tax

What Your University Isn’t Telling You About Your Income Tax

January 4, 2021 by Emily

In this episode, Emily lists six things that your university isn’t telling you about your income tax. Point 1 is on why and how this lack of communication manifests. Point 2 is on what your Form 1098-T, if you even receive one, is not telling you. Points 3 through 5 are on the extra steps that grad students, postdocs, and postbacs on fellowships or training grants need to take but are rarely instructed on or even warned about. Finally, point 6 is on the tax pitfalls that anyone under age 24 needs to watch out for.

Links Mentioned in the Episode

Tax Center for Personal Finance for PhDs
How to Complete Your Grad Student Tax Return (and Understand It, Too!)
Quarterly Estimated Tax for Fellowship Recipients
Emily’s speaking services
Season 2 Bonus Episode 1: Do I Owe Income Tax on My Fellowship?
Season 4 Bonus Episode 1: Fellowship Income Is Now Eligible to Be Contributed to an IRA!
Podcast hub
Subscribe to the mailing list

Receive Your Tax "Cheat Sheet"

Subscribe to the Personal Finance for PhDs mailing list for essential information to help funded US graduate students (citizens/residents) with their federal tax returns

Intro

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

This is Season 8, Episode 1, and I don’t have a guest today, but rather will list for you six things that your university isn’t telling you about your income tax. Point 1 is on why and how this lack of communication manifests. Point 2 is on what your Form 1098-T, if you even receive one, is not telling you. Points 3 through 5 are on the extra steps that grad students, postdocs, and postbacs on fellowships or training grants need to take but are rarely instructed on or even warned about. Finally, point 6 is on the tax pitfalls that anyone under age 24 needs to watch out for.

Please keep in mind that I’m recording and publishing this episode in early January 2021 for tax year 2020, so if you are listening to this at a later date, please check the Tax Center on my website, PFforPhDs.com/tax/ for any relevant tax law changes or other updates.

For Season 8 of the podcast, I’ve shifted up the format! There are two new short segments, one before and one after the interview or, in the case of this episode, expert discourse. I hope this new format will encourage more interactions between me and you, the listener!

Book Giveaway

Without further ado, here’s my episode on what your university isn’t telling you about your income tax. I have seven points for you today.

Preliminary Comments

Before we get into my list, I need to make a few general comments.

First, this episode is for US citizens and residents living and working in the US who have household incomes below about $150,000. I am discussing federal income tax only, but don’t forget that you might be subject to state and local income tax and other types of taxes as well.

Second, I am not a CPA or any kind of tax advisor, so none of this is advice for financial, legal, or tax purposes.

Third, I’m going to use the terms employee income and awarded income throughout the episode, so I need to define them for you up front because I semi made them up.

Employee income is the stipend or salary you receive in exchange for working for your university or institute. It is reported on a Form W-2 at tax time. Typically, employee positions at the graduate student level are called assistantships and max out at half-time positions.

Awarded income is the stipend or salary you receive from your fellowship or training grant, provided it is not reported on a Form W-2 at tax time. You are not considered an employee with respect to awarded income. Awarded income also includes the money that pays your tuition and fees if you are a funded grad student and your health insurance premiums if you are a postdoc or postbac non-employee. We’ll talk more about the tax forms awarded income may or may not show up on momentarily.
Fourth, if you want to learn more from me about any of the subjects I mention, the best place to go is PFforPhDs.com/tax/, where you can find many free articles, podcast episodes, etc. If you want to really dive in deep, I have two paid workshops available.

How to Complete Your Grad Student Tax Return (and Understand It, Too!) goes over how to handle your higher education income and expenses with respect to your tax return, whether you ultimately prepare it manually, using software, or through a human tax preparer. You can find that at PFforPhDs.com/taxworkshop/.

Quarterly Estimated Tax for Fellowship Recipients explains how you know if you’re responsible for paying quarterly estimated tax and goes line-by-line through the relevant tax form to show you how to estimate your tax due. You can find that at PFforPhDs.com/QEtax/. That’s q for quarterly. e for estimated, t, a, x.

Finally, if you want to bring this tax content and more to your peers at your university or institute, I am available for live speaking engagements. Head to PFforPhDs.com/speaking/ for more info on that.
All right! With that out of the way, here is my list of six things your university isn’t telling you about your income tax.

1. Anything

Your university is not telling you anything about your income tax. This can happen in one or both of two ways.

The first mode of non-communication is through tax forms or a lack of tax forms. Now, employees definitely will receive a Form W-2 at tax time that lists their stipend or salary. But the university isn’t necessarily required to send you any forms regarding your awarded income. It’s actually quite common for grad students and postdocs to receive zero tax forms or any kind of formal or informal communication regarding their income. And that obviously leaves them totally adrift, and many don’t even realize that they are supposed to account for their stipends or salaries on their tax return.

Not all universities take this zero communication approach for their PhD trainees receiving awarded income. A lot of them report grad student awarded income on Form 1098-T in Box 5, even though the IRS does not require them to. A minority report awarded stipends or salaries on Form 1099-MISC in Box 3. Some send an informal letter listing the amount of the awarded stipend or salary. These approaches are helpful to a degree, but it would be even better if there was one standard way of reporting awarded income that was used by all universities in the US.

The second mode of non-communication is through staff members. Almost universally, staff members are instructed to not discuss income tax with individual students or postdocs. The university does not want to make itself liable for erroneous tax returns. Even though that’s frustrating, I think it is understandable.

As a sidebar, despite this prohibition, grad students and postdocs frequently repeat misinformation to me that they heard from staff members. Now, whether the staff member said something incorrect or the student simply misinterpreted what was said, I can’t be sure. A perfect example is the phrase “Your stipend isn’t subject to income tax,” which many students have repeated to me. What I think the staff member said or meant to say is “Your stipend is not subject to income tax withholding.” However, what the student hears is “You don’t have to pay income tax on your stipend.” You can see that this is a topic that needs to be discussed carefully.

The best case scenario seems to be when universities host educational workshops on higher education tax topics. Those are typically led by knowledgable staff members, volunteers from local accounting firms, or me, an outside contractor. None of us are giving individual tax advice, but we are teaching grad students and postdocs how the university reports their income and higher education expenses and how the IRS views the same.

So super best case scenario, you receive some kind of tax form or letter and have the opportunity to attend a workshop. Worst case scenario, no forms or letters and everyone clams up.

2. Your Form 1098-T Lacks Vital Information

I want to like Form 1098-T, I really do. It’s the best we have. And, without getting too much into the weeds, Form 1098-T has undergone a couple edits recently that make it far, far easier to use. So that is great. I wish its usage was universal.

Where Form 1098-T still falls short is in failing to catalog all awarded income and all higher education expenses that are relevant to a funded grad student.

On the income side, it’s typical to include tuition and fee scholarships and waivers in Box 5. Often, though not always, the awarded stipend or salary appears as well. But you might have received other awarded income as well during the year from your university or another source, and if that funding was not processed by the department that prepares the Form 1098-T, it may be left out. So you can look at the number in Box 5 of your 1098-T, but you still need to wrack your brain to come up with any additional awarded income you might have had for the year.

On the expenses side, Form 1098-T Box 1 reports “payments received for qualified tuition and related expenses.” A lot of people and software conflate the sum listed in that box with the total of their qualified education expenses for the year. Qualified education expenses are used to reduce your taxable income or your tax liability. I don’t want to get too technical in this episode, but if you make that assumption, you might be missing out on hundreds or even thousands of dollars of qualified education expenses, meaning you could overpay your true tax liability by tens or hundreds of dollars. This is because the definition of “qualified education expenses” is actually different depending on which higher education tax benefit you’re using them for, and Form 1098-T uses the most conservative definition. So unfortunately you can’t just go with the number listed in Box 1. You have to look into all of your higher education expenses individually to determine which you can use for the tax benefit you chose. That means combing through your student account as well as considering other spending you’ve done.

I wish Form 1098-T were completely trustworthy so you wouldn’t have to track down all the underlying expenses in your student account, but it’s just not the case right now.

If you would like some support through this process, I recommend joining my tax workshop at PFforPhDs.com/taxworkshop/. I provide a detailed discussion of what qualified education expenses are missing from Form 1098-T and worksheets to help you keep all the numbers straight.

3. Your Fellowship or Training Grant Income Is Taxable

I just wanted to close the loop I brought up in point #1. In case you were not aware, awarded income is taxable to the extent that it exceeds your qualified education expenses such as tuition and required fees.

Now, just because some income is taxable doesn’t mean you will actually end up paying income tax on it. If your total income is low enough or your have enough deductions and credits to claim, you may not end up paying any income tax. But you have to go through the exercise of filling out your tax return to determine if and how much income tax you owe, and that is true whether your income is awarded or employee or both.

There is a persistent rumor within many universities and departments that awarded income is tax-exempt. That actually used to be the case several decades ago, so there is a kernel of outdated truth in the rumor. And I can understand why the rumor lives on and spreads, because it is what people want to hear. Plus, at many places it is not countered by direct communication from the university as in point #1.

If you would like to hear my full argument with IRS references to prove that awarded income is taxable, please listen to Season 2 Bonus Episode 1 of this podcast, titled “Do I Owe Income Tax on My Fellowship?” It is linked from the show notes for this episode.

4. Your Paycheck Is Pre-Tax, Not Post-Tax.

I’m going to expand on the issues related to awarded stipends and salaries now.

With employee income, your employer withholds income tax on your behalf to send to the IRS and gives you a paycheck for the rest of your income, which is your net or after-tax income. A pay stub is also generated for each paycheck that lists your gross income and all the tax that has been withheld, though you might have to proactively seek it out.

While it is possible to withhold income tax from awarded income, most universities and institutes don’t offer this benefit. There is typically no pay stub generated, either. In the absence of clear communication, harkening back to point #1, many, many fellows who are on board with point #3 assume that their income has already had income tax withheld. After all, that is how paychecks work for the great majority of people who receive them.

It’s a nasty surprise when they realize that their pay is pre-tax, not post-tax, and they have a large tax bill to pay.

5. Your Income Tax Is Due Four Times per Year, Not One

This point follows on on from point #4 for those who do not have income tax withheld from their awarded stipends or salaries:

If the amount you owe in income tax exceeds $1,000 for the year and you don’t fall into an exception category, you are required to make what are called estimated tax payments. This is when you, personally, send the IRS money up to four times per year to stand in for income tax withholding.
Going along with point #1, this is rarely discussed or even mentioned to grad students and postdocs receiving awarded income. A heads up would be nice.

