Handy Dandy Guide to Federal Taxes for Graduate Students
Taxes? Yes please! That our scholarship money is taxable is a huge pain in the ass. I hope to show you in this handy dandy guide that if you follow the rather complicated rules, you will probably not have to pay any federal taxes, or much less than you think.
I wrote it for our situation, but I think it would apply for any full-time graduate student, on a smallish stipend, with perhaps a part-time extra job. Though oriented for singles filing separately, the bottom line ends up being the same even if you’re married and filing together — just the calculations are different at different stages. I should note that I’m anything but a tax expert. I’m just a guy who hates paying money, and hates getting in trouble for evasion. So, feel free to double-check if you’re suspicious, and to correct me if I’m wrong.
Preamble
Some of you have creatively reduced your reported income by subtracting certain purchases (computers, apartment rent, research books) from earned income. However, it states clearly in the tax instructions that you’re not allowed to do that. You’re at most allowed to subtract the cost of books and lab equipment specifically required for courses, which isn’t much for us anthropologists. Some of you, exasperated by the complex instructions (and I sympathize) have just been declaring it all and paying hundreds of dollars in taxes. You were half right, as this guide shows. You’ll also be happy to know that if you take some more time, recalculate your mistaken taxes from previous years, and file them with the 1040X (the correction 1040), you will get that money back. (I know it works, because I did it and have the 800 greenbacks right here to prove it.)
Preparation
1. First off, you will have to use the full form 1040, and not any of the simplified variations, together with form 8863. You can download these from the IRS site. (Note that they are editable PDF files, so you can fill in the forms in software and then print.)
2. You’ll also need form 1098-T, sent to you by the university. The copy you got is only for your reference, as another copy was automatically sent directly to the IRS. (This is important to note! You cannot hide your stipend from the IRS!)
3. Also, of course, you need whatever W2 forms you received from employers, or any other forms for miscellaneous work compensation (such as the 1099-MISC).
4. Finally, and annoyingly, you need a sum of all stipend checks you received from the university, or any other scholarship granting institution, for the tax year. Your bank statements might be the best way to locate these if you didn’t otherwise keep track.
The 1040
1. In form 1040 line 7, you sum your income. Include the sum of your stipend checks from 4, above. (If you like, you can subtract course-required purchases. I doubt it will make a difference, and you can just save yourself the trouble.)
2. Also, on the dotted line on line 7, write “SCH” and then the sum of your stipend checks. I know this is weird, but this is what you’re supposed to do! (Honest, it says so in the instructions, and I’ve had financial advisers say it and do it.)
This largish amount might scare you, because no taxes were withheld for the stipend checks, and it might look like it’s payback time. To the rescue comes form 8863, and the Lifetime Earning Credit. The Lifetime Earning Credit reduces the tax you owe by up to $2,000. That credit goes back to form 1040 line 49, so that it’s reduced from the tax you owe after you look it up in the tax table. So, let’s move over there before finishing the 1040.
The 8863
1. The Lifetime Earning Credit has nothing at all to do with stipend size, but is calculated in relation to how much you were charged by your institution for the year. You see this when you copy “amount billed for qualified tuition and related expenses” from form 1098-T line 2 to form 8863 line 3. This is great for us, because our university is expensive and charges us a lot, even though that charge is covered, for some of us, by an internal scholarship.
... If you were charged more than $10,000, then it’s the full $2,000 credit (see form 1098-T line 2). This would be true for anyone who is a full-time student.
... If you were charged less than $10,000, then it’s 20% of what you were charged, which is less than $2,000, but still good. This would be true for anyone who is pro forma or in Advanced Residency.
2. Your credit also depends on your income (including, and perhaps only due to stipend checks):
... If it’s less than $25,000 and you’re a full-time student, then you absolutely have nothing to worry about. Your Lifetime Earning Credit will cover your taxes.
... If you have a really nice scholarship, or a side job that brings your earnings beyond $25,000, well, those earnings most likely have had tax withheld already (form W2 line 2), and you’re most probably also entirely covered, and at least partially covered.
... If you earned more than $47,000, then the credit will shrink. It becomes proportionally smaller up to $57,000, beyond which you cannot get the credit. (I’m not going to cry for you, though.)
A Note
If you followed this narrative thus far, you can see that the bottom line is that the Lifetime Earning Credit is there in order to encourage people of low income to go to expensive schools.
There’s something in all this that seems, at first glance, grossly unfair. We seem to be doubly privileged: not only do we get the benefit of going to a rich, private institution, but also we get a tax credit as an extra reward for doing so. We are indeed doubly privileged! It’s not, however, the IRS that’s privileging us; it’s the University of Chicago, which does not give us a tuition waiver, but instead formally charges us for tuition, while providing us with an internal scholarship to cover that charge. Our tax history (via the 1098-T) thus records that we were charged heavily for our eduction, even though the charge is mostly invisible to us. This educational charge qualifies us for tax, and perhaps other benefits.