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[anon]

Econ anon's response to the moving post reminded me of a question I've been milling over.  Does anyone here have tax tips for dissertation and postdoctoral fellowships that are given as lump sums by non-university based foundations (and thus have no taxes taken out, no work requirements, little is put towards tuition or fees, etc.)  I'll be facing this situation for the first time next year...

[Sofia]

File estimated taxes.  Or figure out for yourself what you'll owe, and put that amount under "additional withholding" so that it gets taken out anyway.

[Mahoo]

I have one now. Typically they told you the tax requirement on this. My agency told me that I should report it as scholarships/fellowships in the miscellaneous income line on 1040. You do not have to pay self employment or social security on it but you do have to pay income tax.

I was also advised to send in estimated tax. I did not but I increased my regular tax withholding.

[econ anon]

We pre-pay "predicted" taxes each year.  You have to after the first year, according to the IRS.  You can either pay the lump sum in April or you can pay in 4 installments.  Of course, we always underpredict according to their formula.  So on 40-50K a year for an untaxed married couple, we pay around 2K in April and then 2K in predicted taxes, give or take.  Be sure to keep receipts for any computer equipment, textbooks, out of pocket research expenses-- you can directly subtract those from your fellowship (so if your fellowship is 20K and you spend 2K on a computer, then you only have to report 18K on the income line.)  Additionally, if you're paying any tuition yourself out of pocket or are paying college loans or did in the second half of this last year then you may be able to get credit directly from your taxes using the hope credit or the lifetime learning credit (so if you owe 2K and paid 500 in interest, you only owe 1.5K).

If you have another job that is regularly taxed, take out extra money with each paycheck when you sign up for witholding.  This will ease your life come tax time.

[anon]

Thanks so much!  A few other quick questions, and then I'll follow up with a tax advisor later.  Do any of you know whether conference attendence (flight, fees, hotel, etc.) and research (flight, hotel) expenses can also be deducted off the top?  Also, I hate to confess my ignorance, but what is meant by "pre-paying"?  How and when would that be done if my fellowship begins this August?  Thanks!

[econ anon]

You don't have to pre-pay the first year-- the IRS gives you one year of huge tax payments.  You can if you want though-- look up "estimated tax" or "paying estimated tax" on the IRS website (you want individual estimated tax, not corporate estimated tax-- it might be under self-employment).  

After you pay a huge amount in taxes in April, they will send you all the forms you need for year 2 with instructions.  Depending on your marital status, your spouse's income, and how big your fellowship is, you might not end up having to pay estimated taxes in the end.

From an economic sense, it would be best to keep that money in an interest bearing account and not pay until April.  However, if you're the kind of person who will spend the money if it's there, then it's best to pre-pay now so you don't end up with a negative bank balance in april.  The idea is that the IRS wants that interest income after the first year.

http://www.irs.gov/individuals/students/article/0,,id=96674,00.html

[Aristotelian]

Econ Anon is right that you can underpay your estimated taxes, but not too much: you could be liable for a penalty.  I prefer to pay what I expect to owe, then I don't have to worry about incurring a penalty and sometimes get a refund.  I know that doesn't make rational economic sense, but realistically, it's not like I'm going to be investing my $14,000 fellowship on the stock market.

[econ anon]

Unless the law has changed since I started getting fellowships (5 years ago), first year there's no penalty (and of course, you're only getting the fellowship lump for half the year probably-- August to December).  

After that if you pay as an estimated tax the amount determined using their calculation there's no penalty (though the more you owe in April last year, the more they make you pay next year in estimated taxes).

[fellowship]

I would be careful about the 'no first year'.... I have an untaxed fellowship myself and was told repeatedly by my insititution to pay estimated taxes to both the state and feds, and had to sign something saying I was aware of my obligation to file quarterly.  I have poured through the rules and the instances where the do and do not assess penalties depends on the intracacies of your filing-- how much, whether married, have you ever been required to make estimated taxes?

Ask a tax advisor because the penalty will exceed interest in an account if you are wrong.

Also-- the fact that you do not pay FICA is not necessarily true.  A lot of post docs paid on NIH-granted lump sum fellowships have been required to pay fica according to the IRS as of 4/1/2005.  It's a big mess and every university/institution is determining the rules differently, the issue being whether or not you are really in 'training'.  The IRS thinks those in postdoc-like status are not.
http://www.irs.gov/individuals/students/article/0,,id=96674,00.html

Also-- reporting standards differ everywhere.  At my current fellowship I get a 1099 in the mail, a W2 equivalent.  At my previous instiution I got nothing, and nothing was reported, so I had to report it myself.

The point is that 'taking off the top' for supplies, computer etc.... is technically not allowed unless they are expenses that are necessary to obtain a higher degree by everyone enrolled in the program (qualified expenses).

Work-related expenses where you claim you spend stuff out of your own pocket (e.g. non qualifed educational expenses ) to further your training go under misc deductions, and you can only take them if they excede a certain % of your income.

Talk to a tax person and be aware that this is a soupy mess-- just know what you are doing so that you are not suprised nor do you alert the irs via ignorance of the rules.

Normally the income is just so small anyways that you can 'get away' with things, but you must have your rationale in place.

And remember, there is a difference between the tax code and those publications the IRS puts out.  The code is what you have to follow, the pubs are the "correct" interpretation, but I know postdocs who have gotten refunds by following the letter of the code.

Save every single receipt.   I have a big bucket I dump everything in because I never know next year what I will want to prove.