It’s common for funded graduate students to be a bit intimidated by preparing their own tax returns, particularly if they are inexperienced in doing so. The sources of PhD student funding, namely fellowship stipends and the scholarships or waivers that pay tuition and fees, are rather unusual, so most people and even most professional tax preparers don’t have any experience with them. The strategies that apply for undergraduate-level taxes are pretty different from those that apply for graduate-level taxes. But learning how to prepare your grad student tax return isn’t actually difficult, nor are the resulting steps complicated. There’s no reason to be intimidated! This post covers the essential points you need to know to prepare your grad student tax return, whether you do it manually, with tax software, or with the help of another person.
This post is for tax year 2023. This post only covers federal tax due for graduate students in the United States who are citizens, permanent residents, or residents for tax purposes; you may have additional state and local tax due. I am detailing only the aspects of preparing your grad student tax return that are specific to higher education; I am not covering more general tax information that applies to the population at large.
This article is for educational purposes only and does not constitute tax, legal, or financial advice advice. It was last updated on 2/12/2024. For more tax content, visit the Personal Finance for PhDs Tax Center.
This post is a step-by-step guide on how to prepare your grad student tax return. I want to clear up some confusion right up front so that you can work your way through the guide without becoming sidetracked.
All of your income is potentially taxable. The purpose of your tax return is to show that you don’t have to pay tax on all of it. What graduate students don’t often realize is that they have income sources aside from the one(s) that hits their bank accounts or is reported on an official tax document, and they need to deal with those incomes on their tax returns.
You have your stipend/salary that serves as your take-home pay; this is potentially taxable, even if you don’t receive an official tax form about it and you didn’t have any taxes withheld. In fact, I’ll say you’re very likely to end up owing tax on it unless it’s quite low and/or you have a lot of tax deductions and/or credits.
You also have another kind of potentially taxable income if you are funded: the money that pays your tuition, fees, and other education expenses. Your university might refer to this as scholarships, waivers, remissions, etc. Even if this money never passes through your personal bank account, it does pass through your name via your student account, which makes it potentially taxable to you as an individual. There is a very high chance you can use an education tax benefit to reduce your taxable income and/or reduce your tax due, but you have to sit down and do the arithmetic on it, not just assume that you won’t owe any tax on it. (In fact, doing the arithmetic may very well help you pay even less tax than if you ignored it!) This guide shows you exactly how to do that.
This article includes publicly available information on taxes for students and fellowship recipients, largely derived from IRS Publication 970 and my examinations of the tax policies of many universities across the US.
If you want a more in-depth and intuitive presentation of this material , designed for you to prepare your tax return as you go through it , that includes my interpretations of the tricky IRS language and the insight I gained from hiring a CPA to research grad student taxes …
Please consider joining my tax workshop. It comprises pre-recorded videos, worksheets, and live Q&A calls with me.
The first step to prepare your grad student tax return, and any tax return, is to collect all your income sources. These income sources include wages as well as non-wage income such as interest and investment income and self-employment income, but does not include loan disbursements.
With respect to your grad student status, you have income sources that are unusual and may be officially reported to you or not (so check for all of them):
Your university may not use the exact terminology that I did, but the tax forms and documentation (or lack thereof) will help you differentiate among the three types.
At this stage, you may be thinking that the total of all this income is way too high. There’s no way you want to pay tax on all this income! Stick with me: We are going to reduce either your taxable income or your tax due in a subsequent step. But for now, work with all of your incomes.
Would you like the opportunity to ask me a question about your tax situation? I hold monthly live Q&A calls throughout tax season for my workshop participants!
Your grad student income (assistantship pay, fellowships, scholarships, etc.) falls into two broad categories: employee income and awarded income.
Employee income is easy to define, as you will receive a Form W-2 for it.
Awarded income is best defined as any grad student-related income that is reported somewhere other than a W-2 or not reported. According to the IRS, it is “various types of educational assistance you may receive if you are studying, teaching, or researching in the United States… includ[ing] scholarships, fellowship grants, need-based education grants, qualified tuition reductions” (Publication 970 p. 5), but the way the IRS uses those terms doesn’t completely match how we use the terms in academia.
For tax year 2023, there are two* relevant education tax benefits that you can access to reduce your tax burden: making awarded income tax-free and the Lifetime Learning Credit.
