I’ve spoken with several graduate students recently who are either entering or returning to grad school this coming year.
Americans are pursuing advanced academic degrees more than ever before simply because more professional positions demand it.
Despite the promise of higher future earnings, graduate school isn’t cheap. The cost can be hard to stomach especially for young professionals trying to manage their finances and student loan debt.
Getting into a competitive graduate program promises some advantages such as scholarships, grants, and annual stipends.
Tuition aid and fellowship stipends are treated differently for tax purposes. Let’s break down what you can expect.
Are scholarships taxable?
Scholarships and other grants to cover the cost of tuition and fees are tax-free as long as:
1. You’re a candidate for a degree at an educational institution, and
2. The money received is used to cover tuition and fees, books, supplies, and equipment required for the courses.
Because these scholarships and grants are tax-free, they do not have to be reported on your tax return as income.
If the amount of the scholarship or grant exceeds the cost of tuition and is used to pay for incidentals like room and board, travel, or meals then the excess is subject to tax.
How do grad students get paid?
Graduate students typically get paid one of two ways: stipend or salary.
· Stipends – You’ll receive a stipend from the college or university as part of your assistantship or fellowship. The money is meant to support your living expenses so that you can focus on your research.
· Salaries – You’ll receive a salary as an employee of the college. For example, teaching assistants or research assistants are employed by the school to lead classes, grade student work, or collect data as part of their degree granting program.
Both stipends and salaries are considered income and are taxable. Stipends are only subject to federal and state income taxes. Salaries are subject to income taxes, Social Security tax, and Medicare tax.
What about my housing stipend?
Some graduate programs provide students with a specific stipend to pay for housing. Living allowances are considered non-qualified education expenses. Therefore, housing stipends are subject to federal income tax.
What will my tax return look like?
If you receive a stipend for participating in your graduate program make sure to ask questions about how you’ll receive the funds.
Unlike being paid a salary, when you receive a stipend, the paying institution is not required to withhold income taxes.
You’ll have to set aside funds to make quarterly tax payments. If you don’t make payments throughout the year, you’ll end up with a big tax bill subject to penalties.
Believe it or not but you might not even receive tax documents from your school showing the amount of your stipend! Regardless, you are required to report the income on your tax return and to pay taxes on it.