simply awareness! The process itself is not complicated or difficult, as I’ll show you in this complete guide to quarterly estimated tax for fellows.

complete guide quarterly estimated tax

If you’re still unsure that you owe income tax at all on your fellowship income – or you want to help your peers understand this issue as well – I have plenty of articles and podcast episodes on that topic in particular.

Further reading and listening:

This article is for US citizens, permanent residents, and resident aliens living and working in the US, and I’ve made the assumption that you are not, in addition to being a fellow, a farmer, fisherman, or business owner/self-employed, that you do not have any household employees, and that your adjusted gross income is less than $150k. (There are additional factors at play for these groups with respect to calculated estimated tax due.)

This post is for educational purposes only and does not constitute tax, legal, or financial advice.

This post was most recently updated on 4/7/2023.

Table of Contents

This article is an overview of how to handle estimated tax as a fellowship recipient. For an in-depth, line-by-line exploration of the Estimated Tax Worksheet in Form 1040-ES that addresses the common scenarios fellowship recipients face, please consider joining my tax workshop. It comprises pre-recorded videos, a spreadsheet, and quarterly live Q&A calls with me.

Click here to learn more about the quarterly estimated tax workshop for fellows.

What Is Estimated Tax?

The IRS expects to receive tax payments from you throughout the year, not just in the spring when you file your tax return.

To that end, employers offer automatic tax withholding to their employees. The employee files Form W-4 with the employer. This form helps the employee perform a high-level calculation about the amount of income tax the employee will owe for the year, which tells the employer approximately how much income tax to withhold from each paycheck. (Non-student employees will also have FICA tax withheld.)

Non-employees are almost never extended the courtesy of automatic income tax withholding by their university/institution/funding agency. (Income tax withholding for fellowship/training grant recipients is offered in rare cases—Duke University is one, at least while I was there—so it is worth inquiring about, but don’t be surprised if the answer is no.) Instead, the onus is on the individual to manually make tax payments.

By the time a person/household files a tax return in the spring of each year, the IRS expects the tax paid throughout the year to be in excess of or only slightly less than the actual amount owed. Approximately 3 in 4 Americans receive a tax refund (the amount of tax paid throughout the year minus the actual amount owed) after filing their tax returns. The rest, presumably, owe some additional tax when they file their tax returns. If the amount of additional tax due (above the amount paid throughout the year) is too high, the IRS will penalize the taxpayer.

To help taxpayers avoid underpaying tax throughout the year and being penalized, the IRS has set up a method of making manual tax payments four times per year: quarterly estimated tax payments. Anyone whose primary income isn’t subject to automatic withholding (e.g., fellowship recipients, self-employed people) or who has significant income in addition to their employee income (e.g., investment income) should look into making quarterly estimated tax payments.

Who Has to Pay Estimated Tax?

In general, you should expect to pay income tax in the year you receive your fellowship unless:

  • Your income is particularly low (e.g., you had an income for only part of the year or your fellowship went toward qualified education expenses instead of your personal living expenses) or
  • Your tax deductions and/or credits are particularly high.

Your tax due for the year might be large enough that you are required to make quarterly estimated tax payments or small enough that you can skip the quarterly payments and pay all the tax due at once with your annual tax return.

The dividing line is $1,000 of tax due at the end of the year in addition to the tax you had withheld and your refundable credits. If you expect to owe more than $1,000 in additional tax for the year, you should make quarterly tax payments, unless you fall into one of the exception categories discussed in the next section. If you expect to owe less than $1,000 in additional tax, you don’t have to make those quarterly payments and will just pay everything you owe with your annual tax return.

For individuals who receive only fellowship income not subject to tax withholding throughout the calendar year, the calculation is straightforward: How much income tax will you owe for the year, greater or less than $1,000?

