Graduate School Taxation

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dak
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Location: California

Graduate School Taxation

Post by dak »

Helping my adult daughter on her taxes - she has prepared her own taxes in the past, but is in the first year of a PhD program, so things look different.

Her program is fully funded and covers all of the usual tuition, fees, health insurance, etc.

Her 1098-T shows an amount in Box 1 (Qualified educational expenses) - $13K, Box 5 (Scholarships and stipends) ~$60K

The actual graduate student fees as listed on the Registrars webpage are $18K.

The difference ($5K) is the health insurance that is provided by the University. The University requires health insurance, but does not require a student to purchase the insurance through the University. In the event that the student does not purchase insurance through the university, the health care premiums are NOT paid out to the student.

Can someone weigh in on my understanding of the following:

1. The health insurance is considered taxable as it does not meet the "required fees" test to be a qualified expense.
2. Given that all of her qualified expenses educational expenses are paid by the university and not taxed, she does not qualify for the lifetime learning credit.

Thanks for any insight that anyone might have.
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arcticpineapplecorp.
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Re: Graduate School Taxation

Post by arcticpineapplecorp. »

I agree with your synopsis.

Since she received more scholarship/stipend than the cost of qualified expenses you are looking at the excess as income right?
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rainfallwinterberry
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Re: Graduate School Taxation

Post by rainfallwinterberry »

My 2 cents as a PhD student, not a tax lawyer, etc.

How it usually works is that the student gets a W-2, and fills out 1040 just like a normal W-2 worker. The PhD award is split into two parts:

1. Tuition waiver. On the surface this is the school paying your tuition for you, in reality this is the university shuffling (usually smaller) numbers around your advisor's grant or the college's budget. This part is NOT taxed, and sometimes shows up on the 1098-T as a scholarship.

2. Actual money paid out to the student. This usually shows up on a W-2 as *is* taxable, but if you pay any fees then you may take the LLC (not AOTC) under the qualified educational expenses test or pay it out from a 529.

Under this logic I think that the insurance is *not* taxable unless it showed up on her W-2 somehow.
Pdxnative
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Re: Graduate School Taxation

Post by Pdxnative »

Yes, insurance is not a qualified expense.

As far as whether she can take the LLC, check out the section in pub 970 on coordinating LLC and taxable scholarships. She might be able to treat a larger portion of the scholarship/stipend as taxable in order to carve out space to claim the LLC. (As I understand what you’re saying, she is charged tuition but then funded for that amount plus additional expenses through a stipend; if so, pretty sure the stipend is fungible even if in practice the school applied it to tuition first).

https://www.irs.gov/pub/irs-pdf/p970.pdf
Pdxnative
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Re: Graduate School Taxation

Post by Pdxnative »

rainfallwinterberry wrote: Mon Mar 27, 2023 6:57 pm My 2 cents as a PhD student, not a tax lawyer, etc.

How it usually works is that the student gets a W-2, and fills out 1040 just like a normal W-2 worker. The PhD award is split into two parts:

1. Tuition waiver. On the surface this is the school paying your tuition for you, in reality this is the university shuffling (usually smaller) numbers around your advisor's grant or the college's budget. This part is NOT taxed, and sometimes shows up on the 1098-T as a scholarship.

2. Actual money paid out to the student. This usually shows up on a W-2 as *is* taxable, but if you pay any fees then you may take the LLC (not AOTC) under the qualified educational expenses test or pay it out from a 529.

Under this logic I think that the insurance is *not* taxable unless it showed up on her W-2 somehow.
Sounds to me like she is being paid through a stipend, not as a W2 employee. So the stipend includes both the cost of tuition and additional expenses; any amounts exceeding qualified expenses would be taxable. So, if she was compensated through a grant/stipend for the health insurance, that amount would add to the total stipend (it is likely already included in the ~60k in box 5) and would not be offset by the insurance expense; so in that sense the insurance is taxable.
toddthebod
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Re: Graduate School Taxation

Post by toddthebod »

dak wrote: Mon Mar 27, 2023 12:10 pm Helping my adult daughter on her taxes - she has prepared her own taxes in the past, but is in the first year of a PhD program, so things look different.

Her program is fully funded and covers all of the usual tuition, fees, health insurance, etc.

Her 1098-T shows an amount in Box 1 (Qualified educational expenses) - $13K, Box 5 (Scholarships and stipends) ~$60K

The actual graduate student fees as listed on the Registrars webpage are $18K.

The difference ($5K) is the health insurance that is provided by the University. The University requires health insurance, but does not require a student to purchase the insurance through the University. In the event that the student does not purchase insurance through the university, the health care premiums are NOT paid out to the student.

