Update February 2016: This short post has been expanded to a 10-part series of common grad student tax lies on Grad Student Finances. Check it out for more detail, explanation, applicability, references, etc.!
My little university community service project for this fall is working with a staff member to compile a comprehensive reference document for graduate students preparing to file their taxes. The purpose is to help graduate students make sense of the tax-related forms they receive (or don’t receive!) – with lots of quotes and links to the IRS website – so they can correctly figure out their school-related taxable incomes and deductions/credits. For those of you who have never received fellowship income, you might not realize how confusing this can be!
The challenge regarding this situation is that the staff members at my university are strictly prohibited from giving tax advice. That means the people who know the most about graduate student compensation have their hands tied with regard to helping students even when the students come to them for with very specific questions. To make matters worse, professional tax preparers, it seems, are almost universally untrained for the unique tax situation of graduate students.
Through these conversations, I have noted four lies that I know some graduate students have been told by their classmates and tax preparers. Unfortunately, for the document we are creating we cannot make direct statements to counter these lies. But as this blog is unconnected with my university (and if you haven’t figured it out, I’m not a professional and you shouldn’t trust me!), I’m going to make those statements! I’m very curious to hear if any of you have directly encountered a situation wherein one of these was not true (and you’re sure the filer was correct).
One final disclaimer: The corrections to these lies are relevant for US citizens attending school in the US. Our document will cover more than just that situation but this is the current status of our research.
1. You don’t have to pay income taxes. / Your income isn’t taxable. / If nothing was withheld, you don’t owe any taxes.
If you’re paid a stipend that you’re free to use for your living expenses and such, it is taxable! I’m not talking about fellowships that pay your tuition, I’m talking about money that you don’t have to use for qualified tuition and fees. Your income may be so low that you don’t owe taxes, but you still need to file. Not every income type will be reported to the IRS by your university – just because they don’t report doesn’t mean you don’t have to! You might not have any taxes automatically withheld for you during the year, but all that means is that you have to file quarterly estimated taxes, not that you can get out of paying.
2. You received a 1099; that means you are self-employed.
Your employer is your university – you are not self-employed! (Well, okay, you might be self-employed as well, but that’s aside from your role as a graduate student.) Being paid with a 1099-MISC looks like contractor income for self-employed individuals (box 7), but a lesser-known usage of the form is for fellowship and scholarship income (box 3).
3. You can deduct tuition if you receive a statement about it from your university, even if you didn’t actually pay it.
Even if your 1098-T or some other letter makes it appear that you paid tuition, you can’t ignore the reality that the university paid it on your behalf (if that’s the case). If you didn’t actually pay it, you can’t take it as a deduction! The goal is to have your 1040 accurately reflect your taxable income, not to lower your tax burden by making it look like you paid your own tuition.
4. You don’t owe any taxes because you didn’t receive any official tax forms.
It rather makes sense that if you don’t receive any IRS forms reporting your income – and particularly if it hasn’t been reported to the IRS by your university – that you are absolved of your responsibility of paying taxes – not so! I mean, just keep in mind whether you were paid (above tuition and fees) or not! I know of two tax situations wherein a student at my university would be paid taxable income yet not receive any official-looking forms from my university:
1) If a student is paid through her Bursar account and the amount exceeds the qualified tuition and fees, she will not receive a 1098-T and yet does need to file/pay taxes. She needs to check the transactions in her Bursar account to calculate her taxable income.
2) If a student has fellowship income and does not have taxes withheld, he will receive a “courtesy letter” from my university in January instead of a 1099-MISC and that’s what he has to use to calculate his taxable income. Your university may handle these situations differently or there may be others for which they don’t send out forms.
Can you contradict any of the above “lies”? (Correct me before I get further along in this project!) Why do you think there is so much misinformation floating around concerning graduate student taxes? What are the names of the tax forms you have received as a graduate student (mine are 1099-MISC and W-2)? Have you ever received a courtesy letter and in what situation?
photo from Free Digital Photos