For individuals/households with fellowship income not subject to withholding plus employee income subject to withholding (e.g., one person with part-year fellowship income and part-year employee income, one spouse with fellowship income and one spouse with employee income), both the total amount of tax owed across all incomes and the amount withheld must be taken into consideration. If you will owe more than $1,000 in additional tax at the end of the year and don’t fall into an exception category, you should file quarterly estimated tax.

Having a combination of fellowship and employee income is very common for PhD trainees, especially if they are married. My tax workshop addresses how to handle this particular scenario in detail.

Click here to learn more about the estimated tax workshop.

Who Doesn’t Have to Pay Estimated Tax?

Some people who owe more than $1,000 in additional tax at the end of the year are not required to make quarterly estimated tax payments.

  1. If you had zero tax liability in the previous tax year, you are not required to make quarterly estimated tax payments in the current tax year. For example, if last year you were a undergrad or grad student with a low enough income that you didn’t pay any income tax, you’re not required to make quarterly estimated tax payments this year. Please note this refers to your overall tax liability for the year, not whether you had to make a payment when you filed your return.
  2. If the sum of your tax withholding throughout the year and refundable credits equals or exceeds 90% of the tax you expect to owe this year, you are not required to make quarterly estimated tax payments. For example, if your spouse earns the lion’s share of your household income and has a generous amount of tax withheld automatically, your household’s overall tax withholding might be sufficient to exempt you from making quarterly estimated tax payments on your fellowship.
  3. If the sum of your tax withholding throughout the year and refundable credits equals or exceeds 100% of the tax you owed last year, you are not required to make quarterly estimated tax payments. For example, if last year you finished undergrad and started grad school with a stipend, your tax owed for the year was likely quite small. If you have assistantship pay with tax withholding for part of this year and then switch to a fellowship with no withholding, your tax withholding from your assistantship might cover 100% of your tax owed from last year, and you wouldn’t be required to make quarterly estimated tax payments.

The best way to estimate your tax due this year along with your withholding and refundable credits and determine whether you are required to pay quarterly estimated tax is to fill out Form 1040-ES.

Psssst… Want to take a shortcut? If you have no interest in filling out Form 1040-ES’s Estimated Tax Worksheet, join my tax workshop. I explain a shortcut method to make sure you pay enough in estimated tax to avoid a fine without having to complete an advance draft your tax return this year. This method will only take a few minutes!

Click here to learn more about the quarterly estimated tax workshop for fellows.

Fill Out the Estimated Tax Worksheet in Form 1040-ES

Form 1040-ES, specifically the Estimated Tax Worksheet (p. 8), guides you through 1) estimating the amount of tax you will owe for the year, 2) determining if you are required to make quarterly estimated tax payments, and 3) calculating the amount of your required estimated tax payment.

I’ll point out a simple approach to filling out the Estimated Tax Worksheet for individual taxpayers/households with only fellowship and employee income. If you additionally have self-employment income or other types of income, your approach will be more nuanced.

If your fellowship income is disbursed frequently throughout the year (e.g., once per month for the entire year), this simple method will work for you. If your fellowship income is disbursed infrequently (e.g., 1-3 times per year) or throughout only part of the year (e.g., only the fall term after switching funding sources), keep reading for an alternative method.

The important numbers a fellowship recipient needs to plug in to Form 1040-ES to fill it out are:

  • Line 1: Your expected Adjusted Gross Income (AGI), which is your total income for the year less your above-the-line deductions (e.g., deductible portion of student loan interest paid, traditional IRA contributions). Your AGI includes your fellowship income, taxable scholarship income (if applicable), and any wages you (and your spouse) received, e.g., from an assistantship.
  • Line 2: Your deductions. If you plan to itemize your deductions, you should enter the total of those itemized deductions in line 2a; otherwise, enter the amount of your standard deduction (in 2023: single $13,850, married filing jointly $27,700).
  • Line 7: The sum of your credits if you plan to take any. Examples of credits include the Lifetime Learning Credit, the Child Tax Credit, and the Child and Dependent Care Credit.
  • Line 11b: The sum of your refundable credits if you plan to take any, such as the Earned Income Credit or the Additional Child Tax Credit.
  • Line 12b: Your total tax liability for the prior year.
  • Line 13: Income tax you expect to be withheld throughout the year. This can generally be extrapolated from your most recent pay stub.

