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training grant

Fellowship and Training Grant Tax Forms

February 2, 2022 by Emily Leave a Comment

There is no single correct IRS tax form on which to report PhD trainee fellowship and training grant stipends and salaries. Universities and funding agencies take different approaches, which often confuses grad students, postdocs, and postbacs. This article shares the crowd-sourced information on how universities and funding agencies are reporting fellowship and training grant income.

Please contribute to this project by filling out this survey to have your tax form included in this article—and share the survey as well.

I have included the number of entries that I’ve received for each type of tax form.

Further reading:

  • What Your University Isn’t Telling You About Your Income Tax
  • Do I Owe Income Tax on My Fellowship?
  • What Is a Courtesy Letter?

Tax Year 2024 Survey Results

External Fellowships

National Institutes of Health (NIH)

Continuing Education Training Grant (T15)

The T15 has been reported on a:

  • Form 1098-T Box 5 (1 entry)

Intramural Research Program: Postdoctoral Research Training Award (IRTA)

The postdoc IRTA has been reported on a:

  • Form 1099-G in Box 6 (1 entry)

Ruth L. Kirschstein Institutional National Research Service Award (T32)

The T32 has been reported on a:

  • Courtesy letter (2 entries)
  • W-2 (1 entry)

Ruth L. Kirschstein Predoctoral Individual National Research Service Award (F31)

The F31 has been reported on a:

  • Form 1099-MISC Box 3 (2 entries)

It has also been not reported in any way (1 entry)

Linked Training Award (TL1)

The TL1 has not been reported in any way (1 entry)

National Science Foundation

Research and Mentoring for Postbaccalaureates in Biological Sciences (RaMP)

The RaMP has been reported on a:

  • Courtesy letter (1 entry)

Graduate Research Fellowships Program (GRFP)

The GRFP has been reported on a:

  • Form 1098-T Box 5 (2 entries)
  • Courtesy letter (1 entry)

It has also been not reported in any way (2 entries)

National Aeronautics and Space Administration

Future Investigators in NASA Earth and Space Science and Technology (FINESST)

The FINESST has been reported on a:

  • Form 1098-T Box 5 (1 entry)

It has also been not reported in any way (1 entry)

American Institute of Indian Studies

Junior Fellowship

The Junior Fellowship has not been reported in any way (1 entry)

National Institute for Occupational Safety and Health

Occupational Health Psychology Total Worker Program

The Occupational Health Psychology Total Worker Program funding has not been reported in any way (1 entry)

Internal Fellowships

Harvard University

Funding (stipend) for doctoral students still in coursework has not been reported in any way (1 entry – told to use paystub for reporting to IRS)

Northwestern University

The First-Year Fellowship was reported on a courtesy letter (1 entry – letter was requested by recipient).

Stanford University

Funding (stipend) for doctoral students has been reported on Form 1098-T Box 5 (1 entry).

University of Connecticut

The Jorgensen Fellowship has not been reported in any way (1 entry).

University of Pennsylvania

The Educational Fellowship has not been reported in any way (1 entry).

Vanderbilt University

Funding (stipend) for doctoral students has been reported on Form 1098-T Box 5 (1 entry).

Non-tuition scholarship awards (e.g., health insurance, health fee award) have been reported on Form 1098-T Box 5 (1 entry).

Tax Year 2023 Survey Results

External Fellowships

National Institutes of Health (NIH)

Dissertation Award (R36)

The R36 has not been reported in any way (1 entry).

Intramural Research Program: Postdoctoral Research Training Award (IRTA)

The postdoc IRTA has been reported on a:

  • Form 1099-NEC Box 1 (1 entry)

Ruth L. Kirschstein Institutional National Research Service Award (T32)

The T32 has been reported on a:

  • Form 1098-T Box 5 (3 entries)

It has also been not reported in any way (2 entries).