You use your qualified education expenses (QEEs) to take a deduction (by making your awarded income tax-free) or take a credit (by taking the Lifetime Learning Credit). A tax deduction reduces your taxable income, while a tax credit reduces your tax due directly. You can apply either one or both of these benefits, but you have to use different QEE dollars.
(* There is one more education tax benefit, the American Opportunity Tax Credit, which is each beneficial for a very small percentage of graduate students. See the section at the end of the article for more details on this benefit and whether it might apply to you.)
Generally speaking, graduate students should make their awarded income tax-free to the greatest extent possible before applying any remaining QEEs to the Lifetime Learning Credit; this is how tax software will prepare your return. However, some graduate students may be eligible to prioritize the Lifetime Learning Credit (or the American Opportunity Tax Credit) over making awarded income tax-free to further reduce their tax liability (could be worth hundreds of dollars); this scenario is discussed in detail inside my tax workshop.
The definition of a QEE changes slightly for each tax benefit. From Publication 970 p. 4:
“Even though the same term, such as qualified education expenses, is used to label a basic component of many of the education benefits, the same expenses aren’t necessarily allowed for each benefit.”
Tuition at an eligible education institution is a QEE for both tax benefits (although to make awarded income tax-free you have to be a degree candidate). “Required fees” are QEEs for making awarded income tax-free. The Lifetime Learning Credit uses the wording “the fees and expenses [that] must be paid to the institution for enrollment or attendance” to define a QEE. Other fees and expenses beyond tuition may be QEEs; you should refer to the definition of a QEE with respect to each benefit.
If you received a 1098-T from your university, Box 1 will contain the sum of the payments for your the “qualified tuition and related expenses” that were processed by the office at your university that prepared the form. You may have additional QEEs not reported on the Form 1098-T, because the qualified tuition and related expenses on Form 1098-T do not include “charges and fees for room, board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses” (Form 1098-T Instructions, p. 2)
Whether you received a 1098-T or not, you should examine the transactions in your student account to make the final determination about the qualified education expenses that were processed by that office.
You may have additional QEEs not reported on your 1098-T or in your student account, such as required course-related expenses (keep your receipts!).
It’s very worthwhile to examine the definition of a QEE because uncovering additional QEEs almost always translates to a lower tax liability.
The awarded income that you receive can directly cancel against your QEEs to become tax-free. For example, if the tuition that you are charged and the scholarship or tuition reduction that pays it are exactly the same amount, they net to zero and you won’t be taxed on that portion of your awarded income. In fact, you don’t even have to show the IRS this calculation; you only have to report the portion of your awarded income that exceeds your QEEs.
The definition of a QEE to make awarded income tax-free is (excerpted from Publication 970 Chapter 1 p. 6):
Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are expenses for:
Expenses that don’t qualify. Qualified education expenses don’t include the cost of:
Are you unsure whether one of your expenses is a “qualified education expense” to net against awarded income? In my tax workshop, I present the common higher education-related expenses that graduate students incur and tell you whether or not they are QEEs under each of the education tax benefits.
The Lifetime Learning Credit reduces your tax burden and may be beneficial to apply if 1) your QEEs exceed your awarded income and/or 2) a 20% credit is more valuable to you than a deduction.
The Lifetime Learning Credit is a 20% credit; that means that if you use $1,000 in QEE expenses for the Lifetime Learning Credit, your tax due will be reduced by $200. There is a $10,000 limit on QEEs that can be used for the Lifetime Learning Credit, so the maximum benefit is $2,000 even if you have additional QEEs.
The modified adjust gross income phase-out for this deduction begins at $80,000 for a single person and $160,000 for a married couple filing jointly.
The definition of a QEE for the Lifetime Learning Credit is (excerpted from Publication 970 Chapter 3 p. 24, 28):
“Qualified Education Expenses
For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.
Related expenses. Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance.
Expenses That Don’t Qualify
Qualified education expenses don’t include amounts paid for:
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.“
If you take the Lifetime Learning Credit, you must fill out and file Form 8863.
Once you have decided how you would like to use your QEEs, you should bring a few numbers with you to enter into your federal tax return:
You now have an idea of the actions to take and decisions to make regarding your grad student tax return. I know it can seem overwhelming! I don’t want you to spend hours and hours feeling frustrated paging through IRS documentation or wrestling with tax software.