If you come to the worksheet with this set of numbers, all you need to complete it is to follow the arithmetic steps instructed in the form and to look up your tax due using the Tax Rate Schedule on p. 7.

Once you fill out the worksheet, line 11c will tell you the total amount of tax that it is estimated you will have to pay for the year. The rest of the form helps you determine the minimum amount of quarterly estimated tax you have to pay to avoid a penalty, which might be $0. Both of these numbers are key for your tax planning for the year; don’t just make the minimum payments necessary and forget that you might owe additional tax along with you tax return in the spring.

Are you curious about the rest of the lines in the Estimated Tax Worksheet and wondering if you need to fill them out? My workshop devotes a module to explaining each line so you can determine if they apply to you or not.

Click here to learn more about the estimated tax workshop.

Method for Irregular Income

If you receive your income unevenly throughout the year, the IRS has a method for calculating a different amount of estimated tax due in each quarter, the Annualized Income Installment Method (see Publication 505).

Essentially, you calculate your tax due for each quarter based on your cumulative income up to that point of the year. Ultimately, you can pay the lesser of the estimated tax calculated through this worksheet or the quarterly estimated tax calculated from the previous method. (This is helpful if your income is higher later in the year than earlier; you don’t have to pay the extra tax until you actually receive the income.)

If you receive your fellowship income irregularly throughout the year—particularly if you are paid more later in the year than earlier—and want to be very exact about the amount of estimated tax you pay each quarter, you should fill out the Annualized Income Installment Method Worksheet after you complete the Estimated Tax Worksheet.

However, the Annualized Income Installment Method is a very complicated and fiddly worksheet, so if you don’t mind just making the regular quarterly payments, perhaps with guesstimate adjustments, that’s going to be faster and easier. For example, if you have tax withholding in place for much of the year through your assistantship but switch to fellowship funding for just the fall semester, your estimated tax payments all need to be made in the last one or two quarters, not the earlier part when you were having tax withheld.

Join my tax workshop for more details on how to handle quarterly estimated tax when you switch on or off of fellowship mid-year, a common scenario for fellowship recipients.

Click here to learn more about the estimated tax workshop.

Paying Your Quarterly Estimated Tax

If you are required to pay quarterly estimated tax, you have many options for doing so, such as by mail, over the phone, and through the IRS2Go app. The easiest method is most likely through the website IRS.gov/payments, where you can choose to make a direct transfer from your checking account for free or to pay using a debit or credit card for a fee.

The due dates for your 2023 quarterly estimated tax are:

  • Q1: April 18, 2023
  • Q2: June 15, 2023
  • Q3: Sept 15, 2023
  • Q4: Jan 16, 2024 (or Jan 31, 2023 if you file your annual tax return by that date)

Please note that these dates are not at 3-month intervals. Quarter 1 is three months long; quarter 2 is two months long; quarter 3 is three months long; quarter 4 is four months long.

Penalties for Underpaying Tax throughout the Year

There are penalties for failing to make estimated tax payments when you are required to do so or underpaying your estimated tax. The penalty is calculated separately for each quarter, so you may be penalized for underpaying in an earlier quarter even if you made up for it in a later quarter. The details about the penalties can be found in Publication 505.

State Quarterly Estimated Tax

Your state and/or local government may also require you to make estimated tax payments.

Set Up a System of Self-Withholding

If you are going to owe any income tax for the year and do not have automatic income tax withholding set up, you should intentionally prepare for your tax bill, whether or not that tax is due with your annual tax return or quarterly.