Ruth L. Kirschstein Predoctoral Individual National Research Service Award (F31)

The F31 has been reported on a:

  • Form 1098-T Box 5 (2 entries)
  • Form 1099-MISC Box 3 (1 entry)

National Science Foundation

Graduate Research Fellowships Program (GRFP)

The GRFP has been reported on a:

  • Form 1098-T Box 5 (2 entries)
  • Form W-2 (1 entry)

It has also been not reported in any way (1 entry).

Internal Fellowships

Harvard University

The Prize Fellowship has not been reported in any way (1 entry).

Mayo Clinic Graduate School of Biomedical Sciences

Funding (stipend) for doctoral students has been reported on Form 1099-MISC Box 3 (1 entry).

Ohio State University

The Presidential Fellowship has not been reported in any way (1 entry).

Smithsonian Institution

The postdoctoral Smithsonian Institution Fellowship Program (SIFP) has not been reported in any way (1 entry).

University of Nevada, Reno

The Bilinski Fellowship has been reported on Form 1098-T Box 5 (1 entry).

University of Virginia

The Diversity, Equity, and Inclusion Dean’s Doctoral Fellowship has not been reported in any way (1 entry).

A graduate research assistantship position has not been reported in any way (1 entry).

The Raven Fellowship has been reported on Form 1099-MISC Box 3 (1 entry).

Tax Year 2021 Survey Results

National Institutes of Health (NIH)

Ruth L. Kirschstein Institutional National Research Service Award (T32)

The T32 has been reported on a:

  • Form 1098-T in Box 5 (5 entries)
  • Courtesy letter (3 entries)

It has also been not reported in any way (3 entries).

Ruth L. Kirschstein Individual Predoctoral NRSA for MD/PhD and other Dual Degree Fellowships (F30)

The F30 has been reported on a:

  • Form 1098-T in Box 5 + Form W-2 in Box 14 (1 entry)

Ruth L. Kirschstein Predoctoral Individual National Research Service Award (F31)

The F31 has been reported on a:

  • Form 1098-T in Box 5 (2 entries)
  • Form W-2 in Box 1 (1 entry)

It has also been not reported in any way (1 entry).

Ruth L. Kirschstein Postdoctoral Individual National Research Service Award (F32)

The F32 has been not reported in any way (1 entry).

Individual Predoctoral to Postdoctoral Fellow Transition Award (F99/K00)

The F99/K00 has been not reported in any way (1 entry).

Intramural Research Program: Postdoctoral Research Training Award (IRTA)

The postdoc IRTA has been reported on a:

  • Form 1099-G in Box 6 (1 entry)

NIH Oxford-Cambridge Scholars Program

The Oxford-Cambridge Scholarship has been reported on a:

  • Form 1099-G in Box 6 (1 entry)

National Center for Advancing Translational Sciences Clinical and Translational Science Awards (CTSA) Program TL1

The CTSA TL1 has been reported on a:

  • Form 1099-MISC in Box 3 (2 entries)

Clinical Connections-Connecticut (CNC-CT)

The CNC-CT has been not reported in any way (1 entry).

Molecular Biophysics Training Grant

The Molecular Biophysics Training Grant has bee reported on a:

  • Form 1098-T in Box 5 (1 entry)

National Science Foundation (NSF)

Graduate Research Fellowships Program (GRFP)

The GRFP has been reported on a:

  • Form 1098-T in Box 5 (13 entries)
  • Form W-2 Box 1 (1 entry)
  • Courtesy letter (1 entry)

It has also been not reported in any way (5 entries).

Postdoctoral Research Fellowships in Biology (PRFB)

The PRFB has been not reported in any way (1 entry).

