Fellowship Finance

July 31, 2009 7:52 AM

I recently started graduate school supported by a National Science Foundation IGERT Fellowship and I just received my first paycheck--without any taxes taken out of it. Am I exempt from paying tax (state and federal) on my fellowship stipend because it's from the government?

I claimed two allowances on my W-4 and I don't think I would be subject to witholding because my income is so low. Another fellow's tax accountant said the fellowship was exempt, but I'd like another opinion. I want to be sure that I'm not going to get stuck with a large bill next April that I'm unprepared for. Thanks!

posted by Aanidaani to Work & Money (13 answers total)

IRS information on scholarships & fellowships is located here, you may need to do some of their worksheets to find out for sure. FWIW, I had fellowships (thought not from the government) in grad school and although my university did not withhold tax form my checks, I still owed taxes on the fellowships in April.
posted by DiscourseMarker at 8:02 AM on July 31, 2009

The most likely explanation is that taxes are not being withheld from your fellowship but you are still required to pay taxes on it. As a non-US citizen taxes were withheld from my fellowship money, but my classmates who are US citizens did not have any taxes withheld (but were still on the hook for taxes). They really hated it since they had to remember not to spend a pretty substantial chunk of their income.
posted by peacheater at 8:04 AM on July 31, 2009

Either your friend has the worst tax accountant in human history, or his/her fellowship only covers tuition and doesn't provide a stipend.

Fellowship stipends are fully taxable, less any direct educational expenses not covered by other aspects of your fellowship. You will have to write checks to the IRS and state revenue agency come next April, and should start saving for it immediately.
posted by ROU_Xenophobe at 8:05 AM on July 31, 2009

No, you are not exempt although you may find that other people in your position don't actually pay. This is a risk you can take. If you get unlucky, it will suck.

Welcome to the land of having to pay your taxes quarterly. It is a fun and mysterious land full of slightly irate grad students. Just because your money comes from the government doesn't mean that you don't have to pay taxes.
posted by sciencegeek at 8:05 AM on July 31, 2009

I was supported in grad school by an NIH T32 Training Grant. That was, when I was in grad school, (1999-2004) fully taxed, and generally fellowships that cover living expenses are taxed. However, a cohort of students that started four years before me were in a totally different situation where their T32 funds were tax-free, but they had to sign an agreement saying that if they didn't continue in "Science" for at least 2X the length of time that they were T32 supported, then they'd have to repay the fellowship.

Bottom line here is that the tax rules concerning government sponsored fellowships change frequently and you'd best find out from a professional, not a "hear-say" professional, regarding your situation. Some of my classmates applied your reasoning, and the IRS came back within a year or two and said, "Hello! You owe us taxes on your fellowship!" Not a huge deal, but can be hard to scrape up a few $K in back taxes while your still making a grad student stipend.
posted by u2604ab at 8:06 AM on July 31, 2009

My fiance is a postdoc supported by a NSF grant. The check comes from the government in full and he has to pay taxes on it. He is going to do quarterly tax payments.
posted by collocation at 8:09 AM on July 31, 2009

You may not be required to pay FICA/Social Security taxes. As a postdoc my paycheck comes from two different sources, for one of them I pay all taxes and for the other I only pay income taxes. I'd be suprised if you didn't need to pay income tax.
posted by wigner3j at 8:10 AM on July 31, 2009

I had an NSF Graduate Research Fellowship for part of my time at graduate school, and from my own research I came to the conclusion that the answer is no — scholarships and fellowships are not exempt, except for the portion of them used to pay "qualified educational expenses"; stipends, in particular, are taxable. Specifically, according to Publication 970, Tax Benefits for Education:

A scholarship or fellowship is tax free only if:

• You are a candidate for a degree at an eligible educational institution, and
• You use the scholarship or fellowship to pay qualified education expenses.

For purposes of tax-free scholarships and fellowships, these are expenses for:

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

Qualified education expenses do not include the cost of room and board, travel, research, clerical help, or equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

As far as the state taxes go, your state income is usually defined in terms of your federal net income, with various additions and subtractions that vary from state to state. Assuming you're in Philly like your profile says, you'd have to consult with the PA Department of Revenue. Since I concluded that my stipend was taxable, I submitted estimated tax payments to both the IRS and the state treasury (Illinois, in my case) during the three years I had my GRF. You can find the necessary forms here.

I'm not an accountant or a tax lawyer, of course — just someone who was in a similar situation to yours. If you want to be absolutely double-sure you have things right, consult someone in the above professions.
posted by Johnny Assay at 8:16 AM on July 31, 2009

Thanks for all the input. I spoke to the tax office on campus here and it appears that fellows are exempt from FICA (Social Security payments) while enrolled as full-time students. Education-related expenses, such as books, tuition, fees, etc., are tax-free, but the rest of the income is taxed at a normal rate.
posted by Aanidaani at 9:02 AM on July 31, 2009

Yes, you are exempt from FICA but have to pay the rest of the income tax. You should look into paying quarterly so you don't end up owing a substantial sum come April.
posted by emd3737 at 10:19 AM on July 31, 2009

Also note that if you don't make estimated tax payments during the year you can get hit with penalties in april.
posted by paultopia at 11:59 AM on July 31, 2009

2nding paultopia. My husband was on a fellowship similar to yours and got pwned with penalties his first year because he didn't know he was supposed to be paying estimated quarterly taxes.
posted by crinklebat at 10:03 PM on July 31, 2009

Be sure to keep all the receipts for the education-related expenses in case you're ever audited.
posted by sevenless at 10:05 PM on July 31, 2009