My recommendation is to set up a separate savings account labeled “Income Tax” or similar. With every paycheck you receive, transfer into your savings account the amount of money from it that you expect to pay in income tax. For example, if you receive monthly fellowship paychecks, you should set aside 1/12th of the amount you calculated in Line 11c (rounding up). When you pay tax quarterly or annually, draw the payment from that dedicated savings account.

For more details about how to set up this kind of system and save in advance for each of your tax deadlines, join my tax workshop.

Click here to learn more about the estimated tax workshop.

How to Avoid Paying Estimated Tax Using Your Spouse’s Withholding

If you are married filing jointly with one spouse receiving a fellowship not subject to withholding and one spouse subject to automatic withholding, it is possible to set up the withholding on the employee income so that you don’t have to pay quarterly estimated tax on the fellowship.

The idea is that you will increase the automatic withholding on the employee’s income so that it covers what you owe in tax for the year as a couple. This involves filing a new W-4 with your spouse’s employer.

The simplest way to make this change is to enter an additional amount of money on Form W-4 Line 4c to have withheld from each paycheck (Form 1040-ES Line 11c divided by the number of paychecks your spouse receives per year).

How To Launch A Side Hustle in Grad School

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Side hustles are all the rage these days. Everyone seems to have one, and some even translate into big money! However, in my experience, few grad students are aware of (or understand how) to get one going. Even fewer faculty seem to be aware of how they could have one themselves OR how they can support their students in this endeavor. In this post, I’m going to talk to you about why you want to launch a side hustle, and why it’s worth your time to do it in grad school. If your a faculty member these tips can also apply to you!

Today’s article on how to launch a side hustle is by Dr. Leigh A. Hall. To read an article today by Emily, please visit Leigh’s website, Teaching Academia.

launch side hustle

What Is A Side Hustle?

A side hustle is a way to earn extra cash. Ideally, it’s going to be something you are super passionate about because you will be spending extra time creating it. Side hustles happen outside your current full time job (or graduate studies/assistantship). You decide how much time you want to devote to it and when you want to put in the hours. You can work with someone else, but most side hustles tend to start out as solo ventures. As they become more successful, you may find you need to pay others to help you. Some people have such successful side hustles that they eventually leave their full time job and devote themselves solely to their project.

Why Should You Launch A Side Hustle?

You might be thinking you have enough to do right now. You don’t need to have extra demands on your time. And there’s no guarantee that a side hustle will pay off anyways, right? But think about it this way – if your side hustle is inline with things you already enjoy doing then you’re not wasting any time by devoting yourself to it. If you were going to do it anyways, then you lose nothing by seeing if you can generate some extra income by sharing your work with others.

However, the side hustle is not just about you. While it can be a great way to generate extra income, ultimately you are providing a service that benefits others. If people are willing to pay you for your work – whatever it may be – that means they find value in it which means you are enhancing the lives of others in some way.

Finally, a side hustle can allow you to establish yourself beyond your academic career. It will allow you to connect with more people, and different people, than you likely would through academia alone. This can bring you a whole host of opportunities and open doors that otherwise would have stayed close. Your work as an academic will likely reach a narrow subset of people. Add a side hustle to that and you can expand your reach.

How To Identify The Right Side Hustle For You

Ok – you’re interested but unsure about where to start. The first thing is to figure out what you want your side hustle to be about. It can be connected to your day job, but it doesn’t have to. If you have a hobby that you are exceptionally good at then you could turn that hobby into your side hustle. It doesn’t have to extend from your job.

For example, several years ago I ran a successful yoga blog. I’m not a yoga teacher. I just wrote about going to yoga classes and what I learned in the process about myself. Eventually the blog ran its course, but I was able to get some great sponsorships and support along the way.

Because my blog added value to the yoga community, companies would send me yoga mats, clothes, shoes, all kinds of goodies for review. I even got to review a meal kit service so I had groceries mostly paid for now and then. My yoga practice was a serious hobby, and it was able to generate some income for me – even if just through free products – that I enjoyed and benefited from.