Department of Energy (DoE)

National Nuclear Security Administration (NNSA) Stewardship Science Graduate Fellowship

The NNSA Stewardship Science Graduate Fellowship from the Krell Institute has been reported on a:

  • Courtesy letter (1 entry)

Department of Defense (DoD)

National Defense Science and Engineering Graduate Fellowship (NDSEG)

The NDSEG has been reported on a:

  • Form 1099-NEC in Box 1 (1 entry)
  • Courtesy letter (1 entry)

Science, Mathematics, and Research for Transformation (SMART)

The SMART Scholarship has been reported on a:

  • Form 1099-MISC Box 3 (1 entry)

The National Academies

Ford Foundation Predoctoral Fellowship

The Ford Foundation Predoctoral Fellowship has been reported on a:

  • Courtesy letter (1 entry)

Henry Luce Foundation

Clare Boothe Luce Fellowship

The CBL Fellowship has been not reported in any way (1 entry).

Simons Foundation

The Simons Postdoctoral Fellowship has been reported on a courtesy letter (1 entry).

Internal Fellowships

Cornell University

A fellowship for first-year rotating students has been reported on a Form 1098-T in Box 5.

Harvard University

The Prize Fellowship has been not reported in any way (1 entry).

Indiana University

The University fellowship has been reported on a Form 1098-T in Box 5 (1 entry).

Mayo Clinic

The Mayo Foundation for Medical Education & Research Fellowship has been reported on a Form 1098-T in Box 5 + Form 1099-MISC in Box 3 (1 entry).

Rochester Institute of Technology

A graduate research assistantship position has been reported on a Form 1099-MISC in Box 3.

University of California, Berkeley

The Chancellor’s Fellowship has been reported on a Form 1098-T in Box 5.

University of California, San Diego

The Summer Training Academy for Research Success (STARS) Fellowship has been reported on a Form 1098-T in Box 5 and a courtesy letter (1 entry).

University of Connecticut

The Jorgensen Fellowship has been not reported in any way (1 entry).

University of Michigan

The Rackham Merit Fellowship has been reported on a Form 1098-T in Box 5 (1 entry).

University of Pennsylvania

The Dean’s Fellowship in the Graduate School of Education has been reported on a Form W-2 in Box 1 (1 entry).

University of Southern California

The Merit Fellowship has been reported on a Form 1098-T in Box 5 (1 entry).

University of Virginia

The Diversity, Equity, and Inclusion Dean’s Doctoral Fellowship has been not reported in any way (1 entry).

Washington University in St. Louis

The WM Keck Postdoctoral Fellowship has been reported on a courtesy letter (1 entry).

Please contribute to this project by filling out this survey to have your tax form included in this article—and share the survey as well.

Want more tax content specific to graduate students, postdocs, and postbacs?

Visit the Personal Finance for PhDs Tax Center.

Workshop: How to Complete Your Grad Student Tax Return (and Understand It, Too!)

Workshop: Quarterly Estimated Tax for Fellowship Recipients

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
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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:

  1. 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!
  2. Share an episode you found particularly valuable on social media, with a email list-serv, or as a link from your website.
  3. 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.
  4. 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.

Fellowship Income Is Now Eligible to Be Contributed to an IRA!

December 30, 2019 by Emily

In this episode, Emily explains the new legislation that allows non-W-2 fellowship income to be contributed to an Individual Retirement Arrangement (IRA). Up until 2019, fellowship or training grant income (reported on a Form 1098-T or Form 1099-MISC or not reported at all) was not eligible to be contributed to an IRA. Certain legislation, the Graduate Student Savings Act (GSSA), which fixes this problem, has been proposed a few times since 2016, but never passed. However, at the end of the 2019 Congressional session, the text of the GSSA was passed and signed into law as part of an omnibus spending bill (H.R. 1865). PhD trainees who are newly eligible to contribute to an IRA should consider their overall financial status and goals to determine whether to contribute and in what amount.