Ideally, fellowship recipients would be told that they might owe income tax—point #3—and that tax is not being withheld from their paychecks—point #4—and that the best practice is to set aside money from each paycheck for their future tax payments, whether that is once per year or up to four times per year—this point.

If you would like more information about estimated tax for fellowship recipients, I have a great long-form article on it that I’ll link to from the show notes. If you want my help to determine if you are required to make estimated tax payments and in what amount, I recommend checking out my workshop at PFforPhDs.com/qetax, that’s qe for quarterly estimated t a x.

6. Those of You Under Age 24 Need to Be Extra Cautious

If you are under age 24 at the end of the tax year and receive primarily awarded income, there are two tax potholes for you to watch out for. Your university won’t tell you about these subjects because it comes way too close to giving tax advice.

The first is potentially being claimed as a dependent by your parent or other relative, which generally speaking is not good for your bottom line but good for theirs. I have observed that parents and the people who prepare their tax returns tend to default to assuming that anyone under age 24 who is a student is a dependent. The thing to know about being claimed as a dependent is that it’s not a matter of preference. There is a set of five objective tests to determine if a young person is a dependent, which you can read about in Publication 501. There is a tricky part of one of the tests, though, the support test, which is different depending on if your stipend or salary is employee income or awarded income, so watch out for that. You should go the extra mile to discuss with your parent or relative whether you can be claimed as a dependent before either of you files in case there is a difference of opinion to work out, because it’s much easier to do it that way than to mediate a disagreement via the IRS.

The second is the Kiddie Tax. The Kiddie Tax is an alternative way of calculating your tax liability based on your parent’s marginal tax rate instead of your own graduated tax rates. Ostensibly, the Kiddie Tax is supposed to disincentivize high-earning parents from sheltering income-generating assets in their children’s names, but in a mind-boggling twist, the Kiddie Tax applies to awarded income, not just investment income. I have an article on my site on the Kiddie Tax linked from PFforPhDs.com/tax/. I sincerely hope that it does not apply to you or you can find a way to avoid it or minimize it, but in any case it is something to be aware of and watch out for.

I have a whole video in How to Complete Your Grad Student Tax Return (and Understand It, Too!) dedicated to people who were under age 24 during the tax year, so if you want a more in-depth exploration of these topics, please go to PFforPhDs.com/taxworkshop/.

Conclusion

I’m really glad you joined me for this episode! If you found something of value in it, please share it with your peers. You can save them a lot of emotional and financial turmoil and stress by giving them a heads up about the topics I covered. I really appreciate it! Good luck this tax season, and don’t hesitate to reach out if you need any help!

Listener Q&A

Outro

Listeners, thank you for joining me for this episode!

pfforphds.com/podcast/ is the hub for the Personal Finance for PhDs podcast. On that page are links to all the episodes’ show notes, which include full transcripts and videos of the interviews. There is also a form to volunteer to be interviewed on the podcast and instructions for entering the book giveaway contest and submitting a question for the Q&A segment. I’d love for you to check it out and get more involved!

If you’ve been enjoying the podcast, here are 4 ways you can help it grow:

Subscribe to the podcast and rate and review it on Apple Podcasts, Stitcher, or whatever platform you use. If you leave a review, be sure to send it to me!
Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website.
Recommend me as a speaker to your university or association. My seminars cover the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes.
Subscribe to my mailing list at PFforPhDs.com/subscribe/. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs.

See you in the next episode, and remember: You don’t have to have a PhD to succeed with personal finance… but it helps! The music is “Stages of Awakening” by Podington Bear from the Free Music Archive and is shared under CC by NC.

How to Financially Manage a Once-Per-Term Fellowship Paycheck

June 24, 2020 by Emily

In some PhD programs, graduate students on fellowship are paid only once per semester or trimester, between 2 and 4 times per year. This pay frequency engenders unique challenges and opportunities for those PhD students. The less frequent your pay, the more dire the consequences can be if you don’t manage it satisfactorily. This article will walk you through all the areas of financial management that you need to consider when you only receive one fellowship paycheck every three to six months.

financially manage once per semester trimester fellowship

The Good News

Fellowship (and training grant) income is different from most income. I call it “awarded income” as it is technically not given in exchange for work. On the other hand, “employee income” is what you receive for work, such as research (a research assistantship) or teaching (a teaching assistantship).

Some universities use these terms differently, but at the end of the day the way to differentiate them is by what tax form you do or do not receive at tax time. Employee income is reported on a Form W-2, and awarded income is not.

In a typical employer-employee relationship, the employee works and then receives their pay after the pay period has ended, whether that is weekly, biweekly, semimonthly, or monthly.

Because fellowship income is awarded and does not have to follow a period of work, it can be awarded at any time.

Since your fellowship income is awarded once per term, the good news is that you’re receiving that income up front, in a sense. You receive the income near the start of the multi-month period that it is intended to fund, which I’ll call the budgeting period in this post.

That’s the good news: You receive your income at the start of your budgeting period in a sense, instead of at the end of a pay period. That makes the transition onto fellowship income much easier since you do receive a lump sum up front. However, the corollary is that coming off of this type of income can be very difficult—more on that later.

When Exactly Will Your Paychecks Arrive?

As soon as you find out that you are switching to a once-per-term pay frequency, you should inquire about the date on or by which you can expect to receive your paycheck and whether you have to do anything to trigger its payout.

Often, the answer will be vague, for instance a range of a couple weeks or even a month. If it is specific, ask if fellowship pay has ever been doled out late—this is a good question to ask the administration as well as your fellow PhD students.

Then, no matter the information you are given, build into your plans that the pay might come at the end of the stated range or some time after the stated date.

I have heard horror stories from graduate students whose once-per-term fellowship income arrived weeks later than the date they were told, and sometimes that the student had to request a “refund” from the Bursar’s office before it was paid (of which they were not informed in advance).

It’s quite unlikely that an employer would issue their employee’s paychecks late. But again, this is awarded income, so the same rules are necessarily in place.

When it comes to your paycheck dates, play “offense” by being proactive about finding out the above information and taking any steps you are supposed to, but also play “defense” by reserving within your own finances the ability to pay for your expenses for an extra few weeks or month in case your next paycheck does arrive after you expected it to.

In What Amount(s) Will the Paychecks Be?

When you found out that you won your fellowship, you were certainly told its value, i.e., how much money you would be paid over the course of a year.

However, your fellowship award might not be distributed to you evenly throughout the year. If nothing else, it’s common for the summer term to be paid at a lower (even zero!) or higher level than the academic year.

Another consideration is whether you are responsible for paying any fees or similar out of your pocket. In the case of fellowship income, those fees might be automatically deducted from your award before it is distributed to you, which can be jarring if you are not expecting it.

Income Tax

With this type of once-per-term fellowship income chances are good that your university/institute is not withholding income tax on your behalf. (If it is, you can disregard this section!)

If no income tax is withheld from your fellowship paychecks, you have two important money management tasks to accomplish:

Calculate and set aside the right amount of money to pay your eventual income tax bills.
Determine if you are required to pay quarterly estimated tax.

Basically, in step 1, you’re estimating the amount of tax you’ll have to pay, and in step 2, you’re figuring out when you have to pay it (quarterly or yearly).

The best way to accomplish both with respect to your federal tax (you may also be responsible for paying state tax!) is to fill out the Estimated Tax Worksheet on p. 8 of Form 1040-ES. If that seems intimidating to you at all, please check out my resources to assist you and provide workarounds:

Step 1: Estimate Your Tax Bill

Sign up below to receive by email a spreadsheet that helps you with estimating your federal tax due for the year and how much you should save from each of your paychecks. You’ll receive follow-up emails explaining more about how taxes work for fellowships and then be subscribed to my mailing list!

Step 2: Determine If You Must Pay Quarterly Estimated Tax

It’s very common for fellowship recipients, if they are on fellowship for a full calendar year, to be required to pay quarterly estimated tax. Basically, instead of your employer (if you had one) sending the IRS a slice of each of your paychecks automatically, you receive your full pay and have to make manual payments to the IRS.

The Estimated Tax Worksheet on p. 8 of Form 1040-ES will definitively tell you if you are required to pay your estimated tax quarterly or if you can pay your full bill when you file your annual tax return.

If this is daunting to you, I recommend that you sign up for my workshop, which assists fellows in exactly your situation. It walks you through how to fill out every single line of the Estimated Tax Worksheet and covers several special scenarios that are common to PhD students, such as what to do when you switch on or off of fellowship midway through the calendar year. I even outline a shortcut method that allows you to skip filling out most of the form and still avoid being penalized by the IRS!

How to Manage Spending

The most common question I hear regarding once-per-semester or once-per-trimester fellowship income is, “How do I budget with this infrequent income?”

Yes, it is a good thing that this money is paid in a lump sum up front, but it does put a lot more responsibility on the graduate student than they may have bargained for.

Budgeting Regular Expenses

A robust budget is even more vital for a fellow in this situation than it is for a person receiving more frequent paychecks. While Americans living paycheck-to-paycheck might experience a few days of austerity when it turns out there is “more month than money,” in your case overspending could require weeks of austerity, which is rather infeasible.

What I mean by a budget in this case is to predict very well the expenses you will incur over the course of your budgeting period plus an extra few weeks or month.

Those expenses include all your regular and necessary fixed expenses (e.g., rent, fixed-rate utilities, insurance premiums, subscriptions) and variable expenses (e.g., groceries, utilities billed by usage). They also include what you project that your regular discretionary expenses will be (e.g., eating out, entertainment, shopping).

Budgeting Irregular Expenses

Irregular expenses are expenses that you incur once per year or a few times per year.

Examples of irregular expense categories are:

University bills, e.g., tuition, fees, health insurance premium, textbooks, parking permits
Insurance premiums paid yearly or every six months
Car maintenance/repairs
Travel
Electronics
Moving expenses
Household furnishings
Tax

Irregular expenses end to trip up graduate students for two reasons:

The expenses tend to be large relative to a graduate student’s cash flow.
Graduate students are often relatively new to budgeting and managing money, so they don’t have past experience to rely on to predict these expenses.

If a graduate student identifies this kind of expense as a budgeting issue, I recommend that they create a system of targeted savings accounts to help predict and save up in advance for the irregular expenses in their life.