Currently, my side hustle extends from my job. I have a number of courses I sell. Do I generate massive amounts of income? No, but I do enjoy a nice supplement that I can do with as I please (I often just save it).

The key here is to pick a niche that you enjoy and that you want to share with others. And it’s perfectly fine to have both a hobby and a professional side hustle! You get to set the hours and how much you will be involved so do what’s best for you.

Launching Your Side Hustle

There are a number of ways to launch your side hustle, and any combination of them can work. After you identify your niche, you’ll need to consider how you want to connect with others. Some common ways to do this are:

  1. A website. You can get one for free (wordpress.com) and later move to a paid version. A free version lets you test the waters and play around without the stress of having to pay for it.
  2. A YouTube channel: I highly recommend this. Everything is going in the direction of video. A channel will allow you to build an audience. And while you are giving people content for free, once they see that you have something of value they will start to buy your more in-depth products.
  3. Patreon: Admittedly, I need to get this one going. Patreon allows you to sell memberships at varying tiers. For example, you might have people who give you 5.00 every month in exchange for specific things you create or offer. A second tier of people might give you 10.00 a month and receive something different/more. You get to decide how to price the tiers and what people get in return.
  4. Selling Courses: You may want to create one or more courses that people can access asynchronously. A number of platforms allow for this with varying advantages and disadvantages. Udemy allows you to post your courses free of charge, but they will take a hefty fee in return (they also help with marketing your courses). Platforms like Teachable and Thinkific require you to pay an ongoing fee or yearly subscription for your courses to be hosted, and they do no marketing. However, you stand to keep more of your money each time you sell a course here than on Udemy.

Launching your side hustle thus requires:

  • A clear vision of what you are going to be offering
  • Who would be interested in your product/creations?
  • Understanding where to house yourself and your work

A side hustle is going to require a mix of free and paid content. You are going to want to have a website or YouTube Channel (likely both) and a plan in place for content development. What do you want to sell? When will you find time to create this content and build out your offerings (both free and paid).

If you’re wondering if there is a right/wrong/best time to launch your side hustle my answer to you is this:

There is no best time to launch. You need to know what it is you want to do and what platforms you want to start out on. Then you go. You don’t need to do everything at once, and you can build out along the way as you get comfortable. The trick is to not get caught up on something not being good enough or that you only need to do X and then everything will be perfect. We’re not looking for perfect here. We’re looking for a few key things to be in place and then it’s time to go.

Having a side hustle can bring in extra income while allowing you to grow and develop professionally or with a hobby. The sooner you get started the sooner you will start to reap the rewards.

Dr. Leigh A. Hall is a professor at the University of Wyoming where she holds the Wyoming Excellence Chair in Literacy Education. She’s had a side hustle for four years now selling courses that can benefit graduate students and early career academics. See her work at TeachingAcademia.com.

Where to Find Completely Free Help for Your Tax Return

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It’s incredible that in the US we are expected to prepare our own tax returns! Even a simple return can prove quite challenging for someone new to preparing one, so it’s natural to turn to other sources for help. Grad students have a double disadvantage in this area: 1) Their income and expenses are a bit unusual, so finding the right help can prove difficult. 2) They don’t have much available cash to pay for help. The good news is that there are numerous 100% free sources of help for your tax return.

free tax help

The IRS

I think the IRS should be the first place you turn for help when preparing your tax return! After all, they have the final word on how to properly fill out a tax return. The IRS provides multiple sources of 100% free help.

Instructions

The central form of your tax return is Form 1040. (Non-residents will use a Form 1040-NR. In previous years, you might have used a Form 1040-A or Form 1040-EZ, but those no longer exist post-Tax Cuts and Jobs Act.) That is the one every filer will fill out. If you have a simple return, that’s where it stops, but if your return is more complex, you may have some additional schedules and forms to fill out.

Form 1040 comes with a detailed instruction booklet (not yet updated for 2019). If you’re ever confused about what the form means, just refer to that particular line in the instructions.