Links Mentioned in this Episode

  • IRS Publication 590A (p. 6, old definition of taxable compensation)
  • The Graduate Student Savings Act Fixes a Major Flaw in Tax-Advantaged Retirement Accounts
  • House Resolution 1865
  • IRS Publication 970 (p. 5, definition of fellowship)
  • Everything You Need to Know about Roth IRAs in Graduate School
  • One-on-One Financial Coaching
  • The Wealthy PhD
taxable compensation fellowship IRA

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 4 Bonus Episode 1, and in this episode I will update you on recent legislation that has a major positive impact on the PhD trainee population.

Specifically, starting on January 1st, 2020, the definition of “taxable compensation” for the purpose of contributing to an individual retirement arrangement or IRA was  updated to include taxable fellowship income not reported on a W-2.

That’s the takeaway point for those of you already in the know about this issue: Your taxable non-W-2 fellowship income is now eligible to be contributed to an IRA. You can open a Roth or traditional IRA on January 1 or following and put in the $6,000 maximum contribution if you like, assuming your taxable fellowship income is at least $6,000 in 2020. If that’s all you need to know, feel free to stop this episode now, but please share it with your peers as you go.

In the rest of this episode, I will review the prior definition of taxable compensation and how it negatively impacted the PhD trainee community and then explain the recent legislation that changed the definition for 2020 and forward. At the end of the episode, I’ll point you to a few resources to help you in your investing journey.

1 The Prior Definition of Taxable Compensation

The federal government offers a few different tax incentives to encourage individuals to invest for their retirement.

When you invest money inside a tax-advantaged retirement account, you don’t have to pay tax on the growth in your investments as you would for a regular taxable investment account and you also can take a tax break on either the amount of money you contribute to the account or the amount of money you withdraw from the account in your retirement.

Most of the tax incentives are offered through workplace-based retirement accounts, such as a 401(k) in the private sector or a 403(b) in the nonprofit sector. However, there is one type of account that can be opened outside of your workplace, and that is the Individual Retirement Arrangement or IRA.

You as an individual can go to just about any brokerage firm and open an IRA, and it’s not at all connected to where you work. The contribution limit for an IRA is $6,000 per year if you’re under age 50.

The restriction the federal government places on IRAs is that you have to have what’s called “taxable compensation” in a given calendar year to contribute to an IRA. Your overall income also has to fall under certain limits to contribute.

The old definition of taxable compensation was as follows. Think of a two-column list. The left-hand column is types of income that are considered taxable compensation, and the right-hand column is types of income that are not considered taxable compensation. I’m not giving you the exhaustive lists, but just an idea.

In the left-hand list, taxable compensation, you had:

  • W-2 income, such as you would receive from being an employee,
  • Self-employment income,
  • Alimony,
  • Etc.

In the right-hand list, not taxable compensation, you had:

  • Rental income,
  • Interest and dividend income,
  • Pension or annuity income,
  • Taxable scholarship and fellowship income not reported on a W-2,
  • Etc.

This was specified in the tax code. So if your fellowship or training grant income was reported on any kind of tax form other than a W-2, such as a 1098-T or 1099-MISC, or not reported at all, it was not considered taxable compensation for the purposes of contributing to an IRA.

That means that if you went an entire calendar year with only non-W-2 fellowship income, you would not have been able to contribute to an IRA in that calendar year.

This was really tough news for a lot of people in our PhD community. The irony was that students and postdocs who won outside fellowships often received a higher income than their employee peers, so they perhaps had more money available to invest, but they were barred from using an IRA to do so.

Now, there were a couple workarounds. Keep in mind that the contribution limit to an IRA is $6,000 or the amount of your taxable compensation, whichever is lower.

First, the calendar year and the academic year do not line up. So if your funding source switched between W-2 and non-W-2 between academic years, you would still have at least a degree of IRA eligibility in that calendar year.

Second, if you were married and your spouse had taxable compensation, you could contribute to a spousal IRA, up to their amount of taxable compensation or the overall $12,000 per year limit for two IRAs, whichever was lower.

