Graduate students need to be aware of the tax implications and requirements of any financial aid they accept.
Federal government agencies require students to determine taxation of scholarships and fellowships when filing annual income tax returns. Indiana University does not issue 1099s to fellowship holders.
Stipends and Tuition
The general rule is that any income is subject to federal taxation. Scholarships and fellowships, however, are excluded from taxation when the award is a qualified scholarship given to a recipient who is seeking a graduate degree program.
Qualified scholarships and fellowships include tuition and fees required for enrollment or attendance at the educational institution and fees, books, supplies, or equipment required for courses of instruction at the institution.
All stipends are taxable income. For tax purposes, you must keep copies of all award notices and announcements. For items you wish to deduct, you must have receipts. Scholarship and fellowship recipients should keep fee statements, textbook receipts, and similar records to support their calculations of the nontaxable and taxable portions of their awards.
Who Must File
All students must file federal income tax and state income tax. If you reside or have worked in another state, you may have to file in those states, also.
Most graduate students are exempt from FICA, social security, and Medicare.
Special rules apply to international students, visiting scholars, and non-resident aliens. The IRS requires educational institutions to report scholarship and fellowship grants to non-resident aliens on form 1042S-Foreign Person's US Sourced Income Subject to Withholding.
It is your responsibility to determine that the withheld amount is correct, e.g., whether a tax treaty exemption applies, whether the reduced withholding rate applies, etc.
The IU Office of International Services’ (OIS) tax site has more useful information for international students.
When to File
U.S. citizens should estimate at least a 15 percent tax burden on taxable income.
Students must file estimated taxes quarterly. Those waiting until the end of the year to file may be subject to penalties.
Estimated taxes for the calendar year are due in four installments:
- April 15
- June 16
- September 15
- January 15
Payments should accompany a form 1040-ES with the student's social security number listed on the form. Failure to make these payments on time may result in the assessment of underpayment penalties.
To avoid this penalty, you may either:
- Pay at least 90 percent of the tax shown on the current year's return;
- Pay 100 percent of the tax shown on the prior year's return, assuming that the return represents a 12-month period; or
- Make payments on a current basis using annualized income installment methods.