Interactive Tax Assistant

In addition to the PDF publications, the IRS has large set of tools known as the Interactive Tax Assistant. After selecting your question of interest (e.g., Do I Include My Scholarship, Fellowship, or Education Grant as Income on My Tax Return?), the ITA will prompt you for information and give you an answer at the end of the process.

Publications

Additionally, the IRS has instead created numerous publications to explain their interpretation of the code even more clearly.

The most relevant publications for PhDs are (not all updated for 2019):

These publications are also frequently broken up and summarized into articles that are easily searched on the IRS website.

Free File

The IRS also provides free tax software for low-income individuals and households through its Free File system. If you have a household income below $72,000 per year, you can take advantage of it. Very well-known software providers like TurboTax® and TaxAct® have Free File versions available.

Help Line

If you would rather wait on hold than sift through publications on your own, you can call the IRS Help Line during tax season. Sometimes a customer service agent can quickly answer your question and clear up your confusion.

Be warned that:

  • The hotline is available from 7am to 7pm “local time.” The last time I called, local time was determine by my phone number’s area code, not the time zone where the call actually originated.
  • The customer service agents don’t have access to any special information. Everything they reference is already publicly available.

Other Tax Software

If you don’t qualify for the IRS Free File software, you may be able to use free versions of other software. Software like this prompts you for relevant information to assemble your tax return, so it’s an easy way to access professional tax advice. However, if your return becomes complex enough, you may be required to pay a fee to complete and submit it.

The Internet

There are plenty of non-IRS sources of tax help available online:

As with anything you find online, you have to take tax information with a grain of salt. Check the source and check their references. You are not receiving advice tailored to your situation, even if you’re listening to an expert. A special word of warning for tax year 2020: Check the publication date on any articles or posts. The Tax Cuts and Jobs Act was a once-in-a-generation tax overhaul, so triple-check any information you find that was originally published for tax year 2017 or earlier.

Your University and/or Community

Your university and local civic organizations (e.g., libraries, community centers) may provide free tax help. It might even be tailored for students and/or low-income individuals. A number of universities have hosted my tax seminar, and others ask local CPAs to volunteer their time. One common program at universities and elsewhere is Volunteer Income Tax Assistance (VITA) for taxpayers earning less than $56,000 per year and others with particular needs. If you avail yourself of help from any of these sources, please be aware that the volunteers and even professionals may not be well-trained in the nuances of higher education income and expenses as relevant to PhD trainees.

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

When to Pay for Help

The great majority of tax information that you need to prepare your return is available to you for free. If you have the time and inclination, you could learn enough to put together a competent tax return. However, your time may be more valuable to you than the money you could spend getting more targeted and/or direct tax help. If your tax return is sufficiently complex (e.g., you own property, have investment income, are self-employed, etc.), it’s worthwhile to hire a professional tax preparer.

My workshop provides (in video format) exactly the information grad students need to prepare and understand their tax returns. It includes special scenarios, such as for dependents and students under the age of 24. The best component of the workshop is the live Q&A sessions, in which you can ask any questions you have after viewing the videos. Working through the components of this workshop will massively cut down on the time you need to spend researching how to prepare your tax return as it is narrowly tailored for funded graduate students.

Finally, some tax questions are just too nuanced for the answers to be clearly found for free online. In 2018, I hired a tax firm to validate my overall approach to PhD trainee taxes and research some really gnarly questions. As I learned, there is a lot of gray area when it comes to taxes! The relevant sources are the tax code, the IRS’s translation of the code (e.g., the publications), the court rulings that help interpret the code, and finally, what the IRS actually elects to enforce. If you’d like to benefit from this research (and the benefits may include a literal reduction in your tax liability!), you’re welcome to join my tax workshop for PhD trainees.

