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tax guide

What Is a 1098-T?

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The purpose of a 1098-T is to allow students and the parents of dependents students to take an education-related tax deduction or credit. The 1098-T form (p. 4) states:

You, or the person who can claim you as a dependent, may be able to claim an education credit on Form 1040 or Form 1040A. This statement has been furnished to you by an eligible educational institution in which you are enrolled, or by an insurer who makes reimbursements or refunds of qualified tuition and related expenses to you. This statement is required to support any claim for an education credit.

While some universities use the 1098-T to report fellowship stipend income, not all do. Once a student’s non-compensatory (fellowship and scholarship) income exceeds his qualified education expenses (as is the case for many funded graduate students), the university has three choices: 1) generate a 1098-T that reflects all of the fellowship stipend and scholarship income, 2) generate a 1098-T the reflects the scholarship but not fellowship stipend income, or 3) not generate a 1098-T.

Universities do not have to report (net) non-compensatory taxable scholarship and fellowship pay to the IRS, either on a 1098-T or a 1099-MISC, though some choose to. The instructions for the 1098-T (p. 2) state:

File Form 1098-T, Tuition Statement, if you are an eligible educational institution that received payments for qualified tuition and related expenses from a student. You must file for each student you enroll and for whom a reportable transaction is made… Exceptions. You do not have to file Form 1098-T or furnish a statement for:… Students whose qualified tuition and related expenses are entirely waived or paid entirely with scholarships.

These instructions reinforce the idea that the purpose of the 1098-T is to claim an education tax benefit, and when an education tax benefit is not available, the 1098-T becomes optional.

Therefore, if you receive a 1098-T, you can reference it for the total amounts of scholarship income and qualified education expenses processed by your student account. Double-check the amounts reported in Box 2 and Box 5 of the 1098-T against the transactions in your student account to verify their accuracy. If you do not receive a 1098-T, likewise you will need to access your student account and your own bank records (or the courtesy letter or 1099-MISC sent to you) to tally all the fellowship and scholarship income you received as well as all the qualified education expenses. Please take note that the definition of qualified education expenses changes depending on the type of education tax benefit you are claiming, so what your university deems qualified education expenses for the 1098-T may not match what you decide to claim.

Parent article: Think about Your Grad Student Income and Assess the Tax Forms Your University Generated

We at Personal Finance for PhDs are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.

 

What Are Qualified Education Expenses?

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Qualified education expenses are education-related expenses for which a student or the parent of a dependent student can claim a higher education tax benefit. As grad students have educational expenses associated with their role as students (even if the expenses are paid on their behalf), they can always reduce their tax burden using their qualified education expenses.

This article was most recently updated on 3/19/2024. It does not constitute tax, legal, or financial advice.

The precise definition of what does and does not constitute a qualified education expense varies based on the type of educational tax benefit being claimed. Publication 970 (p. 4) explains:

Even though the same term, such as qualified education expenses, is used to label a basic component of many of the education benefits, the same expenses aren’t necessarily allowed for each benefit.

Please note that each of the following higher education tax breaks have eligibility criteria not listed in this article.

Tax-Free Scholarships and Fellowships

The qualified education expenses that balance against scholarships and fellowships paid to students to make the scholarships and fellowships tax-free are defined on p. 6 of Publication 970:

Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:

  • Tuition and fees required to enroll at or attend an eligible educational institution; and
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

Expenses that don’t qualify. Qualified education expenses don’t include the cost of:

  • Room and board,
  • Travel,
  • Research,
  • Clerical help, or
  • Equipment and other expenses that aren’t required for enrollment in or attendance at an eligible educational institution.

Lifetime Learning Credit

The qualified education expenses that qualify for the Lifetime Learning Credit are defined on p. 24 and 28 of Publication 970:

For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

Qualified education expenses don’t include amounts paid for:

  • Insurance;
  • Medical expenses (including student health fees);
  • Room and board;
  • Transportation; or
  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

American Opportunity Tax Credit

The qualified education expenses that qualify for the American Opportunity Tax Credit are defined on p. 13, 14, and 17 of Publication 970:

For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

Related expenses. Student activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.

Qualified education expenses don’t include amounts paid for:

  • Insurance;
  • Medical expenses (including student health fees);
  • Room and board;
  • Transportation; or
  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

What Is a Courtesy Letter?

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A courtesy letter is not an official tax form. Instead, it is a communication sent to you by your university or funding agency that tells you the amount of fellowship or training grant income they gave you in the course of the previous year. The letter might also include a warning that the sender will not be able to make any comments about your tax liability or how to prepare your tax return.

What Is a 1099-MISC?

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1099misc

The most widely recognized use of a 1099-MISC is to report non-employee compensation aka self-employment income. The fact that Form 1099-MISC is sometimes used to report fellowship pay, which is not self-employment income, can be quite confusing for grad students and the people and software that prepare their tax returns.

If a 1099-MISC is used to report fellowship pay, the pay will appear in Box 3 “Other income.” Fellowship pay is considered similar to an award. In its instructions to organizations, Form 1099-MISC (p. 5) states:

“Box 3… The amount shown may be payments received as the beneficiary of a deceased employee, prizes, awards, taxable damages, Indian gaming profits, or other taxable income.”