Third, if you had a side hustle, that self-employment or W-2 income would give you some eligibility.

As a last resort, if you truly didn’t have access to an IRA in a calendar year, you still had the option to invest for retirement in a regular taxable investment account. If you chose a tax-efficient investing strategy, such as passive index investing, you probably would not have much of an additional tax burden due to the favorable tax rates for long-term capital gains and qualified dividends. However, this tax advantage was not widely recognized.

The effect of this law was that many PhD students and postdocs who had the financial means to invest for retirement were prevented from contributing to IRAs, and they likely didn’t try to invest instead in a taxable account. The law sent the message that PhD trainees were not supposed to be investing for retirement and were not worthy of being extended the same tax break that employees were. This had an overall dampening effect on the financial ambition of PhD trainees, which in my opinion was a very serious problem.

2 The Legislation That Changed the Definition

All that has changed now. In essence, the new legislation moved taxable scholarship and fellowship income not reported on a W-2 from the right-hand column to the left, from being explicitly excluded from the definition of taxable compensation to being explicitly included in the definition for graduate students and postdocs.

The origin of this legislation was the bipartisan Graduate Student Savings Act or GSSA, first introduced in 2016 in the Senate by Senators Elizabeth Warren and Mike Lee and in the House by Congressmen Joe Kennedy and Luke Messer; however, it was not passed at that time. The GSSA was re-introduced in 2017 and 2019 and eventually included in the bipartisan SECURE Act in 2019, none of which passed.

You can learn more about the GSSA in Season 4 Episode 9 of this podcast, in which I interview Abby Dove, a graduate student who as a science policy fellow worked on getting a scientific advocacy group to endorse the GSSA.

Ultimately, in the closing days of the 2019 session, the text of the GSSA was included in an omnibus spending bill along with the rest of the SECURE Act, passed by both chambers of Congress, and signed into law by the president.

I’ll read to you exactly the change that was made in House Resolution 1865, and I’ll link it from the show notes.

“SEC. 106. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS TREATED AS COMPENSATION FOR IRA PURPOSES.

(a) In General.—Paragraph (1) of section 219(f) of the Internal Revenue Code of 1986 is amended by adding at the end the following: “The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

(b) Effective Date.—The amendment made by this section shall apply to taxable years beginning after December 31, 2019.”

There you have it! The definition of “taxable compensation” for the purposes of contributing to an IRA now includes taxable fellowship income for graduate students and postdocs. However, by my reading, it seems that taxable post-baccalaureate fellowships have not been included in the definition.

That language of “aid the individual in the pursuit of graduate or postdoctoral study” reflects the definition of a fellowship from IRS Publication 970, which reads quote “A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research” end quote.

3 What to Do Now

This change is really good news for the PhD trainee community overall, but it may or may not materially change anything for you. If you now have access to an IRA in 2020 when you otherwise would not have, what should you do? I imagine that PhD trainees fall into one of three groups.

First, some PhD trainees should not be investing for retirement right now, so having access to an IRA doesn’t really matter. This is the case if you don’t have the available cash flow to invest or have other, higher-priority financial goals, such as paying off high-interest debt or saving up cash.

Second, some PhD trainees are ready and able to invest but don’t have pre-existing savings or investments. Maybe they have recently finished paying off certain types of debt or saving up sufficient cash, and they now have cash flow available for investing. This is the group that can open up an IRA and set up a regular savings rate into it; this is called dollar cost averaging. With a $6,000 per year limit, your regular monthly contribution to the IRA can be up to $500, which would be a great savings rate for a graduate student or postdoc.

Third, some PhD trainees have already been saving or investing outside of an IRA and are eager to contribute a lump sum of money to an IRA. You are permitted to contribute the full $6,000 in one go if that’s your preference. Then, throughout the year, you can direct your ongoing savings rate to a taxable investment account or other financial goals.