Making Ends Meet on a Graduate Student Stipend in Los Angeles

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In this episode, Emily interviews Adriana Sperlea, a PhD student in computational biology at the University of California at Los Angeles (UCLA). Living in Los Angeles is financially challenging to say the least, and Adriana has found ways to improve her cash flow over time, such as by doing a summer internship, moving into subsidized graduate housing, living car-free, and budgeting intensively. She has even recently started contributing to a Roth IRA! Adriana and Emily additionally discuss how Adriana discovered that she owed a large tax bill on her fellowship income and how she paid those back taxes and started paying quarterly estimated tax.

Links mentioned in episode

grad student los angeles

0:00 Introduction

0:54 Please Introduce Yourself

Adriana Sperlea is a PhD student at the University of California, Los Angeles. She is studying Bioinformatics through an interdepartmental program. She is an international student from Romania. Her stipend is about $32,500 and she says it goes up a little bit every year. Each month, she receives $2,400. She is in her fifth year of her program.

3:03 How do you live within your means in Los Angeles?

Adriana says that getting outside financial support wasn’t an option for her. Her family doesn’t have the means to provide her financial support. As an international student, she doesn’t qualify for subsidized loans. After her third year of graduate school, she had a summer internship that provided an income on top of her graduate stipend. This is the only extra income she has been able to receive outside of her stipend. Due to regulations on visas, international students cannot work side hustles. It is illegal for international students to be employed outside of the university. Emily says that international students are in a tough financial position because they don’t have access to options to loans or side income that U.S. citizen graduate students can access.

Adriana was on a training grant that required her to do an internship. It was the Biomedical Big Data training grant. She received pay for her internship and continued receiving her graduate student researcher funding. She lived in San Diego for her internship. San Diego is cheaper than Los Angeles, but she still had to pay her portion of rent for the apartment she shared with her partner in Los Angeles.

6:56 What is your approach to budgeting in Los Angeles?

Adriana says that before she created your budget, she had to figure out your housing costs. She lives in graduate student housing, which is subsidized and affordable, but there’s not enough available for all graduate students at UCLA. In Los Angeles, you have to shop around a lot and hustle to make housing costs work with your stipend income. Many people use Craig’s List. Finding housing that costs 30% of your income is not feasible in Los Angeles, but housing that costs 40% of your income could be feasible.

Adriana explains that the subsidized housing at UCLA is available through a lottery system. Those who get into the subsidized housing are allowed to stay for seven or eight years, basically as long as needed to complete the graduate program. The leases are month-to-month, so people move out at any time of the year. Adriana says there isn’t enough available, so she pushes for more student housing. She lives in a junior one bedroom, which costs $1,300 per month. She pays $650 for rent because she shares the one bedroom. It helps lower housing costs to share a one bedroom, but for many people this is not an ideal situation.

Adriana says that housing and transportation are the two big items for the budget. She doesn’t have a car, but she shares one with her fiancé. She says to find affordable housing, you need to spend time looking for uncommon offers, start early, and have patience. You may need to sacrifice certain amenities and quality, but look for places livable and clean. Ultimately, there is only so much you can do.

13:30 What is the system that you use for budgeting?

For her budgeting system, Adriana uses a manual spreadsheet. She inputs her income and monthly fixed payments first. Then she divides the remaining income by four, for four weeks of the month. This sets her variable spending income for each week. Whenever she buys something, she inputs it. She always has a sense of what she spends. She buys groceries on the weekends and cooks her meals, so she doesn’t go out to eat during the week. She doesn’t spend anything Monday through Friday. Often, she has about $100 leftover to use on the weekends for fun.

Emily recaps Adriana’s budgeting system. Adriana subtracts her monthly bills from her monthly income. With the remainder, she divides by four for each week. She uses it for groceries first, then doesn’t spend money during the week. She has wiggle room for miscellaneous and money leftover for the weekend. Adriana adds that if she sees something she wants to buy, she puts it on a list. At the end of the month, she looks at her list and ranks the things she wants. This reduces impulse purchases and formalizes the practice of delayed gratification.

17:30 What do you do about large expenses?