The 1099-MISC instructions (p. 5) make explicitly clear that the award should not be compensatory or paid in exchange for work:

“Also enter in box 3 prizes and awards that are not for services performed.”

Interestingly, the 1099-MISC instructions (p. 2) state that fellowships and scholarships should not be reported on a 1099-MISC:

“Scholarships. Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported by you to the IRS on any form.”

It seems that the universities that use the 1099-MISC to report fellowship pay are skirting this prohibition because the scholarship and fellowship grants are not being given for services. That type of pay is compensatory and usually referred to as an assistantship in the case of graduate students. The instructions clearly state that universities do not have to report non-compensatory taxable fellowships and scholarships to the IRS. However, some universities do report non-compensatory fellowships and scholarships using a 1099-MISC. Even though the 1099-MISC is a confusing form to receive, it might be even more confusing to not receive any communication whatsoever.

I have observed that use of the 1099-MISC to report fellowship income correlates with grad students having taxes withheld from their fellowship pay. The 1099-MISC, unlike the 1098-T, allows the university to report both the gross pay received and the amount of federal and state tax withheld.

If you receive a 1099-MISC that reports your fellowship income, you should report it as fellowship/scholarship income rather than as 1099-MISC “other” income. Your gross income from this source will appear in Box 3. Your amount of federal tax withheld will appear in Box 4, and your amount of state tax withheld will appear in Box 16.

If your income is reported in Box 7 instead of Box 3, this is considered self-employment income and you will pay a much larger amount in tax, so make sure that you were properly categorized. (Again, fellowship pay is not self-employment income, so self-employment pay from a university implies that you served as a contractor on a specific project outside of your direct role as a graduate student, and this was likely explicitly discussed with you in advance.)

Parent article: Think about Your Grad Student Income and Assess the Tax Forms Your University Generated

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.

 

Where to Report Your Grad Student Income on Your Tax Return

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There are two broad categories of grad student income: employee income and awarded income. Both types of pay are supposed to be reported in the ‘wages’ line on your tax return, Form 1040 Line 1. Read on for the relevant tax code references.

Where to Report Employee Income

Employee income comes from work and is reported on a Form W-2. Assistantships, whether research, teaching or graduate, provide the grad student with employee income. Postdocs often hold employee positions as well. This type of grad student and postdoc income is the same to the IRS as employee income from other sources.

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 Box 2 (federal), Box 17 (state), and Box 19 (local).

Form W-2 contains instructions for the employee (p. 7):

reporting_W2i

Where to Report Non-Compensatory Grad Student Income

Non-compensatory income is given as an award and is not in exchange for work. Scholarships and most fellowships are forms of non-compensatory work. Non-compensatory pay will be officially reported to the student on a 1098-T in box 5 or on a 1099-MISC in box 3. It also might be unofficially reported on a courtesy letter or not at all.

Please note that when you calculate the taxable portion of your non-compensatory income for the year, you have two choices for what to do with your qualified education expenses: to take a deduction or a credit.

Scholarship and fellowship income that is reported anywhere other than on a W-2 or not reported at all should also be added to the ‘wages’ line on your tax return alongside the letters SCH.

reporting_taxfree

The Wages Line on the 1040

The 1040 instructions dictate that W-2 income should be reported in line 7 (p. 21):

reporting_1040_W2

Publication 970 says that fellowship and scholarship income should be reported in line 7 (p. 7):

reporting_1040_SCH

The Wages Line on the 1040A

The 1040A instructions dictate that W-2 income should be reported in line 7 (p. 23):

reporting_1040A_W2

Publication 970 says that fellowship and scholarship income should be reported in line 7 (p. 7):

reporting_1040A_SCH

The Wages Line on the 1040EZ

The 1040EZ instructions dictate that W-2 income should be reported in line 1 (p. 10):

reporting_1040EZ_W2

Publication 970 says that fellowship and scholarship income should be reported in line 7 (p. 6):

reporting_1040EZ_SCH

Parent post: Grad Student Income Tax Guide: 2015 Edition

We at Personal Finance for PhDs are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.

 

Grad Student TurboTax Guide: 2016 Edition

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The purpose of this guide is to help you enter your proper income and qualified education expense data into Turbotax so that it generates an accurate tax return for you. This guide uses the free version of TurboTax.

Before you begin, please review the 2016 tax guide home page to gather all the forms you need. If you do not have documentation for all of your income (both compensatory and non-compensatory), you will need to do some calculations before you start entering data into TurboTax.

The common combinations of tax documents that grad students receive are:

If you made estimated tax payments on your fellowship income, you will also need to enter your estimated tax payments into TurboTax. Read: How to enter estimated tax payments into TurboTax

Related article: Paying Income Tax throughout the Year

Even if your income and expenses don’t exactly match one of the above scenarios, you can likely combine them to figure out how to report all of your income and qualified education expenses.

Parent post: Enter Your Grad Student Income into Tax Software

We at Personal Finance for PhDs are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.