If you keep the basic concept of an income tax in mind, though, it should become easier to figure out:
Any and all money you receive from someone else is taxable and must be reported as such unless otherwise specified1.
I will go through the 4 most common income categories for a graduate student, with the assumption that that the reader has never filed taxes before, and provide information on free tax filing programs.
Disclaimer: I have no formal tax training. I’m just a moderately intelligent graduate student who has dealt with this for a few years and read the relevant documents.
The most common categories of income for a graduate student are:
- Stipend from your institution or wages from other employment (Form W-2)
- Interest on savings accounts (Form 1099-INT)
- Stipend from a grant
(Form 1099-MISC)(See note below)
- Non-stipend scholarships and grants (Form 1098-T)
If your tax situation is very simple and you know you won’t be claiming any special deductions, exemptions, or credits, and aren’t Head of Household or Married Filing Separately, you can file Form 1040EZ. If you don’t meet the requirements for this form, as more fully described here, you will need to file Form 1040A. However, if you have stipend income from a government grant (which may be reported on Form 1099-MISC or may be unreported), you must use the more complicated Form 1040.
If you are fairly familiar with reporting normal wages and interest, go ahead and skip the first two sections.
Reporting stipend/wages reported on Form W-2This is the easiest to report. You take the amount reported in Box 1 of Form W-2 (sum them if you have multiple forms) and write it on Line 1 of Form 1040EZ or Line 7 of Form 1040A or Form 1040. However, you will want to hold off filling in this line if you have scholarship and grant money.
Reporting interest income reported on Form 1099-INTHopefully you’ll have a chance to save some money while in graduate school. If you do, you’ll be making interest on it, which will be reported in Box 1 of Form 1099-INT. Add these up, if you have more than one, and write the total on Line 2 of Form 1040EZ or Line 8a of Form 1040A or Form 1040.
Reporting stipend from a grant (possibly reported on Form 1099-MISC)If you received a Form 1099-MISC: Take the amount reported in Box 3 of Form 1099-MISC and write it on Line 21 of Form 1040. It cannot be reported on either of the simpler forms. In addition, you must write in a description of the income. “Other income from Form 1099-MISC” would be sufficient.
If you did not receive a Form 1099-MISC: You'll have to calculate the pre-tax amount from your paystubs and record it on the same line, but instead write the source as your University.
Update 4/7/13: Based on a somewhat arcane interpretation of an IRS ruling, your school is not required to report the income to the IRS. This does not make the money tax-free, it just moves the burden of reporting to you instead. The major difficulty comes from the fact that this means the school can't withhold taxes from your paycheck automatically. Your options are 1) if you have a portion of stipend income not on a fellowship, you can adjust the withholding there to compensate, or 2) you can pay quarterly estimated taxes over the course of the year, using Form 1040-ES.
Update 4/5/14: It apparently is possible that sometimes this income will be reported in Box 7, which seems to indicate that it must be reported as self-employment income, and thus would have to have self-employment taxes taken out from it. (These are what would be called payroll taxes in a normal job.) However, I have never personally encountered this situation. My advice would be to ask the entity providing the tax form why they reported it the way they did, and then to seek professional advice. If you find out what to do, I'd like to hear from you.
Reporting scholarship and grant incomeHold on, because this is where it gets complicated. Scholarship and grant money is only tax-free if it is used for school—or in tax-speak, “qualified educational expenses.” This is limited to tuition and required fees and expenses for courses (e.g. required textbooks, supplies, etc.). Any scholarship money used for another purpose, such as for health insurance paid for by your graduate program, is considered taxable. This latter part can come back to bite you in the ass when it comes time to file your tax return; unlike the rest of your income, this income isn’t factored into your monthly withholding. If you want to account for it, see the section on withholding below.
Sometimes taxable scholarship money will be reported on Form W-2. In that case, you can treat it like the other Form W-2 income above.
More generally, scholarship money and tuition and fees are reported by the institution on Form 1098-T. The school will either report the payments they’ve received (Box 1) or the amount they’ve billed (Box 2) during the tax year for qualified expenses. Box 5 reports the scholarships and grant funds they have knowledge of. Luckily, the IRS provides a handy worksheet that allow you to calculate the taxable and tax-free parts of your scholarship money. Here is the worksheet from Publication 970, which details the tax considerations for education:
Now that you’ve calculated the taxable scholarship income which wasn’t reported on Form W-2, you report it by adding this amount to the sum of your Form W-2 amounts (see above) and writing it on Line 1 of Form 1040EZ or Line 7 of Form 1040A or Form 1040. Additionally, to the left of the box you must write “SCH <amount>”, where <amount> should be replaced by the value of the non-Form W-2 taxable scholarship income.