You can read more about how to create this type of system in this podcast episode: How to Solve the Problem of Irregular Expenses.

Essentially, you create a unique savings account for each category of expenses and save regularly into that account, pulling money from it only when you incur a related expense.

The advantage that you have in receiving your income for several months up front is that you can also fund your targeted savings accounts up front, at least for the several-month period that your paycheck covers.

Account Structure

I really believe in setting up checking and savings accounts to serve your needs, not simply following the crowd—hence the system of targeted savings accounts I just reviewed.

While I imagine some people can keep all of their fellowship income in their checking account and draw it down over the course of the semester or trimester without running out of money or making sub-optimal financial decisions… I wouldn’t risk it!

Many graduate students I speak with who have once-per-term fellowship income use a separate savings account to hold the bulk of their paycheck and pay themselves a salary of sorts with a once-per-month automated transfer.

While this system simulates a monthly paycheck, it doesn’t take advantage of the unique property of receiving the large paycheck up front.

Instead, what I would do is set up several accounts (you might need to use two banks for this!):

One checking account for your monthly expenses that are fixed or only vary slightly with usage, e.g., rent, utilities, subscriptions. You should set up auto-drafts to pay these bills directly from this account.
One checking account for your variable and discretionary spending, e.g., groceries, eating out, entertainment, shopping. You can spend directly from this account and/or use it to pay your credit cards.
One savings account that holds the part of your fellowship paycheck that you will draw down.
Your set of targeted savings accounts.

Here is how I propose that you use this set of accounts:

When you receive your fellowship paycheck, deposit it into your ‘monthly bills’ checking account.
Calculate using your budget the amount of money you will spend on those necessary monthly expenses throughout your budgeting period; round up or leave some buffer. This amount will stay in this checking account, and all those monthly bills will be paid from this account.
Transfer the rest of the income to the savings account for holding it over the budgeting period.
Fund your targeted savings accounts according to your calculations for your irregular expenses.
Above a certain buffer amount of money, divide the balance in your holding account by the number of weeks in your budgeting period. Set up an auto-transfer to move this amount of money from savings to your variable and discretionary spending checking account. That is the amount of money you can spend that week on the categories it covers.
Pull money from your targeted savings accounts into your checking account as needed to cover your planned-for irregular expenses.
Repeat every time you receive a fellowship paycheck.

While somewhat complex, the advantage of this system is that it helps you make spending decisions across three time frames: yearly (for the targeted savings), monthly (for the monthly bills), and weekly (for the variable and discretionary spending), which are otherwise difficult to synthesize.

Reaching Long-Term Financial Goals

In the budgeting exercise I outlined above, I did not include any line items for saving or repaying debt. While these steps are out of reach for graduate students who are paid only enough to survive (or not even that much), as a fellowship recipient, you might have more financial wherewithal.

If you are being paid above the local living wage or more than your peers who are not on fellowship, I encourage you to set a monetary financial goal so that you come out of graduate school with more money to your name than you went in with.

If you don’t yet have any emergency savings, make a ‘starter’ emergency fund your #1 goal! Open up yet another savings account and nickname it ‘Emergency Fund.’ Contribute money to it until you reach at least $1,000 and perhaps up to two months of expenses. When you are just getting started with savings, this Emergency Fund can double as your in-case-my-paycheck-is-late fund, but as you create more financial wherewithal, they should add on top of each other.

After that, your goal might be to increase your emergency fund to 3-6 months of expenses, pay off debt, or invest for retirement or other goals.

You can still accomplish these goals with infrequent fellowship income. As you catalog your expenses, write in a savings goal to your budget as well. You can put money from your paycheck toward this goal shortly after you receive it if you’re confident you won’t overspend the money you keep in cash. Alternatively, you can put the money toward your goal near the end of your budgeting period once you’re sure you won’t run out of funds! A combination of the two might be even better: contribute a minimum amount first and set aside another amount as a stretch goal that you can contribute once you near the end of the budgeting period.

Switching Off of Fellowship Income

Just as you looked into the dates of your expected paychecks when you switched onto infrequent fellowship income, you need to ask about the frequency and pay dates of the assistantship or other type of income that you are switching onto when your fellowship ends.

Again, you can expect to be paid at the end of or after the pay period rather than at the beginning. That means you will have to pay for your living expenses for an extra couple of weeks or a month off of your fellowship income before your assistantship income arrives.

For example, if your fellowship was for an academic year and summer, September through August, and you switched onto assistantship pay at the start of the following September, it would be typical for your first assistantship paycheck to come at the end of September or beginning of October. That’s 13 months of living expenses that your fellowship needs to fund, not 12.

How to Manage Income Tax Payments for Your Fellowship or Training Grant Stipend

June 23, 2020 by Emily

Title: How to Manage Income Tax Payments for Your Fellowship or Training Grant Stipend

Format: Live workshop (in person or remote)

Intended Audience: Graduate students and postdocs receiving stipends/salaries not reported on a Form W-2 (i.e., fellowship, training grant)

Length: 90 minutes

Timing: Year-round

Summary: This workshop shows graduate student and postdoc fellows exactly how to handle paying income tax on their stipends/salaries, whether through the quarterly estimated tax system with their annual tax returns. Every participant should leave the workshop knowing whether they are required to pay quarterly estimated tax to the IRS in 2020 and in what amount and how to repeat this calculation in subsequent years.

Outline:

How the IRS views fellowship/training grant income
Best practices for saving for your tax bill
What is quarterly estimated tax
Who does not have to pay quarterly estimated tax
Special scenarios: married filing jointly, switching on or off of fellowship, under age 24
Walk-through of Form 1040-ES’s Estimated Tax Worksheet
How to pay quarterly estimated tax if required
How Q1 and Q4 are different
State estimated tax

Back to Speaking home page.

How Winning Fellowships Forced This Grad Student to Take Out Student Loans

January 6, 2020 by Lourdes Bobbio

In this episode, Emily interviews Dessie Clark, a doctoral candidate in Community Sustainability at Michigan State University. In 2018, Dessie received a few small fellowships for conference travel and a couple months of stipend income. In 2019, the financial aid office told her she had been “over-awarded” and had to pay the travel fellowship money back. Dessie took out student loans to pay that bill and then set up a payment plan with the IRS when she couldn’t pay the additional tax due on the fellowships. Dessie shares the steps she takes now when receiving fellowships so that she does not become over-awarded and how to prepare for tax time as a fellowship recipient.

Links Mentioned in This Episode

Teaser

00:00 Dessie: Outside of academia, people wouldn’t hesitate to ask questions about their paycheck, right? And so we need to kind of be thinking about it the same way. If something was different on your paycheck, you would ask why or what’s going on and how you need to deal with it. So just not being afraid to try and talk to people about what’s going on with you so you don’t get in a bind.

Introduction

00:22 Emily: Welcome to the Personal Finance for PhDs podcast, higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season five episode one and today my guest is Dessie Clark, a doctoral candidate and community sustainability at Michigan State University. In 2018, Dessie received several thousand dollars in fellowship income for travel awards and a couple months of stipend income. In 2019, she received a bill from the university for the amount of the travel awards. Apparently, she had become overawarded, a term that was totally new to me., Dessie he took out student loans to pay back the university, and to add insult to injury, faced a higher tax bill that season as well. Dessie relays what she had learned on how to avoid becoming over awarded and her advice for all graduate students receiving stipends. Without further ado, here’s my interview with Dessie Clark.

Will You Please Introduce Yourself Further?

01:19 Emily: I have joining me on the podcast today Dessie Clark, who is a graduate student and is going to be telling us about being awarded fellowships as a graduate student and some of the unexpected downsides that can come with being awarded fellowships, which is of course a wonderful thing, but in Dessie’s case they caused a few other complications. Dessie, thank you so much for joining us on the podcast today and will you please tell us a little bit about yourself?

01:45 Dessie: My name is Dessie Clark and I am a doctoral candidate in community sustainability at Michigan State University. I actually got my master’s degree at Vanderbilt University in community development and action. And then I moved to Michigan to finish out my PhD.

02:01 Emily: Great. And how long have you been at Michigan State?

02:04 Dessie: I have been at Michigan State for four years.

02:09 Emily: Okay. So I won’t ask you when you’re finishing, but I’ll just say soon, you’re finishing soon.

02:13 Dessie: Yeah, hopefully this year, maybe next year, maybe, you know, whenever.

Funding During the PhD:

02:16 Emily: Yeah. So can you tell us a bit how your funding has worked since you’ve been doing your PhD?

02:22 Dessie: I’ve mostly been funded as a research assistant, so that provides coverage for tuition and then a stipend to live on. There have been a couple of summers where I’ve taught as an instructor, but for the most part it’s been RAs. And then there have been some brief moments in time where fellowships have also come into play, which is what I wanted to talk about today.

02:43 Emily: Yeah. Please elaborate about that. When did you win fellowships and maybe what amounts were they, those kinds of details?

02:52 Dessie: I think one of the things that’s important is that I didn’t necessarily know that I was getting fellowships. How this came into play for me was I had friends that had gotten fellowships and they had talked about how they were unaware of the tax implications. So I knew when I was going to apply for fellowships or asked for them that there would be tax implications there. But for me, I was actually receiving fellowships in the form of travel awards. So there were multiple times where I applied to go to conferences, and when I was awarded that travel money, I wasn’t aware that they were fellowships. So I’ve won I guess, fellowships of several thousand dollars for travel. Then there was a brief time where, I needed to change labs and so fellowships were used to fund me in my transition.

03:40 Emily: Okay. So definitely for the travel awards, we’re only talking about thousand, few thousand dollars here and there. Seemingly a relatively small amount of money, right? And then when you were switching labs, was it a semester’s worth of funding or how long was that?

03:54 Dessie: It was still relatively small. It was a couple of thousand dollars, but all of these fellowships awards actually happened in the same semester, so by the end it ended up being like $7,000 or $8,000.

04:07 Emily: Oh, okay. When they hit all at once, it really does add up in that case. Okay. So yeah, you didn’t really know that that was what you were receiving. So what happened? You get this money and it’s all good, right?