Adriana has a savings account with $2000 to $3000. She has this savings because her rent decreased since she moved into subsidized housing and she received extra income during her internship. She uses this savings account for big expenses that are necessary, and then she gradually fills it back up. She says that before her internship, it was really tough to make big purchases. For example, she didn’t go home to Romania often because she didn’t have enough for flights.

Emily recaps that Adriana got a boost from her summer internship. This helped her get ahead. She repays herself into savings instead of using a credit card. Adriana says she has credit cards for maximizing rewards but she does not spend unless she actually has that money. She has a healthy fear of credit cards.

20:16 Any other comments about your budget or how you make it work in Los Angeles?

Adriana has loosened the reigns on herself. She says she has gotten a sense of it after manually managing her budget for so long. Emily says Adriana has internalized her budget. Her budget is in her mind, so she is less dependent on the spreadsheets. Emily says that if you go to a new city, you get thrown. If there’s a big shift in your life that’s a good time to start carefully tracking again.

22:00 Can you talk about saving for retirement?

Adriana shares that about one year ago, she asked her fiancé’s dad about investing. Her fiancé’s dad talks a lot about investing, so she asked to learn more. He recommended the book A Random Walk Down Wall Street*. Adriana realized that investing is not rocket science and super simple. She thinks there is a weird culture around investing to make it sound more complicated than it is. She says that it’s easy, there’s a low risk way to do it, and during graduate school is the best time to invest. She thought that you have to worry about the market, but she jokes that the best strategy is to forget your password.

[* This is an affiliate link. Thank you for supporting PF for PhDs!]

Adriana uses a Roth IRA. This account pays taxes on her money now. She says this is better because during graduate school, this is the lowest tax bracket that she’ll ever be in. It’s the lowest tax bracket that exists, so this is a good time to invest. She puts $200 in every month. She can budget that now because her rent costs are low. Adriana likes to check in and see she’s accumulated money. Emily writes about investing on her blog and agrees investing is easy.

25:54 Can you tell us the story of your big financial mistake from your second year?

When Adriana started graduate school, she was taxed as an international student. As an undergraduate, she went to college in the U.S. She always had taxes withheld and she never had to worry about taxes. But after Adriana started graduate school, Adriana’s residency status changed from non-resident alien to “resident for tax purposes.” This means the U.S. can tax her like she’s a resident. This tax status changed in June of her first year of graduate school, but it was retroactive for the whole calendar year. She had never heard about this issue from anyone else. In June when her status changed, the IRS refunded her about $3,000 that was originally withheld from her. At the time she didn’t fully understand why she received this money, and she spent it. But when April came and she had to do her taxes, she learned that she owed about $3,000 in taxes. It was pretty scary for her.

Emily says this tax mistake is pretty common. For the first full calendar year that you’re in graduate school on a fellowship-style stipend, you’re supposed to pay quarterly estimated tax. Most people don’t know about this.

30:28 How did you pay the tax balance?

Adriana only had about $1,000 set aside. She feels a bit lucky that she was disputing with the IRS for money that she hadn’t gotten back due to a treaty between Romania and the U.S. that provides for international workers to get their taxes back from first five years from working with non-resident alien status. This dispute got resolved at the same time as her large tax bill. She also applied for a payment plan with the IRS. Anyone can do a payment plan with the IRS if you haven’t done one in past five years and your balance is less than $200,000.

Emily says that many people are intimidated by the IRS, but it sounds like Adriana had a good experience. Adriana says she spent a lot of time on hold. But if you’re a graduate student and you realize you can’t pay your tax bill, the IRS is a place to turn to and get a payment plan with no interest.

34:40 Final Comments

Adriana says budgeting can be tough and time consuming, and a little bit stressful. She says it’s worth it because it’s more stressful to not be able to pay rent. Emily says that it’s better to fess up, face up to reality of the situation, and engage with it. Don’t try to run and hide, because that compounds the problems.

35:18 Conclusion