One question I’ve already received a few times is whether fellowship recipients will be able to contribute to a 2019 IRA. In general, you are allowed to contribute to your prior year’s IRA up until tax day of the subsequent year, and this is a strategy I recommend to anyone who has not yet maxed out their IRA for the prior year. However, since the text of the bill says the change will go into effect after December 31, 2019, my reading is that the old definition of taxable compensation will apply to 2019 IRAs and the new definition will apply to 2020 IRAs.

If you’re not sure what your unique next steps should be or if what I spoke about today even applies to you, I am available to coach you. I can’t recommend specific funds, but we can work together to determine your next financial goal, increase your savings rate, and figure out which high-level investing strategy is most appropriate for you.

You can set up one-on-one coaching with me by going to PFforPhDs.com/coaching. Another excellent option is to participate in my upcoming program, The Wealthy PhD, through which you will receive course content, individual and group coaching, and community with your peers. You can find more information about The Wealthy PhD at PFforPhDs.com/wealthyPhD.

I would be absolutely delighted to shepherd fellowship recipients who have never before invested through the process.

As for additional resources, I have many, many articles on investing on my website, and I have linked several updated ones from the show notes. You can find the show notes for this episode at PFforPhDs.com/s4be1 for season 4, bonus episode 1.

For international students and postdocs, I would also recommend listening to Season 4 Episode 17 of this podcast, which answers the question of whether it is permissible and advisable for international students, postdocs, and workers to invest while living in the US. Keep in mind that I recorded this episode prior to the definition of taxable compensation changing.

Finally, if you need to take a big step back because you were surprised to hear that your fellowship and potentially scholarship income is taxable, I recommend listening to Season 2 Bonus Episode 1 of this podcast, titled Do I Owe Income Tax on My Fellowship?

Thank you for joining me for this special bonus episode. Please spread the good news about IRA eligibility to your peers also receiving fellowship or training grant income by sharing this episode with them!

Outtro

Listeners, thank you 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 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.

Fellowships

March 8, 2015 by Emily

fellowship freedom
source

Frequently, PhD students will be supported for one or more years of grad school by training grants or fellowships. Training grants are given to departments to support incoming students while they are engaged with taking classes and doing rotations before committing to an advisor. Fellowships may be given by the university or an outside funding source and typically carry some prestige as well as possibly a higher pay rate. Both fellowships and training grants are typically considered non-compensatory pay because there is “no work requirement.”

Further reading: Stop Making Excuses and Start Applying for Graduate Grants, Scholarships, and Fellowships

Finding Fellowships

Before you enter your program, you should talk with faculty members, administrators, and older students to learn what type of funding you have been offered for the first and subsequent years and what additional funding you might apply for. Fellowship applications are often due in the fall for funding beginning in the next school year, so you may need to start your applications soon after arriving on campus.

In addition to university-based fellowship opportunities, there are many national-level field-specific fellowships available to students at different stages of their degrees that are catalogued in fellowship databases.

What if I have more than one fellowship?

It is not uncommon for students to receive more than one fellowship that provide stipends. In those cases, the funding agencies typically coordinate a schedule that will allow the student to use only one fellowship at a time and spread the funding out over more of the student’s tenure in grad school. These qualified students may have fellowship funding from the start of grad school to the end.

If I win a fellowship, what does my department give me?

If you receive a fellowship that alleviates your university of providing your stipend, particularly if it is prestigious and for multiple years, ask your department if they provide a bonus or supplemental pay to students who win that fellowship. If you are receive the fellowship during your application process, find out which schools would offer a bonus or supplemental pay and consider letting your top choice know what your other offers are. This is possibly the only opportunity a grad student has to negotiate compensation.

What happens when my fellowship ends?

If you receive a fellowship that provides a stipend that is higher than the base stipend of your department, be cognizant that your stipend may decrease significantly when your fellowship ends. Be proactive in using your excess income for those years to beef up savings or pay down debt instead of inflating your lifestyle.

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