04:19 Dessie: Right. So I get this money and I’m really excited, I can afford to go to these conferences, I’m able to switch labs. But one of the things that I didn’t know is that they were fellowships, so I was kind of surprised two-fold. The first thing that happened that let me know that something wasn’t going quite right was that — this was in the fall of 2018 — so when I was going to start school in spring 2019, I got a bill from the university that said, “you owe us money, you’ve been over awarded.” I had no idea what that meant, but what I understand now is that every student has a cap on what they’re allowed to receive for education-related expenses. They had decided that this amount of money that I had received for travel had thrown me over that, so I needed to pay back university. That was kind of the first thing I noticed.

Fellowship Cap and Being Over-awarded

05:05 Emily: Let me pause there, because this term over awarded is new to me as well. What are you paying back to the university?

05:16 Dessie: What they were charging me ended up being the sum total of those travel award costs. There’s something that you can do to kind of help with this. Like I said, every student has a cap for how much money they’re allowed to receive, but one of the things that your department can do is they can write a letter saying, “This travel money is necessary for this person’s education. This is advancing their education or contributing in some way and this money is going towards that. It’s nothing extra. It’s not something we can go shopping on. This is money for the students’ education.” I didn’t know that that was something that could be done or needed to be done, so it wasn’t done in my case. I got this bill and it happened to be for the exact amount that I had received for travel awards. I found out through talking to financial aid that basically those things have been passed through as fellowships and because of how they were categorized, I got more money from the university than I was allowed to and so I needed to pay it back.

06:12 Emily: So it sounds like your stipend had been paid by your RA position and this supplemental fellowship, but those were kind of evening out to be what you’re allowed to be paid. And then these travel awards were over and above that and they were like, you’re not allowed to receive this money. This is literally the first time I’ve heard of this. I don’t know if maybe this is unique to your university or your department or maybe in all these cases, other people write these letters, their advisors write these letters that you’re talking about. I’m not sure how that works out, but this is really the first time I’m hearing about this, so it’s definitely raising like some major red flags for me.

06:46 Dessie: Yes. So from my understanding, and this is just what I’ve been told, this kind of cap exists for every student that is at a university, but I don’t know if it’s just how my university chose to handle it, or if this is happening a lot more than people know about, but basically what happened was I was over whatever that cap is. So it became a huge issue because now I’m sitting here before I can start school being told that I was thousands of dollars.

07:15 Emily: Right, exactly. So what did you do?

07:19 Dessie: What I did was what I didn’t want to do, I took out student loans and they subtract it from that.

07:24 Emily: So you took out student loans to pay the university for money that you had won that you used go to conferences. This Is bananas. This situation makes no sense. I’m really glad that you volunteered to come on the podcast to talk about this because the situation I’ve heard in the past for other students is that maybe they have a fellowship coming from the university or maybe they have an RA position or TA, something like that. Then they win a fellowship that’ll pay like their stipend. And a lot of students think, “I am in the money now.” They think getting that fellowship on top of the existing funding for their RA position or whatever it was. That is almost universally not the case. It is possible that you may end up being paid more than you were going to in the first place, but it’s not going to be double what your stipend was to begin with. And so there’s plenty of people who are caught by surprise by “what I just won funding, what do you mean you just take away my other funding?” No, that’s definitely how that works everywhere. There may be some room for negotiation and so forth, but that’s how the standard situation works. But I’m really glad to hear about your situation as well. So you know, now that you have been through the whole thing, what could have been done on your behalf and wasn’t. I don’t know. This is something that I’ve never heard of, of a student having a proactively ask for, so of course you wouldn’t have known, but I guess in the future, anyone listening who receives extra fellowships in some manner, make sure that you’re not going to run into any kind of cap, or whatever exceptions need to be made are going to be made on your behalf. Is that your advice?

Proactive Steps to Avoid Getting Over-awarded

08:54 Dessie: Yes, that is definitely my advice. I think something else too that really ties into this, that I experienced, is I got another fellowship for travel in spring and of course this time I was like, “hi, can you please write this letter and send it to financial aid? “And they were able to do that. But I came upon a situation this summer where there was something the university was going to pay for and they weren’t able to pay for it the way that they want it to. I had gone to my college and I said, I need help figuring out how this thing is going to get paid for, but it can’t be a fellowship because I’m scared I’m going to get over awarded again and I’m going to owe it. My college was really great at hearing that concern and trying to work with me on it, but what ended up happening in the meantime is that the graduate school at my university granted it as a fellowship anyway. One of the things that I think is a kind of a broader issue is that when we’re getting loans or we’re getting grants, we have to accept them and there’s usually some paperwork that we have to go through promising whatever and making sure we fully understand the impacts, but I was awarded a fellowship without my permission basically. I think that the school has figured it out, so that way I won’t be over awarded and this won’t impact me, but I also think that’s why I said at the beginning, it’s really important to know how things are being classified and categorized on your behalf because maybe something is a fix, but then all of a sudden six months down the road you’re being asked to pay it back. I think keeping an eye on that is really important.

10:15 Emily: Yeah. I mean, it sounds like you were taking the proactive steps the second time around that you knew to take, and yet, as you just said, they can just push these things through into your student account and there’s no process around it. It’s totally on their end and they have control over it. But I guess, did it just end up being that they just took it back like, “Oh, we gave it to you, now we’re going to take it back and award you the money in some other way?”

10:40 Dessie: They ended up just doing what I was talking about before and doing the right amount of paperwork to explain why this is an educational expense and all of that. I think it was handled because they knew that there were some extra steps that needed to be taken. But I think another thing too is you asked me how I found out about all this. Like so many other students at tax time, it really became a “you owe this money.” I think too, it’s easy for us to just think like, well this was only, you know, $1,000 here or $1,000 there. But it really adds up. And for most graduate students, we’re not in a super comfortable financial place. So even a surprise tax of a couple of hundred dollars can really set you back.

11:20 Emily: Yeah, and sometimes I think it’s easy to forget the academic year and the calendar year don’t line up, right? So you could be receiving fellowships maybe in two different academic years, but if they fall in the same calendar year, then it’s all going to add up at that year-end tax return.

Commercial

11:40 Emily: Emily here for a brief interlude. Tax season is upon us and while no one loves this time of year, it’s particularly difficult for post-bac fellows, funded grad students, and postdoc fellows. Even professional tax preparers are often thrown for a loop by our unique tax situation. And don’t get me started on tax software. I provide tons of support at this time of year for PhD trainees preparing their tax returns. From free articles and videos, to paid at-your-own-pace workshops, to live seminars and webinars for universities and research institutes. The best place to go to check out all of this material is pfforphds.com/tax that’s P F F O R P H D dot com slash T A X. Don’t struggle through tax season on your own. Visit my website for the exact information you need in the most efficient form available. Now back to the interview.

Tax Consequences of Being Over-awarded

12:44 Emily: Okay, not only did you, you know — Hey, you received award funding. Awesome. Got that. Oh no, you have to pay it back to the school. Ridiculous. You have to take out student loans, do that. So essentially, with some middlemen, you were just taking out student loans to go to conferences, which is probably not a decision, it sounds like, you would have made, had you known that was going to be outcome. On top of that, travel and research is not a qualified education expense for making fellowships tax free. So you end up with this tax bill on top of all the other stuff that’s happening. How did that play out?

13:19 Dessie: I think one of the things that I knew when I was changing labs is that I knew that a portion of that fellowship money, I knew it was untaxed* and I was gonna need it. So I was able to put that aside. What surprised me is when I sat down with my accountant and she put two and two together, that all these other things had been categorized as fellowships, the amount I had set aside to pay taxes on was not nearly the amount of money that I needed. That was obviously a huge strain. I’m lucky enough that I have a partner who works, but we did end up having to go on a payment plan to the IRS because I just couldn’t afford to come out of pocket the amount that I owed.

[* By ‘untaxed,’ Dessie is referring to the fact that income tax was not withheld for her on this portion of her income, not necessarily that it is tax-free.]

13:57 Emily: At the point when you were working with your tax preparer, at what point in tax season was that? Were you getting ready to file and you found out that, “Oh wait, I’m going to owe more than I had set aside?”

14:08 Dessie: It was right at the end. There was no fixing it. I getting ready to file taxes and she’s like, this is not looking good, and it was what it was at that point.

14:18 Emily: Not all the listeners may know, but some people might hear, maybe from their parents or something, about filing extensions. So they get another, I don’t know, six months or something to file your tax return. You do not get an extension on actually the tax that you owe. You only get the extension on the return. So if you’re finding out in March or April that you owe a tax bill and you’re not prepared to pay it, as you said, graduate students typically live without much margin in their lives. If you find that you owe a tax but you’re not prepared to pay it, really probably the best thing to do is what you did, which is to go on a payment plan with the IRS. A lot of people would say, “Oh my gosh, the IRS, I’m so afraid I don’t want to talk to them. I don’t want to deal with them,” but actually that’s the worst step you can take, is not to talk to them. Did the payment plan work out okay? Did it end up being all right that you could pay a little bit over time?

15:06 Dessie: I’m still on it to this day. I owed a chunk and there’s only so much I could put towards it per month. So yeah, it has worked out. I’m making my payments so I haven’t gotten in trouble with the IRS, but it isn’t a new bill now every month that I have to pay. I think too, just thinking about this calendar year and the implications for next tax season, I think now I’m just very closely watching anything financially that comes through the school just to make sure I don’t get into this situation again. I know now there are ways that your department or your college can help you, and making sure that these expenses are processed the way they should be as true education expenses and not as extra in your life. And just keeping an eye on that. I think especially as I get into the fall, I will definitely be following up with my administrators and saying, “Hey, just want to make sure I see this here. Was there something that went with this to make sure that I’m not getting a bill for being over-awarded again, or I’m not having any more tax implications than I already know I will have.”

Saving Money for Taxes When Your Fellowships Do Not Have Tax Withheld

16:08 Emily: Right. At this point, now that you’re so aware and you’re so proactive about everything, are you filing quarterly estimated tax or does your additional tax due not rise to that level of necessity?

16:22 Dessie: It doesn’t rise to that level, but I am always putting stuff aside. Even when there are things that should be categorized in a way that I won’t have to worry about that, I’m still always just taking a certain percentage and putting it aside, because I think in my situation, the worst case scenario is to have what happened this year and be totally surprised and unprepared, because that’s exactly what happened.

16:42 Emily: Can you tell the listeners a little bit about your system for setting money aside? Because maybe they want to know, mechanically, how you do that.

