Fellowship income is generally not taxed if received by a candidate for a degree at an educational organization like a college. However, if it exceeds certain limits and is not used for expenses related to studies, it may be taxed. The portion used for tuition, fees, supplies, and equipment is tax-free. If the fellowship grant covers living expenses, such as room and board, it is taxable unless it is used for expenses directly related to the studies.
Defining Fellowship Income
Fellowship income is a type of financial aid that is awarded to students and other individuals to support their education or research. This income is considered taxable by the Internal Revenue Service (IRS) and is subject to specific tax rules.
Taxation of Fellowship Income
- Qualified fellowship income: Up to a certain amount of fellowship income is tax-free. For the 2023 tax year, this amount is $27,000.
- Nonqualified fellowship income: Fellowship income that exceeds the qualified amount is considered nonqualified and is fully taxable as ordinary income.
Determining Qualification
To determine whether fellowship income is qualified or nonqualified, the IRS considers the following factors:
- Purpose of the grant
- Degree requirements for recipients
- Teaching or research required
- Obligation to perform future services
Table: Qualified vs. Nonqualified Fellowship Income
Characteristic Qualified Income Nonqualified Income Amount Up to $27,000 Over $27,000 Tax status Tax-free Fully taxable Obligation No future service obligation Future service obligation Eligibility for Tax Exemption
To qualify for tax exemption, fellowship income must meet the following requirements:
- The recipient must be a candidate for a degree at an educational institution.
- The fellowship grant must be used to cover the costs of studies or research (e.g., tuition, fees, books, supplies).
- The recipient must not receive any other compensation for services performed as part of the fellowship (except for reasonable reimbursements for expenses).
If the fellowship income does not meet these requirements, it is considered taxable income and will be subject to federal income tax.
Taxability of Fellowship Income Requirement Taxable Income Nontaxable Income Recipient is a candidate for a degree No Yes Grant is used to cover study or research expenses No Yes Recipient does not receive other compensation for services Yes No Calculation of Taxable Income
To determine the taxable portion of fellowship income, the following steps are involved:
- Step 1: Deductions from Gross Amount: Subtract any amounts used for tuition and related educational expenses required by the fellowship grant from the gross amount.
- Step 2: Exclusions from Taxable Income: Exclude any amounts of the fellowship grant considered excludable by law. The following amounts may qualify for exclusion:
- Amounts received by candidates for degrees
- Amounts used for field research or teaching
- Amounts of stipends paid to non-U.S. citizens who are not U.S. residents
- Step 3: Net Fellowship Income: The remaining amount after deducting expenses and excluding excluded amounts represents the taxable fellowship income.
Example Calculation of Taxable Fellowship Income Gross Fellowship Amount Expenses Deducted Excludable Amounts Taxable Fellowship Income $20,000 $5,000 $10,000 $5,000 Reporting and Filing Requirements
Reporting qualified fellowship income separately from other types of income helps ensure that the correct tax treatment is applied. Failure to do so could lead to overpaying taxes and missing out on potential tax benefits.
- Form 1040, Line 7: Report the total amount of fellowship income received during the tax year on line 7 of Form 1040.
- Form W-2: Employers or institutions providing fellowship income should issue a Form W-2 to the recipient. The amount reported in Box 12, Code P, represents the value of fellowship income excluded from taxable income.
- Form 1098-T: Educational institutions may provide Form 1098-T to students receiving qualified fellowship income. Information reported on Form 1098-T can help individuals determine the taxability of their fellowship income.
Fellowship recipients must file a federal income tax return by the April 15th tax filing deadline or request an extension to file. The reporting and filing requirements for state income tax may vary, and individuals should consult with their state tax agency for specific guidelines.
Form Purpose Form 1040, Line 7 Report total fellowship income Form W-2 Report fellowship income excluded from taxable income (Box 12, Code P) Form 1098-T Provide information about fellowship income for taxability determination Well, there you have it folks! Now you’ve got the 411 on how fellowship income takes a hit from Uncle Sam. Remember, it’s not as scary as it seems. Get your ducks in a row, keep those receipts handy, and you’ll be navigating tax season like a pro. Thanks for taking the time to soak up this tax knowledge. Be sure to check back later for more money-saving tips and tricks. Until next time, keep your finances in check and your stress levels low!