If, however, you had more qualified expenses than tax-free scholarship money—meaning that you paid some qualified expenses from non-scholarship money—then you are potentially eligible for one of the several education deductions or credits that are available. Consult Publication 970 for details on these credits and worksheets to determine if you are eligible and how to report it.
CheatingSince no one bothers to explain the possible tax issues with scholarships to us, it is easy to mess up. Several graduate students I know have considered all scholarship money to be tax-free, even that used for health insurance. A few have even taken advantage of education tax credits which are clearly meant for people paying their way through school, rather than receiving a full ride.
I think this mostly happens out of ignorance, either assuming that scholarship money is tax-free or you enter the values in the program the wrong way and it tells you that you deserve a credit or owe less in taxes. But sometimes this is a willful ignorance or even intentional cheating, thinking that they didn't realize or won't get caught. And they're probably right that they won't get caught--though I also know a couple who have been caught. But no matter how they rationalize it, they are cheating on their taxes all the same.
TurboTax ConfusionI haven’t used other programs and so cannot speak about them. However, using TurboTax to enter scholarship and grant money can be a little confusing. When it asks you to enter “Amount from 1098-T, Box 2 that was actually paid to the school in <tax year>”, it is asking whether the entire amount billed in that year was paid during that year. Most cases—and especially if it is entirely paid for by scholarship money—this will be equal to the amount in Box 2.
Update 2/19/14: I have been more recently using H&R Block's online software, and it is a bit more clear on this aspect. When you enter the 1098-T information, it automatically figures out the scholarship amount and adds it to the W-2 section.
Completing your taxesFrom here, follow the instructions (always read the instructions!), add up all your taxable income, subtract any deductions/exemptions, figure out your tax, then subtract any credits and the amount already withheld to determine your refund amount or taxes owed. Congratulations, you are done with your federal taxes and ready to get your refund and/or grudgingly hand over a check!
State taxesDon’t forget to file state taxes too, if you live in a state with an income tax! Usually they draw on information you put in your federal tax return, so it is best to finish that before moving on to the state returns. In general, state tax returns are similar to the federal return, with some adjustments. Some places, like New York City, have a local income tax too—if you do, you have my condolences.
Free online tax filingFor people who don’t make much money—like, just as an example, graduate students—there are many free online filing options available which also help you look for deductions and credits. This is all made available by the IRS under a program called Free File. Each company listed has different income thresholds and restrictions. It is also worth checking with your state’s version of the IRS for their free filing options. Of note are the big companies' options, H&R Block Free File and Intuit Tax Freedom Project (TurboTax), which provide free state filing for many states. However, you have to go directly to them via the links provided; they don’t advertise these options on their main sites, for obvious reasons. I can’t vouch for most of them, but I have been using the TurboTax solution since I started graduate school and I’ve been very happy with it.
Update 2/19/14: I switched to H&R Block the last two years because it was a bit more intuitive to me.
Setting Up WithholdingSetting up proper withholding is essential for avoiding a nasty surprise next year. You can try to use the IRS Withholding Calculator, but I’ve found it to be a bit complicated. You can also simply do an estimate for your next year’s taxes using this year’s tax return form and just divide the owed taxes by 12 to figure out how much you should have withheld, then file a new Form W-4 by placing the adjustment amount in Box 6.
And keep in mind that while it might feel great to have a sizable refund, that really means you gave the government an interest-free loan. You would have been better off putting that extra money in a savings account.
Use at own riskI hope that my guide above has helped give you a place to start from with your taxes. Keep in mind that these are just guidelines for the basic situations that I think most graduate students will have: A stipend, some scholarship or grant money, and maybe a savings account. If you think I’ve missed an important common issue, please let me know.
And of course, if you have some sort of funky situation—you have self-employment income, or are somehow making extraordinary amounts of money, or are investing in non-retirement accounts, etc.—then read the relevant IRS publications to do it yourself, rely on software like TurboTax or H&R Block, and/or hire a tax professional. I actually highly recommend trying to learn the tax codes that apply to you, even if you ultimately use software or a professional.
1If you want the full story on what is taxable or not, see IRS Publication 525. Most of it won’t apply to you though: e.g. see page 35 for details on handling money from a Pulitzer or Nobel prize.