16:48 Dessie: Yeah. I am not an accountant so I don’t have this down to any kind of science. It’s just kind of what I’ve found has worked for me. So anytime that I get any kind of award through the school, whether it be for travel or whatever else, it could be research money, I always take about 30% of that and I put it in a savings account. And that seems to be kind of a pretty safe estimate of you definitely won’t need to pay more than that, and so I think that’s been my system now. Even when I make requests for money, I always keep that in mind, because I think something that I’ve watched other students go through is they ask for exactly what they need, forgetting about that tax buffer. And so you might end up short or paying back necessary money later.

17:33 Emily: Yeah, good idea. I do think 30% is a very good margin, probably more than you’ll need, but better to be on the safe side than on the sorry side, as you definitely found out. Do you have like a separate savings account that you use for that or something?

17:46 Dessie: Yes, I have a savings account that I just don’t touch. I kind of joke with my partner, that it’s like the savings account that you don’t use as a savings account. There is no level of emergency that could make me touch that money. I pretend it’s not there because for all intents and purposes, it’s not mine. It’s the government’s, and I don’t want to end up in a situation. I mean it’s August, right? And I’m still on a payment plan for this past year’s taxes. I don’t want to have to do that again.

18:12 Emily: Yeah, I do the exact same thing. When I was in graduate school, some years…Well, I guess it wasn’t in graduate school, but it was when I did my postbac, taxes weren’t being withheld. I had to pay quarterly estimated tax at that time. I started doing the exact same thing. I set up a separate savings account, I have it nicknamed tax, put money in there as I get money to come in, withdraw from it as I was paying quarterly estimated tax. But I wanted to say that I do the exact same thing as you, which is that I don’t think about that tax savings account as being my money. Right now, when I’m self employed, I also have the responsibility of paying quarterly estimated tax. And so I actually calculate my, or our family’s net worth every month, on the first of the month, and so I calculate two numbers, which is one my technical net worth, which includes the tax money in it, and then what I label as my true net worth, which subtracts that tax savings account balance out. And I say, “Nope, I don’t even think of it as being mine right now because, as you said, I know I just have to hand it over to the IRS in a few months.” I don’t want to think of it as accessible at all, in the meantime. So yeah, thanks for sharing about that.

Final Words of Advice

19:16 Emily: Is there any other final advice around the situation that you would want to tell someone else so they don’t get into the same kind of problems that you did?

19:24 Dessie: Yeah, just kind of recapping what I said. So I think, of course, the conversation that fellowships are untaxed* is just a broader conversation we need to be having in general because I don’t think a lot of people know that. But again, just monitoring how things are being processed for you and if they’re technically being categorized as a fellowship. Then, I think that for the most part students are pretty safe. I don’t want to create mass panic as far as this cap goes. If you’re just talking about you just have an RA or you know, just the little student loans or you just have a TA. I think where you start to get near this cap is when you’re doing a lot of research awards and travel awards and teaching where it’s on top of what you’re already getting. I think for students that might have multiple things going on, like I clearly had, making sure you’re having a conversation and knowing where that line is so that way you don’t cross it because the way that they balance their books is you’re not going to know until you’re far down the road and the money is already spent. It’s going to be the next semester. So just keeping an eye on that and honestly just reaching out and asking your financial aid office and saying “I know that there’s a certain amount of aid that we’re allowed to get. What is my number?” So you can kind of monitor it yourself because I really think that for most people, you’re better off saying, “No, I’m not going to take that award this semester. No, I’m not going to get this or do this now” and waiting, so you don’t cross that line and end up having the money need to be paid back.

[* By ‘untaxed,’ Dessie is referring to the fact that income tax was not withheld for her on this portion of her income, not necessarily that it is tax-free.]

20:44 Emily: Yeah. Or just be aware, as you were saying earlier, that these letters or whatever can be written so that the money goes on top. So it sounds like, at least your university, your department, it wouldn’t be like, oh, your advisor just wants to pay you more or someone wants to just like give you a fellowship. You’re going to run into problems with that. It has to be something that’s justifiable under their system for raising their cap on an exception basis to allow that award to go through.

21:10 Dessie: Right, and I think too, just noting that the people that work in financial aid may not be as familiar with why research money or why conference money is an educational expense. So things that you might see and go through and you think, “Oh yeah, that’s totally an expense for my education. Anyone would see that?” No, you might have to justify it and they might need, you know, justification from your department on why this is important for your education.

21:32 Emily: Yeah. And I will just add that financial aid professionals and so forth, they’re not going to touch this tax issue with you. They’re going tell you to go away if you try to ask them tax questions. But in the area of how much you’re supposed to be awarded and what the education expenses are, they are the experts in that area. So you can definitely go to them with those kinds of questions. Just don’t ask them, “what’s my tax bill going to be?” They’re not going to answer that. But, yeah, among that subject matter, they are the best people to go to, I think. It sounds like you’ve developed a little bit of a working relationship with those people.

22:04 Emily: Dessie, thank you so much for giving this interview and sharing the story. I think it’s really unfortunate how it worked out and also just that you were saying that you didn’t catch all of this until the following calendar year or the following semester, naturally. That’s how these things work. Of course you wouldn’t, but because it happened so late, it sounds like the proper paperwork couldn’t have been pushed through in the past. I just want to ask the concluding question that I ask of all my guests, which is what is your best financial advice for another graduate student or early career PhD?

22:34 Dessie: I think asking questions. I think that early and often you should ask questions about the money that you’re getting, where it’s coming from, how it’s classified, and just always not being afraid to shoot financial aid and message and say “Hey, this has come through. Is there anything I need to do with this?” Because I think everyone, us included, but also the financial aid folks would rather be proactive about dealing with a problem rather than getting the early spring email, which was “what is happening, I can’t pay you a couple of thousand dollars.” I think just always asking questions and not being scared to ask about how these things impact you. Outside of academia, people wouldn’t hesitate to ask questions about their paycheck, right? And so we need to kind of be thinking about the same way. If something was different on your paycheck, you would ask why or what’s going on and how you need to deal with it. So just not being afraid to try and talk to people about what’s going on with you so you don’t get in a bind.

23:28 Emily: Yeah, absolutely. And like you said earlier, you don’t have to accept a fellowship. It can just be pushed through. And likewise for some other people, they might not even really be aware of how they’re being paid. They’re just kind of receiving a paycheck and they don’t really know is it from an assistantship. I mean they would know if they were teaching your class, right? They know if it says teaching assistantship, but is it a fellowship, is it an RA, I don’t know. The roles, like what you actually do for each of those things, are pretty much the same. So you might not even be aware until you get a W2 at tax time or don’t get a W2 at tax time, what happened in the previous year. Then, if any adjustments need to have made, then it’s too late, right? Then the tax year has already ended. So totally want to underline that advice — know why you’re being paid, know what kind of tax forms you’re going to receive.

24:10 Emily: I just want to add in a final note for the listeners, if there’s anyone listening who is receiving a fellowship, even a small award, like what Dessie’s been talking about during this interview, you should look into whether or not you need to file quarterly estimated tax. I’m going to link in the show notes my massive article on quarterly estimated tax. And I also have a workshop on that that’s linked from that article. So I’ll link to both those things in the show notes. Please note that the deadlines for quarterly estimate tax are in mid April, mid June, mid September and mid January of every year, usually the 15th of the month or the business day following. So keep those deadlines in mind. If you are receiving a fellowship, you might not have to pay quarterly, but at least you need to investigate and figure out whether or not it’s your responsibility, or whether like what Dessie’s doing, you can just set the money aside and leave it until the end of the year and pay it all at once with your annual tax return.

Loading…

25:01 Emily: Thank you again Dessie for coming on and giving this interview and giving this word of warning to all the other graduate students listening.

25:08 Dessie: Thank you for having me.

Outtro

25:10 Emily: Listeners, thank you for joining me for this episode. PFforPphDs.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes and a form to volunteer to be interviewed. I’d love for you to check it out and get more involved. If you’ve been enjoying the podcast, here are four ways you can help it grow. One, subscribe to the podcast and rate and review it on Apple podcast, Stitcher, or whatever platform you use. Two, share an episode you found particularly valuable on social media or with your PhD peers. Three, recommend me as a speaker to your university or association. My seminars covered the personal finance topics PhDs are most interested in, like investing, debt repayment, and taxes. Four, subscribe to my mailing list at PFforPhDs.com/subscribe. Through that list, you’ll keep up with all the new content and special opportunities for Personal Finance for PhDs. See you in the next episode, and remember, you don’t have to have a PhD to succeed with personal finance, but it helps. The music is Stages of Awakening by Podington Bear from the Free Music Archive and is shared under CC by NC. Podcast editing and show notes creation by Lourdes Bobbio.

The Graduate Student Savings Act Fixes a Major Flaw in Tax-Advantaged Retirement Accounts

October 14, 2019 by Meryem Ok

In this episode, Emily interviews Abigail Dove, a PhD student at Johns Hopkins. Abby spent last summer as a science policy fellow at the Federation of American Societies for Experimental Biology (FASEB). Her major policy accomplishment during her internship was to secure FASEB’s endorsement of the Graduate Student Savings Act of 2019 (GSSA), a bill that has been proposed in both chambers of Congress. Graduate students and postdocs are not currently permitted to contribute their non-W-2 income, which typically comes from fellowships and training grants, to Individual Retirement Arrangements (IRAs). The GSSA would allow this type of income to be contributed and have a very beneficial effect on the PhD trainee workforce. Abby explains her role in shepherding the GSSA endorsement through FASEB, what the GSSA would do for graduate students and postdocs, and how the GSSA relates to the SECURE Act, another bill that has passed the House and is before the Senate.

Links Mentioned in the Episode

Teaser

00:00 Abigail: But it was a little tricky for FASEB to first navigate the waters. They’ve never supported a tax legislation before. You think that experimental biology doesn’t have that much to do with legislation on tax. But here was a perfect one for them to start.

Introduction

00:22 Emily: Welcome to the Personal Finance for PhDs podcast, a higher education in personal finance. I’m your host, Dr. Emily Roberts. This is season four, episode nine and today my guest is Abigail Dove, a PhD student at Johns Hopkins and recent science policy fellow at FASEB, the Federation of American Societies for Experimental Biology. Abby’s major policy accomplishment during her summer at FASEB was to secure FASEB’s endorsement of the Graduate Student Savings Act of 2019, or GSSA, a bill that has been proposed in both chambers of Congress. Graduate students and postdocs are not currently permitted to contribute their non-W2 income, which typically comes from fellowships and training grants to individual retirement arrangements or IRAs. The GSSA would fix that problem and have a very beneficial effect on the PhD trainee workforce. Abby explains her role in shepherding the GSSA endorsement through FASEB, what the GSSA would do for graduate students and post docs, and how the GSSA relates to the Secure Act, another bill that as of this recording has passed the House and is before the Senate. Without further ado, here’s my interview with Abigail Dove.