Can someone weigh in on my understanding of the following:

1. The health insurance is considered taxable as it does not meet the "required fees" test to be a qualified expense.
2. Given that all of her qualified expenses educational expenses are paid by the university and not taxed, she does not qualify for the lifetime learning credit.

Thanks for any insight that anyone might have.
She will fill out worksheet 1-1 in pub 970 which will tell her, more-or-less, that $60k - $13k = $47k is taxable compensation. (While there are other expenses that can be paid from a 529, the strict definition of qualified education expenses used here is typically what is reported in box 1). She will then report the $47k on line 8r of Schedule 1.

In order to qualify for the lifetime learning credit, she can choose to include some of that 13k in her taxable income, and as the credit is equal to 20% of the first $10,000 in eligible expenses, and as she is likely in a less-than-20% tax bracket, she should look into this.
rainfallwinterberry
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Re: Graduate School Taxation

Post by rainfallwinterberry »

Pdxnative wrote: Mon Mar 27, 2023 7:55 pm Sounds to me like she is being paid through a stipend, not as a W2 employee. So the stipend includes both the cost of tuition and additional expenses; any amounts exceeding qualified expenses would be taxable. So, if she was compensated through a grant/stipend for the health insurance, that amount would add to the total stipend (it is likely already included in the ~60k in box 5) and would not be offset by the insurance expense; so in that sense the insurance is taxable.
My current stipend is paid out as a W-2, and so are most of the people I know studying at universities around here in Boston (BU, MIT, Harvard, NEU). I think the distinction is between a *fellowship*, which is a grant without conditions, not reported on W-2s (or any 1099), and a research *stipend*, which *is* technically pay for work done as a research assistant or teaching assistant, and thus reported on a W-2. The portion reported on a W-2 is I believe *always* taxable; if there are fees not paid by the university then you may use those fees to claim LLC/529 (it's kinda stupid, for example the university will pay me 50k, but then turn back around and demand about 500 of that back in fees; other universities I've seen take up to 3k. Such is the life of paper pushers pushing papers around a giant university bureaucracy).

So out of the 60k total, if she received a W-2 for 42k, that's the floor on how much is taxable. I think other commenters are right in that you might need to add on 5k (holy shit that's a lot for student health insurance) that aren't qualified educational expenses coming out of the non-W2 portion of the award package from the university.
Pdxnative
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Re: Graduate School Taxation

Post by Pdxnative »

rainfallwinterberry wrote: Mon Mar 27, 2023 10:48 pm
Pdxnative wrote: Mon Mar 27, 2023 7:55 pm Sounds to me like she is being paid through a stipend, not as a W2 employee. So the stipend includes both the cost of tuition and additional expenses; any amounts exceeding qualified expenses would be taxable. So, if she was compensated through a grant/stipend for the health insurance, that amount would add to the total stipend (it is likely already included in the ~60k in box 5) and would not be offset by the insurance expense; so in that sense the insurance is taxable.
My current stipend is paid out as a W-2, and so are most of the people I know studying at universities around here in Boston (BU, MIT, Harvard, NEU). I think the distinction is between a *fellowship*, which is a grant without conditions, not reported on W-2s (or any 1099), and a research *stipend*, which *is* technically pay for work done as a research assistant or teaching assistant, and thus reported on a W-2. The portion reported on a W-2 is I believe *always* taxable; if there are fees not paid by the university then you may use those fees to claim LLC/529 (it's kinda stupid, for example the university will pay me 50k, but then turn back around and demand about 500 of that back in fees; other universities I've seen take up to 3k. Such is the life of paper pushers pushing papers around a giant university bureaucracy).

So out of the 60k total, if she received a W-2 for 42k, that's the floor on how much is taxable. I think other commenters are right in that you might need to add on 5k (holy shit that's a lot for student health insurance) that aren't qualified educational expenses coming out of the non-W2 portion of the award package from the university.
It doesn’t sound like she’s being paid as a W2 employee; if she were, then the funds wouldn’t be reported in box 5 on the 1098t. This is not unusual in the case of fellowships and, yes, even assistantships at many schools. They can be called stipends whether W2 or taxable scholarship which does add to the confusion.
Topic Author
dak
Posts: 178
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Location: California

Re: Graduate School Taxation

Post by dak »

Thanks for the replies - I need to digest your comments a bit, but to answer some of the comments to date:

She is not paid on a W2. Everything is shown on the 1098T, so she is not an employee.

There are no fees that are not paid by the University, so the LLC seems to not be in play.

At some point in her training she will need to TA a course or two and it is my understanding she will get a W2 for that period, and the rest of her scholarship/stipend will end up on the 1098-T.

I don’t know how they could make this any more confusing for these young adults.
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