BY: Diana Lutz
Every graduate student who has ever applied for a fellowship, like the NSF GRFP or GAANN, has heard those sweet, sweet words. Tax. Free. Year after year, students spend hours crafting their personal statements and research proposals, and every year they hear that winning this fellowship comes with 0 taxes as a cherry on top. As a recent recipient of the NSF GRFP, I am here to dispel the myth that fellowships are magical, non-taxable free money.
From the Internal Revenue Service (IRS) (https://www.irs.gov/taxtopics/tc421), your fellowship is tax-free if the following conditions are met:
- You’re a candidate for a degree at an educational institution
- The amounts you receive are used to pay for required tuition and fees, books, supplies, and equipment required for courses at the educational institution
A fellowship is taxable (aka a part of your gross income) if the following conditions are met:
- Any amount is used for incidental expenses, such as room and board, travel, and optional equipment
- Any amount is received as payment for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant
Thus, this will likely mean most (or all) of the money you receive from your fellowship as a stipend is a part of your gross income. Why?
- Tuition is usually covered by STEM graduate programs.
- Many fellowships tend to have separate funding portions (see NSF GRFP or GAANN) that are managed by the school. They can be used for school-only expenses (travel to conferences, equipment, books, supplies, fees), such that you would not need to spend your stipend on these things.
When I was searching the internet and frantically calling state and federal tax offices for any shred of reliable information, I luckily found a trustworthy resource for PhD students trying to figure out their taxes (and finances overall). Dr. Emily Roberts is the founder of Personal Finance for PhDs (http://pfforphds.com/), a finance blog where she tackles all these hard questions and tricky situations. I found helpful guides on whether I owed income tax on my fellowship,what to do in odd tax situations with fellowships, and how to manage paying quarterly estimated tax for my fellowship.
Once you know what portion of your fellowship is taxable, it’s important to understand that your institution will probably not remove tax from your checks like they did when you were a TA/RA. Your institution will either report the fellowship money on a common tax document (like a 1098-T) OR they will not report it to the IRS via any official document. Instead, they can send you a letter at the end of the year confirming the amount of money they dispensed to you, but this does not count as an official tax document. It is then your job to report this money to the IRS by paying estimated taxes throughout the year to both the state and federal governments. If you do not pay estimated taxes, you will likely incur a fee when you go to pay your taxes in April.
Bottom line – understand how your fellowship money is being spent.
Do you only use it to buy groceries, rent, car repairs, shopping, having lunch, and other ~life~ things? Then all of the money is your gross income and it is taxable. If you use some of it for educational expenses, then that can be deducted. Even so, I highly advise you talk to a tax professional if you have any questions or concerns.
Now is the time to remember your high school economics lessons: There is no such thing as a free lunch!