Will You Please Introduce Yourself Further?

01:33 Emily: I have joining me on the podcast today, Abigail Dove, and she is a PhD student who completed an internship at FASEB last summer. And she has a lot to tell us about the Graduate Student Savings Act. So if you have been wondering about your IRA and why you can or cannot contribute to it, that’s what we’re going to be discussing in today’s episode. Abby, thank you so much for joining me today and will you please introduce yourself a little bit further?

01:59 Abigail: Sure. Thanks for having me. My name is Abigail Dove. Currently, I’m a PhD student at Johns Hopkins and I just started my sixth year. I work in fruit flies and study the gonad development. A little bit of my background: I first started as an undergraduate at Bard college, a small liberal arts school in upstate New York. And then I did a postbac for two years at the NIH NIDDK (National Institute of Diabetes and Digestive and Kidney Diseases) before starting at Hopkins. What we’re talking about is kind of the work that I did at my internship at FASEB, which is the Federation of American Societies for Experimental Biology, which I guess to be a little more descriptive it’s a society that represents 29 member societies, which has about 150,000 scientists that they represent.

Tell Us More About Your FASEB Internship

02:57 Emily: Excellent. You and I have common that we both did a postbac at the NIH. In fact, I’ve interviewed several other people on the podcast who have that on their resumes as well. So very popular program. Anyone still in college considering going for a PhD in biomedical sciences or related areas should definitely consider the NIH postbac program. It’s amazing. Okay. So you had this internship at FASEB last summer. What exactly were you doing in that role? Because it’s a little bit unusual for a graduate student to have an internship. And I think especially a graduate student in the biological sciences because, I don’t know about you, but I sort of observe the culture as like, “ah, you need to stay at the bench 120% of your time and never do anything away from the bench.” So please tell us a little bit more about what you were doing in that internship.

03:40 Abigail: Yeah, so I was really fortunate. I have a PI that–we both know that I’m interested in a career that is outside of the academic track. So, I did a lot of science outreach and I knew that I like communicating science to the public. So I wanted to pursue this career of science policy as a way to talk to the public about science and its importance. So what I did at FASEB, I had a lot of responsibilities. I was particularly interested in training and workforce policy. So, policy that relates to students, postdocs, and even faculty as it’s something that everyone can relate to. So that was one of the reasons that I was most interested in it. And I did a wide range of things. I hosted a webinar on work-life balance and the lab culture and we can include a link to that if anyone wants to watch it later. I represented FASEB on Capitol Hill and at the NIH for different events and I generated comments on sexual harassment that will soon be sent to the NIH. I also helped organize an online symposium series for the FASEB Science Policy Committee on challenges facing women throughout their career lifetime. And then I compiled minutes for the meetings, I drafted talking points for committee members, and then the big thing that I did was I spearheaded FASEB’s endorsement of the Graduate Student Savings Act.

How to Land a Science Policy Internship

05:13 Emily: Excellent. And we’ll get a lot more into that in a moment. But that sounds like a really exciting internship. It’s absolutely fabulous that your PI was supportive in you completing that. I actually did a science policy internship as well. The Mirzayan Policy Fellowship out of the national academies. That was actually after I finished graduate school. But it’s available to current graduate students as well. So, if what Abby was describing sounds amazing to you, that’s another potential avenue for you to get that kind of experience in science policy. Okay. So how did you actually land this internship if other people are interested in doing something similar?

05:46 Abigail: Yeah, so I first started–we have an office at Hopkins, it’s called the Biomedical Careers Initiative Office. And it’s really great for people that are looking for careers outside of the academic track. They were offering a course on science policy and advocacy that was actually being taught by the Director of Public Affairs at FASEB, Jennifer Zeitzer, and the Director of Science Policy, Dr. Yvette Seger. So the class gave us a background on legislation and how bills get enacted into law. And we did some case studies on different issues in science policy. They also taught us how to be a science advocate. But finally, we had to write a policy memo on an opportunity or challenge in research activities supported by federal funding, and we had to give an elevator pitch on that to the class as well. And I did mine on saving for retirement as a graduate student and a postdoc.

06:48 Emily: Yeah. Excellent. And so was it through that paper and that pitch that you gave that you found the Graduate Student Savings Act?

06:56 Abigail: Yes, that’s how I found it. Oh, I guess we didn’t cover how I got the position too. So this office that hosted the class actually also hosts internships for students. And so FASEB was also accepting applications for science policy fellows through the Biomedical Careers Initiative Office. So I applied for that directly. But they also have internships for a wide range of different careers outside of the academic track, including industry and consulting and patent law as well as policy.

What is the Graduate Student Savings Act?

07:33 Emily: It sounds like a great deal of support actually, that Hopkins is providing and helping you sort of step a little bit outside of academia into another role that can really presumably help your post-PhD career, should you decide to pursue one in science policy. So let’s kind of back up a second and explain more about what the Graduate Student Savings Act is because it’s probably not one that most people have ever heard of. Right? Like probably a lot of people in my audience, they know about IRAs. Maybe they don’t have one, but they sort of know they’re supposed to or maybe they know they might not be able to have one. So what is the Graduate Student Savings Act?

08:06 Abigail: Yeah, so the Graduate Student Savings Act. There’s a bill in both the House and the Senate and they’re essentially the exact same bill, so they’re called companion bills. And they would allow graduate students and postdocs who receive their income through either a fellowship or stipend to contribute to an IRA or an individual retirement account. The current issue right now is that on the current tax law, trainees who are receiving their income through a fellowship or a stipend are actually prohibited from contributing to an IRA because it’s not considered compensation or earned income.

08:44 Emily: Exactly. And I like to further kind of clarify this for people by saying within academia we might use the word fellowship in different ways. We might use the word stipend in different ways. Nobody’s ever heard the word compensation. But what it really boils down to is, is your graduate student or postdoc income reported on a W2 or not reported on a W2? It could be reported somewhere else, it could be reported not at all. W2 income is the kind of income, taxable compensation, or earned income that can be contributed to an IRA under the current law. And anything else in terms of graduate student, postdoc income non-W2 does not fall into that category, unfortunately. So that’s how things currently stand. The Graduate Student Savings Act includes this type of non-W2 or fellowship income in taxable compensation for the purposes of contributing to an IRA. Is that correct?

09:39 Abigail: Yes. And unfortunately, it doesn’t change its designation universally. It doesn’t make it earned income or compensation, but it just allows it to be saved for retirement purposes in an IRA.

09:51 Emily: Yeah. This is one of those confusing things about the tax code in general is that they use these terms like “taxable compensation” and “earned income” under different contexts. And so sometimes they have different definitions under different contexts. So earned income has other implications in the tax code, like around the earned income tax credit. Whereas, taxable compensation has a different meaning. It’s under the section for IRA contributions and so forth. So it’s sort of defined there as “taxable compensation for the purposes of contributing to an IRA is these things,” and currently, it says explicitly, “does not include fellowship income, not reported on a W2.” So that’s the current status. But then there’s this Graduate Student Savings Act bill as you said, it’s sort of on the floor in both the House and the Senate.

How Abby Got FASEB to Endorse the GSSA

10:37 Emily: I was looking at the history of this and I think the first time it was introduced was 2016 and it’s introduced every year I think in more or less the same form until now, 2019. We should actually say we’re recording this interview on September 25th, 2019. It will be released within a couple of weeks of that date. So things might have changed. But as of September 25th, 2019, the Graduate Student Savings Act has not been passed but it is, I guess, available to be passed. So, what was the process like for getting FASEB to ultimately endorse the Graduate Student Savings Act, and what work did you do to make that happen?

11:15 Abigail: Yeah, so originally before I even did the class, FASEB was not aware of the Graduate Student Savings Act at all. It wasn’t on their radar. It wasn’t until I wrote my policy memo on the issues of graduate students saving for retirement, and I actually did the research and I was just Googling it and I came across it on my own, that we both kind of became aware of it. And so I kind of took this on as a task that I wanted to complete in my fellowship and I thought it was an important task and FASEB was great. If there was an issue that I really wanted to take on and it was something that was good for FASEB to endorse, they would have no problem with me taking the lead. So this was my big accomplishment of the fellowship.

12:04 Abigail: And since FASEB is a nonprofit organization any bill that they support needs to have bipartisan support for endorsement. And that thankfully both the House and Senate bill had bipartisan support on both pieces of legislation. I think some of the previous iterations of the Graduate Student Savings Act didn’t have bipartisan support. So this was really important for FASEB to get on board. But it was a little tricky for FASEB to first navigate the waters. They’ve never supported a tax legislation before. You think that experimental biology doesn’t have that much to do with legislation on tax. But here was a perfect one for them to start.

Personal Impact of Flawed Tax Legislation

12:49 Emily: Yeah. As you were saying earlier, it’s a clear workforce issue. Right? So that’s the definite connection or conduit between what they do generally and this weird little tax quirk that happens to deeply affect their own workforce.

13:03 Abigail: Well, yes. So this actually personally affected me. From when I was in college and doing other side jobs, I was always contributing to an IRA, if possible. My dad is very financially responsible and he just told me when I was young, “you need to have an IRA.” He always recommended a Roth IRA. He always thought it would be better to get tax first and any profit you make later you don’t get taxed on. So there’s two different IRAs, a Roth and the standard IRA. So maybe some clarity on that. But this personally affected me when I was a post-bac for those two years I was receiving stipend income and wasn’t reported on a W2 so I couldn’t contribute to an IRA for those two years.

13:51 Abigail: Then my first year in graduate school I was on a training grant, so also not receiving a W2 so I couldn’t contribute. My second year I was actually a teaching assistant, so I was being employed by the university somewhat and getting my income reported on the W2. So I was for that year able to contribute, which was really great. And then I got awarded the National Science Foundation, Graduate Research Fellowship award.

14:20 Emily: Congratulations, but also, dun, dun, dun.

