Ines Zemelman, EA 30-Jul-13
The IRS understands that seeking higher education equates to more expenses and less time to devote to earning an income. We’ve received numerous questions from grad students both here in the United States and overseas, so we compiled a list of our most frequently asked questions to help provide you with a basic understanding of your tax rights and responsibilities as a grad student.
The only income I receive is a Grad Student Stipend. Am I required to file a US Income Tax Return?
The only broad answer to this question is: Maybe. To understand whether or not you are required to file a US income tax return, you must first be able to explain 2 things: First: What was the purpose of the stipend? Second: On what did you spend the money?
Before we examine the different situations in which your stipend may or may not be tax exempt, let’s first make something clear: Just because you aren’t required to file a US income tax return doesn’t mean you shouldn’t file one. Your stipend may be completely tax-exempt, in which case you wouldn’t have to file a US income tax return; but if you were to file a return, you may be eligible to receive a tax refund by claiming the various deductions available to you. If you’re not sure how to figure out whether or not you’d get a refund, make sure to get in touch with an international tax expert to help guide you in the right direction.
Now that we got that out of the way, let’s take a closer look at each of these questions about the taxability of grad student stipends.
What Was the Purpose of the Stipend?
For most, the answer to this question may obviously be: To provide me with the resources to further my education. There are many different types of income that are offered to students in the form of a stipend, however, and they basically fall into 2 categories: Benefitting the student and benefitting the institution.
Let’s assume that you’ve begun doing some work for a professor or department in the form of writing literary reviews, helping on an actual case or business venture, or some other arrangement in which you are providing services that benefit the college or an employee of said college. If you receive a stipend in exchange for any of these types of services, that stipend is considered taxable income by the IRS and must be reported as such on Form 1040. The same is true for an intern stipend, since the payment is for services rendered.
Generally speaking, stipends that are offered solely for the purpose of continuing your education are tax exempt. Depending on what expenses are being paid out of your stipend, however, you may be obligated to report at least a portion of your stipend income as taxable income on Form 1040. So the next question is:
On what did you spend the money?
If your stipend was spent on the acquisition of supplies and services in direct pursuit of your advanced degree, it remains tax exempt. These types of supplies and services include: Books, registration fees, tuition, supplies, tutoring, internet access (limited to portion relevant to education), etc.
If any portion of your stipend was spent on anything not having to do with your education such as paying a rent or mortgage, buying investments, or other personal expenses then you must claim it as gross taxable income on Form 1040.
What Additional Tax Credits Are Available to Me as a Grad Student?
As a grad student, you are eligible to claim either the Tuition and Fees Deduction or the Lifetime Learning Credit as long as you have taxable income and/or receive a stipend. The details of each are as follows:
- Tuition and Fees Deduction: This deduction allows a grad student to deduct up to $4K of qualifying higher education expenses. The term ‘qualifying higher education expenses’ refers to expenses which were paid directly to a college or university for tuition, fees, and various other expenses. Generally speaking, these expenses do not include books and supplies unless they’re acquired from the institution itself.
- Lifetime Learning Credit: This credit allows a grad student to claim 20% of up to $10K of qualifying expenses to be credited against his/her taxable income for a maximum potential credit of $2K. While qualifying expenses are a bit different for this credit than they are for the Tuition and Fees Deduction, your ability to claim books and supplies is still limited. If you plan on including any of these expenses in your credit calculation, make sure to take the time to review the qualification guidelines. If you live and attend Graduate College in a Midwestern disaster area or another qualifying high risk area somewhere in the world, you may qualify for a higher credit amount of up to $4K.
If you claim the Tuition and Fees Deduction, you will not be eligible for the Lifetime Learning Credit. If your parents are helping with your education expenses, however, they will be able to claim the credit on their US income tax return.
Do I have to file a US Income Tax Return as a Grad Student Overseas?
If you are a US Citizen or Green Card holder attending Graduate College abroad and you have taxable income which exceeds the filing threshold determined by the IRS, then you will most likely be required to file a US income tax return. Depending on the country in which you’re residing, there may be an active tax treaty with the United States through which all or a portion of your income is exempt from US taxation. Make sure to check the list of active tax treaties or consult a professional tax advisor or tax attorney to help you understand the details of the treaty between the United States and your host country.
Is There Anything I Can do Now to Get More Back from My Tax Return Next Year?
Yes! Keep as detailed and accurate records as possible during the year. You may want to create a spreadsheet or some other tracking method that will allow you to separate tuition and fees from books and supplies as well as other categories of your education expenses.
Also, if you receive multiple stipends, make sure to keep a detailed record of the source, reason for the stipend, and the expenses that each covered. You may be able to devise a better record keeping strategy if you take the time to familiarize with the taxation methods of each stipend you receive. The more you understand about how your income will either be taxable or qualify for tax exemption, the better you can prepare by categorizing your income and expenses.
To make sure as much of your stipend as possible is tax exempt, make sure to allocate as much of your stipend as possible to tuition and fees, as these are the easiest higher education expenses to deduct. Also, check with your university to see if there are different conditions or restrictions that could be placed on your stipend which allocate a portion to room and board or other expenses.