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What special tax write-offs — and responsibilities — do graduate students have? We asked Lindsey Buchholz, a senior tax research analyst with H&R Block's national research office, to answer graduate students' top tax questions.

How is stipend or fellowship income treated for tax purposes?

Both are usually tax-exempt, as long as you use the money for tuition, fees, books, supplies and equipment required for enrollment and in the pursuit of a degree. If you use a scholarship or grant for other purposes, such as room and board, you must include it in your gross income, and it will be taxed.

An exception to that rule is if your scholarship or fellowship grant represents payment for services. For example, if you receive a stipend in return for doing a literature review for a professor, that income is taxable because it's done primarily for the professor's benefit, rather than your educational advancement. Report such income on line 7 of Form 1040. The grantor or payer of such a stipend must also report it, withhold payroll and income taxes, and file a Form W-2.

I have no income other than a fellowship. Do I need to file taxes?

Generally, it's a good idea to file your taxes — you may be eligible for a refund. However, if all of your income is exempt from taxes under the rules above, you do not need to file a return. If you receive other income that exceeds the IRS filing threshold, you will have to file. The filing threshold for a single person under age 65 for 2010 is $9,350. For a married couple, with both spouses under 65 filing jointly, the 2010 threshold is $18,700. If your income is below the filing threshold and you had taxes withheld from your pay, you can get a refund of all taxes paid by filing a return.

Do I have to pay taxes on my internship stipend?

Yes, because the stipend is paid for the intern's services.

Are there any tax credits I should know about?

Graduate students may be eligible for either the Lifetime Learning Credit or the Tuition and Fees Deduction if they have taxable income from scholarships or fellowships, or receive a stipend, or if their expenses are above the excluded amount. In other words, you can't use the same expenses to qualify for the exclusion, the credit and the deduction. Two credits and deductions to consider are:

  • The Lifetime Learning Credit, which refunds 20 percent of up to $10,000 of qualified expenses, providing students with up to $2,000.

  • The Tuition and Fees Deduction, which allows students to deduct up to $4,000 of qualified higher education expenses. The IRS defines qualified higher education expenses as tuition and fees paid directly to the institution. The cost of books, supplies and other equipment is generally not deductible under this rule unless this money is paid directly to the institution as a condition of enrollment and attendance. Room and board, insurance, medical expenses and personal expenses also are not qualified expenses

Can I ever write off books or school supplies?

If you're using the exclusion and education tax credits mentioned above, you can count books, supplies and equipment as qualified expenses. However, there are specific conditions that must be met and they differ for the lifetime learning credit, the tuition and fees deduction and the exclusion.

Do international students have to file taxes?

If they have taxable income above the filing threshold, they may have to file a return at both the federal and state level. There are some cases in which an international student's income may not be subject to tax if there is an exception in the tax treaty between the United States and the student's home country. Treaties differ for each country, so students should check with qualified tax professionals to help them determine if an exception applies to them.

How can I save money on taxes next year?

Keep complete and accurate records of all your school expenses, so you don't miss out on any education deductions or credits. Save your receipts for books, supplies and equipment. Also, learn more about the potential tax consequences of stipends, fellowships, grants and scholarships. In general, you'll want to use potentially tax-exempt scholarship income for tuition, and pay for other expenses with other income. You may want to, for example, maximize your tax-exempt income by asking your university to remove a restriction from your stipend requiring it to be used for room and board.

What other advice do you have for cash-strapped grad students?

Check out other gradPSYCH articles on:

 

Educational Tax Benefit Required for course? Required by all students in course? Books must be purchased directly from the institution as part of tuition/fees? Must be required for enrollment or attendance? Must be included in tuition/fees required for enrollment or attendance and paid directly to institution 
Tax-free scholarships, fellowships, and stipends Yes Yes No No No 
Lifetime Learning Credit No No Yes Yes  Yes
Tuition and Fees Deduction No No Yes Yes  Yes