14:23 Abigail: Yeah. So it was really great. But then I also couldn’t contribute to my IRA because it wasn’t reported on a W2. So that affected me for my third and fourth year of graduate school. My fifth year I got married. So that changed things a little. I was still on my NSF fellowship. But because I was married to someone who had a real job and was receiving income that was deemed compensation, I was able to contribute to my Roth IRA just because I was married to my husband. so that was my last year of my fellowship. Now I’m back at Hopkins and I’m TA’ing for this year. So I will again be able to contribute even if my husband wasn’t receiving earned income himself.

15:14 Emily: Yeah, I have a little bit of a similar story of flip-flopping between RAs and fellowship income. And at some point I got married and so my husband, having a similar situation of flip-flopping between RAs and fellowship income, it helped in certain years one of us would have a taxable compensation, maybe the other one wouldn’t. So one of the things that helps people in this situation–under the current status of fellowship income, non-W2 income is not eligible to be contributed to an IRA–one thing that helps is that the academic year and the calendar year do not line up. So, if you have different sources of funding in two different academic years, maybe you can be covered for one calendar year in terms of being able to contribute. It helps if you’re married of course, to someone with taxable compensation. And the other workaround is actually having a side hustle that is self employment income. So self-employment income is taxable compensation that can be contributed to an IRA. So that’s something I sometimes float with people who are frustrated by their multi-year wonderful fellowship packages that don’t allow them to contribute to an IRA. If it’s possible to side hustle, that’s another way to kind of sneak in that eligibility. So, your stipend wouldn’t be eligible, but that side hustle income would be eligible. All these are workaround solutions, the real main solution is just changing the tax code because this is ridiculous that this is happening, right?

Commercial

16:35 Emily: Emily here for a brief interlude. Through my business, I provide seminars and webinars on personal finance for graduate students, postdocs, and other early-career PhDs for universities, institutes, conferences, associations, etc. I offer seminars that cover a wide range of personal finance topics and others that take a deep dive into the financial topics that matter most to PhDs, like taxes, investing, career transitions, and frugality. If you are interested in having me speak to your group or recommending me to a potential host, you can find more information and ways to contact me at pfforphds.com/speaking. That’s p f f o r p h d s.com/speaking. Now back to the interview.

Anything Else About Your Role in FASEB?

17:25 Emily: Okay. So, anything else to add about your role with getting FASEB to endorse the GSSA?

17:31 Abigail: Yeah. So, because it was a tax bill and FASEB had never endorsed a tax bill before, they want it to go through full process of endorsement. They wanted to get everyone’s feedback on it. So the first step was going through their Training and Career Opportunities Subcommittee. So, they have a monthly meeting, I prepared talking points for the chair of that committee, and we discussed it and they couldn’t see anything wrong with it. So, we got a full endorsement from that subcommittee. Then we had to go up one level to the Science Policy Committee and did the same thing, had to talk to the entire committee, got overwhelming support of it. So, it got pushed up to the next FASEB tier, which was the executive committee. They gave the final approval. Actually, for the Training and Career Opportunities Subcommittee and the Science Policy Committee, I made a one-page summary of the current situation and how the Graduate Student Savings Act would change that. So, a one-page review for them. And then when we went for approval for the Executive Committee, we had the full letter drafted for them to approve, and we can also give you a link to the FASEB’s endorsement letter too, as well.

18:56 Abigail: Normally, it would go to the FASEB board for approval, but the board was jam-packed with what they had to do for that month. So, because we got unanimous support from the two committees before that, they thought that the Executive Committee approval would be sufficient. But I started my internship in June and it wasn’t approved until the first week of September. So, it does take a long time for this approval to go through because you have to wait every month for the next committee to happen. And if there are changes and edits to it, then it can also take a lot of time. You want to do it as quick as possible so the endorsement actually has an effect if the bill is getting voted on soon.

19:47 Emily: Yeah, exactly. This is fascinating to hear kind of how the sausage is made, and not even to make the policy, but just to get something like this: an endorsement from group whose endorsement matters in this kind of thing. What I’m just thinking is how good it is that FASEB has connections to the current trainee workforce like through you and other interns they accept because they had you to tell them, “Hey, this is an issue that’s going on. And by the way, there’s a solution to it and it’s in front of Congress right now.” So it’s just, I guess it’s really good for them to offer these kinds of internships programs to get those fresh ideas and those connections to people who are still in training.

20:30 Abigail: Yeah, I think they really appreciate the fellowship program for that same perspective. The younger generation. People serving on these committees and the boards are faculty members that have been serving for a while and they’re very removed from this training portion. I think there might be–and correct me if I’m wrong–but I think there could be a few postdocs who are serving on boards, but I think that’s very unlikely. Most of it’s always faculty. There’s never a postbac representative in these meetings. So, having a fellow there, they really value so they can get that younger perspective on what’s happening currently.

What is the SECURE Act?

21:10 Emily: Yeah. That’s excellent. Okay. So that was your role with FASEB and then with respect to the GSSA, the Graduate Student Savings Act. There is a different bill before Congress that has sucked up a lot more attention in terms of changing the tax code than the GSSA has, and that is the SECURE Act. Can you tell us what the SECURE Act is? Not in a lot of detail, but basically just how it relates to the Graduate Students Savings Act?

21:35 Abigail: The SECURE Act is Setting Every Community Up for Retirement Enhancement Act of 2019, and it’s just a massive retirement savings bill. For some perspective, the Graduate Student Savings Act is a two-page bill, whereas the Secure Act is 124 pages. So it’s just way too large for FASEB to endorse something so big. But fortunately, it has almost the exact same wording as the Graduate Student Savings Act in one of its sections. So it would get across the same thing as the Graduate Student Savings Act. It would allow graduate students receiving unearned income to contribute to an IRA account. It just was too big of a bill for FASEB to endorse because we can’t vet everything and it’s a little bit out of FASEB’s wheelhouse.

22:22 Emily: Yeah. So, basically what sounds like has happened is that the Secure Act has absorbed the Graduate Student Savings Act pretty much verbatim. And it’s making a lot of other changes as you said to retirement accounts. I’ll link to a couple articles on the Secure Act from the show notes, but some other things that caught my eye that it’s trying to address are like having part time workers have more access to 401k’s. It’s changing a little bit of the distribution rules, like once you’re actually in retirement and about inherited IRAs and there’s just a lot of changes there. Abby and I were glancing over it and we saw something that, “Oh maybe this addresses the kiddie tax.” We’re not even sure about that, which would be amazing if it does. So there’s a lot of different things that it touches.

23:02 Emily: And as you were saying earlier, like for FASEB being able to endorse the GSSA, the GSSA had to have bipartisan support. In fact the Secure Act does have bipartisan support. It passed the House and is currently hung up in the Senate as of, again, September 25th. Because the Secure Act passed the House with such strong bipartisan support, everyone kind of thought that it would pass the Senate really quickly. But it’s been hung up, so its future is uncertain but hopefully it will get through. And the wording that was adopted from the GSSA, hopefully that would actually be maintained. And in the final version we would actually see this benefit be extended to graduate students and postdocs where it wasn’t before. But that’s kind of where things stand as of today as of this recording. Hey, maybe by the time this is published something will have changed on that front. That would be awesome.

23:56 Abigail: I think something also important to note is that the wording of the bill, I don’t think that it would also apply to postbacs. It seems very specifically to graduate students and postdocs. So I think, unfortunately, postbacs would be still excluded from the Graduate Student Savings Act.

How Will the Internship Help Your Future?

24:12 Emily: Hmm. Interesting. Yeah. I’ll have to take a look at that because I didn’t realize there were distinctions being made among different levels of training. We’ll see how that actually shakes out. It’s always sort of uncertain until kind of the next tax cycle rolls around how these things are actually going to be implemented and everything. Thank you for pointing that out. For postbacs out there, this might not be the news you’re looking for. Maybe you still need the side hustle or maybe you still need to get married to have one of these workarounds. Just kidding, people don’t do that. Okay. So Abby, how do you think that this internship experience with FASEB is going to benefit your future career?

24:52 Abigail: Oh, I think it benefited me already tremendously. Besides from just getting a sense of what science policy really is and getting to immerse myself in it and what I would expect in a job. I got great networking. I already met a bunch of people because FASEB represents so many other societies. You know, I really got to get my name around and people know my work now. I also just got a ton of experience. I generated a bunch of writing samples, which is really crucial in the science policy job search, and I think I’ll get great references also for future jobs. So, it’s benefited me tremendously.

25:30 Emily: Do you have specific plans yet for after you finish? Like what positions you might apply for?

25:35 Abigail: Yes, I’m probably looking for science policy analyst positions. When I graduate. I don’t see really any benefit of doing a postdoc afterwards. There are people that continue to do more science policy fellowships. I’m kind of in the boat where I would just like to be out of fellowships and schooling and just want a real job. And I think with this internship I generated enough experience that I would be able to get an entry-level position and be a sought-after candidate.

Final Advice for Early-Career Grad Students

26:08 Emily: Yeah, I have a great deal of sympathy with that position of, “okay, I don’t need any more training. I’m trained. Let me have a job. Finally.” Definitely. So Abby, last question here, which is one I ask all of my guests. What is your best financial advice for another early-career PhD? And that could be related to something we’ve talked about today or it could be something entirely different.

26:29 Abigail: Yeah. So I think of course I would recommend that everyone should open and save in a Roth IRA account and start saving what they can, even if they can’t hit the max. But I think more importantly, we know that graduate school is a really stressful time, and I think it’s really important to invest in your personal wellbeing. And so if that means, paying for workout classes or traveling or if it’s even retail therapy. I think whatever it is, if it’s important to you and if it makes grad school a little bit saner for you it’s important to put some money aside and make time for yourself.

27:08 Emily: Yeah, it’s, it’s actually a little bit weird that sometimes we have to give graduate students permission to spend money on themselves. But if you think about it like more broadly, other people when they receive the financial advice to cut back on those discretionary expenses, cut back on those Wants and so forth, it’s usually because they’re spending at such a level that’s actually endangering their other financial security.

27:35 Emily: Graduate students I would say in general are not spending a sufficient percentage of their income on discretionary things for themselves. Actually, sort of to tie this back to the GSSA, one of the co-sponsors of the GSSA is Senator Elizabeth Warren. She’s sponsored every year in the past, whatever, four years that it’s been up. Many years ago, back when she was a consumer advocate, basically, she wrote this book called All Your Worth*. She co-authored it with her daughter. And that book promotes the balanced money formula, which is to spend, of your after-tax income, no more than 50% of your after-tax income on Needs, 30% on Wants and 20% to Savings. And I was looking at that the other day and I’m thinking that graduate students, I would be surprised if they spent 30% of their income on their Wants.

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

28:28 Emily: Usually, it’s that Needs category that gets up to 60, 70, 80% or more because of rents and high costs of living areas and low stipends and all of those kinds of problems. So yeah, in fact, sometimes we do need to hear the advice that it is okay to spend a little bit of money on yourself to help bolster your mental health and help you get through graduate school in great shape. Of course, it’s ideal if you can do that alongside saving for your future and doing all these other great things, but we want you to get through graduate school in one piece. So yeah, thank you for that advice, Abby, and for giving this interview today.

29:02 Abigail: Well, thank you for having me.

Outtro

29:05 Emily: Listeners, thank you so much for joining me for this episode. Pfforphds.com/podcast is the hub for the Personal Finance for PhDs podcast. There, you can find links to all the episode show notes, a form to volunteer to be interviewed, and a way to join the mailing list. I’d love for you to check it out and get more involved. If you want to support the show and my business, please go to pfforphds.com/helpout. There are plenty of ways to do so without laying out any of your own money. See you in the next episode! And remember, you don’t have to have a PhD to succeed with personal finance, but it doesn’t hurt. The music is Stages of Awakening by Podington Bear from the free music archive and is shared under CC by NC.

This NDSEG Fellow Prioritizes Housing and Saving for Mid- and Long-Term Goals

August 5, 2019 by Jewel Lipps

In this episode, Emily interviews Lourdes Bobbio, a graduate student in materials science at Penn State and NDSEG fellow. Lourdes breaks down the top five expenses in her budget: housing, food, taxes, utilities, and subscription services. She explains the financials systems she has put in place to reach financial success during her PhD: targeted savings, automated transfers, quarterly estimated tax, high-yield savings accounts, and taxable retirement investments with a roboadvisor. Lourdes has decided to prioritize her housing within her budget, but still balances that expense with plenty of saving for her future wedding and retirement.

Links mentioned in episode

0:00 Introduction

1:07 Please Introduce Yourself

Lourdes Bobbio is a fourth year PhD student at Penn State University in State College, Pennsylvania. She is in the materials science and engineering department. She currently lives alone.

1:55 What is your income?

Lourdes is on the National Defense Science and Engineering Graduate fellowship. She makes $38,400 each year which is $3,200 per month. She says that this income goes pretty far in State College.

2:37 What are your five largest expenses each month?

Lourdes explains that the cost of living in State College is fairly low, especially compared to where she grew up near Washington, DC and where she went to undergraduate in Boston. She was more accustomed to high cost of living. Her top expenses are rent, taxes, food, utilities and subscription services.

3:08 #1 Expense: Rent

Lourdes lives in the downtown area of State College. She lives on her own without roommates. She determined that she values being able to walk to work every day, living close to campus, living near restaurants, and living by herself. She doesn’t have a car, so she doesn’t have car related expenses in her budget. She says she has never owned a car. She says a majority of graduate students in State College have a car. The town is small and there is a limited number of things to do. If you want to go away for the weekend, having a car is useful. She says there is an abundance of housing close to campus and a fairly good bus system.

She spends about $1500 per month for rent. She lives in a one bedroom with an office space which could be a second bedroom. She values having a space of her own. Because it is a college town, it runs on the school schedule. She says the cycle of finding apartments is over in November and December. She has lived in the same place for her whole time in graduate school. She says for her first year of graduate school, she wasn’t on the NDSEG fellowship. Her parents helped her pay rent a little bit and they stayed in the office room when they came to visit her. When she got her fellowship, she determined she could pay for the apartment on her own.

Lourdes says that her boyfriend has a car, and several of her friends own a car. When she wants to travel out of town, she goes with them.

8:46 #2 Expense: Taxes

Lourdes charges herself for taxes. Because she has fellowship income, she does not have automatic withholding for her taxes, so she needs to make quarterly estimated tax payments to the IRS. When she gets paid at the beginning of the month, she takes out the money for taxes right away and puts it into a savings account. When it’s time to make the quarterly payment, she has the money available. Emily emphasizes that the majority of fellows do not have taxes withheld and fellows need to withhold taxes themselves.

When she first got her fellowship and realized that no taxes would be withheld, she had to go through the process of filling out the 1040-ES worksheet to figure out the total amount that she would owe. She figured that out and divided it by twelve so she could save that amount each month. She has a spreadsheet to plan her budget for the entire year. She sets it aside in a high yield savings account until she has to pay it each quarter. Emily explains that 1040-ES is not submitted to the IRS and she has a workshop to help people work through the form.

Lourdes banks with Discover online bank and she also has a credit card with them. She puts her long term savings there. She has a checking account with a local credit union and a short term savings account.

13:42 #3 Expense: Food

Lourdes includes groceries and going out to eat in her food expenses. She says she spends more on dining out than she would like to, but she doesn’t feel guilty about it because she budgets for it and knows how much she can spend. Emily shares that budgeting is “freeing” and Lourdes agrees. Lourdes says that she values the social time that is associated with dining out. She spends about $200 to $300 per month on food.

15:42 #4 and #5 Expense: Utilities and Subscription Services

Lourdes says that she pays $30 to $40 on electricity. She pays about $25 per month on subscription services, Netflix and Spotify. She says that Audible is about $15 per month and she recently cut it. She reevaluates what she is subscribed to each year.

Her apartment has internet and cable included. She wouldn’t have paid for cable if it wasn’t included. She says that internet can be pricey and she’s glad it is included in her rent.

19:08 What are you currently doing to further your financial goals?

Lourdes has short term, mid term, and long term goals. She says she has two savings accounts to break down her goals. She has a savings account through her credit union that’s connected to her checking account. She puts money for her short term goals there. Her mid term and long term goals go into her high yield savings account.

Her short term goals include a general travel fund. She takes a bus to go to DC to visit her parents. She puts about $15 to $20 per month for travelling home. She has a gift fund as well, which helps her save for going to weddings. She has a “fun fund” where she saves for higher price experiences, like going to Broadway shows that have $60 tickets. She also uses her fun fund for buying items for her hobbies, like baking equipment. Emily says that she calls this a system of targeted savings account. This is a system for saving for irregular expenses.

Her mid term savings goals is for her wedding. She is saving about a couple hundred dollars per month for her wedding. She is also thinking about buying a house in the future and she is saving with that in mind. Additionally, because she is on a fellowship, she has to pay out of pocket for her health insurance. Recently when she had to be taken off of her parent’s health insurance, she used her emergency savings account to pay for health insurance. Now she has been saving for her next year’s health insurance premium.

26:28 Do you have long term goals?

Lourdes is also saving for retirement. For one year in graduate school, before she was on her fellowship, she was able to max out her Roth IRA. She learned that she is not eligible to contribute to a Roth IRA while on a fellowship. Now she invests in a general taxable brokerage account. She does not contribute as much but she tries to put $100 or $200 per month into it.

Emily explains that your eligibility for an IRA depends on you having taxable compensation or earned income. For graduate students, this means W-2 pay which is typically an assistantship. The NDSEG fellowship doesn’t count as taxable compensation or earned income. At this point, many people don’t bother saving for retirement because they don’t have an IRA. Emily encourages investing at as an early an age as possible.

Lourdes said when she learned about the tax and retirement savings of her fellowship, she realized that she would have to invest in a taxable account. She did a lot of research into what she wanted to invest in. She didn’t feel very knowledgeable. She used Vanguard for her Roth IRA but she wanted to try something else. She currently uses an online roboadvisor Wealthfront, which she likes so far. She says it is an easy way to get a broad portfolio. She thinks in the future she would move to somewhere with lower fees. She says she has no fees because her amount is below the threshold of $15,000. Wealthfront lowers the threshold with referrals. Her referral link in these shownotes.

32:30 What is your best financial advice that you’d share with your peers?

Lourdes advises not to be afraid of having a budget. She says many people are worried that budgets are restricting. She says that budgets are freeing, especially as a graduate student on a limited income. She says the budget gives her freedom that is very valuable and makes finances less scary.

tax

Links Mentioned in the Episode

Receive Your Tax "Cheat Sheet"

Intro

Book Giveaway

Preliminary Comments

1. Anything

2. Your Form 1098-T Lacks Vital Information

3. Your Fellowship or Training Grant Income Is Taxable

4. Your Paycheck Is Pre-Tax, Not Post-Tax.

5. Your Income Tax Is Due Four Times per Year, Not One

6. Those of You Under Age 24 Need to Be Extra Cautious

Conclusion

Listener Q&A

Outro

The Good News

When Exactly Will Your Paychecks Arrive?

In What Amount(s) Will the Paychecks Be?

Income Tax

Step 1: Estimate Your Tax Bill

Step 2: Determine If You Must Pay Quarterly Estimated Tax

How to Manage Spending

Budgeting Regular Expenses

Budgeting Irregular Expenses

Account Structure

Reaching Long-Term Financial Goals

Switching Off of Fellowship Income

Links Mentioned in This Episode

Teaser

Introduction

Will You Please Introduce Yourself Further?

Funding During the PhD:

Fellowship Cap and Being Over-awarded

Proactive Steps to Avoid Getting Over-awarded

Commercial

Tax Consequences of Being Over-awarded

Saving Money for Taxes When Your Fellowships Do Not Have Tax Withheld

Final Words of Advice

Outtro

Links Mentioned in the Episode

Teaser

Introduction

Will You Please Introduce Yourself Further?

Tell Us More About Your FASEB Internship

How to Land a Science Policy Internship

What is the Graduate Student Savings Act?

How Abby Got FASEB to Endorse the GSSA

Personal Impact of Flawed Tax Legislation

Commercial

Anything Else About Your Role in FASEB?

What is the SECURE Act?

How Will the Internship Help Your Future?

Final Advice for Early-Career Grad Students

Outtro

Links mentioned in episode

0:00 Introduction

1:07 Please Introduce Yourself

1:55 What is your income?

2:37 What are your five largest expenses each month?

3:08 #1 Expense: Rent

8:46 #2 Expense: Taxes

13:42 #3 Expense: Food

15:42 #4 and #5 Expense: Utilities and Subscription Services

19:08 What are you currently doing to further your financial goals?

26:28 Do you have long term goals?

32:30 What is your best financial advice that you’d share with your peers?

33:50 Conclusion

Footer

Sign Up for More Awesome Content