Commit a couple hours to taking my tax return workshop, feel confident and supported, and emerge with an accurate and minimized tax return!
With respect to your taxable grad student income, Lifetime Learning Credit, and tax already paid, how to report them on your tax return is very straightforward. Of course, you will fill out the rest of your tax return by following the form instructions; this section only relates to the grad student aspects of your return.
Write your employee income (reported on your Form W-2) on Form 1040 Line 1a.
Write your taxable awarded income on Form 1040 Schedule 1 Line 8r. (This dedicated line is new as of 2022!)
Report your Lifetime Learning Credit on Line 3 of Form 1040 Schedule 3; you will also file Form 8863. The amount of this credit will directly reduce your tax due.
If you received a Form W-2 and/or Form 1099 for part or all of your grad student income, you will enter the amount of federal tax that was withheld from your income in Line 25 of Form 1040. There are different parts of the line depending on which form was used.
If you paid quarterly estimated tax on your fellowship income, report the total of the estimated tax payments you made in Line 26 of Form 1040.
I have omitted from detailed discussion two education tax benefits that you may be familiar with from past experiences preparing your tax return.
The American Opportunity Tax Credit is typically used during the undergraduate years only. It can be claimed in only 4 tax years and not in any tax year after the one in which you finish your first four years of postsecondary education. Therefore, if you graduated from college in 2023 (in four years) and you (or your parents) claimed the American Opportunity Tax Credit in no more than 3 previous tax years (e.g., freshman spring/sophomore fall, sophomore spring/junior fall, and junior spring/senior fall but not freshman fall), you may be eligible to claim it in 2023.
The American Opportunity Tax Credit is the most valuable education tax benefit available, so if you are eligible for it, you will almost certainly want to use it to the greatest degree you can. It is a 100% credit on up to $2,000 of QEEs and a 25% credit on up to $2,000 of QEEs.
The definition of a QEE for the American Opportunity Tax Credit is distinct from the definition for other education tax benefits.
If you claim the American Opportunity Tax Credit, you cannot use the Lifetime Learning Credit or the Tuition and Fees Deduction. If you are considered a dependent on your parents’ tax return in 2023, you cannot claim the credit (your parents would).
To claim the American Opportunity Tax Credit, you need to fill out and file Form 8863.
The Tuition and Fees Deduction expired at the end of 2020.
Would you like the opportunity to ask me a question about your tax situation? I hold monthly live Q&A calls throughout tax season for my workshop participants!
If you were age 23 or younger on December 31, 2023 and a full-time student for at least five months of the year, you may be subject to an alternative, higher tax known as the Kiddie Tax. This could be the case if your income was primary awarded income.
As a full-time student (for at least part of 5 calendar months) and under age 24, your parents (or another relative) might also be able to claim you as a dependent, though you will have to pass the ‘residency test’ and ‘support test.’
One entire module of my tax return workshop is devoted to the special tax considerations of graduate students under the age of 24. Please consider joining the workshop for much more details about the Kiddie Tax and dependency.
The most challenging aspect of this process is simply knowing the various aspects that you have to consider. The most complicated aspect is collecting and categorizing all of your income sources and education expenses.
Best of luck to you as you prepare your grad student tax return this year! If you need additional support:
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A tax situation I have seen goes like this: Graduate student applies for external funding award/grant and receives it. The amount of this award/grant is paid by check directly to the student. The conditions of the award/grant are that the student must use the money to cover research expenses – say, cost of laboratory supplies, equipment, etc. Per the fund-granting organization, the student is not to use the money to pay their own cost of living expenses or wages. How would you deal with this tax situation?
Greetings, Thank you so much for posting this. I got a number of scholarships and grants this year that showed up on my 1098 and my initial H&R block estimate for taxes owed nearly gave me a heart attack, so I’ve trying to figure out how I can change that.
I am in the same situation as Emily, with a scholarship that was awarded directly to me but can only be used for research allowances. Could you share the feedback you sent Emily in an email? Thanks!
Same situation as posted by Jessica and Emily as far as award can only be used for funding research, in shock at the amount owe in taxes. Could you also share feedback you sent on how to deal with this situation?
Hi Emily, I have a similar situation regarding scholarships/grant money that can only be used towards research. Could you share the response you sent to the above inquiries? Thanks,
Dorian
I’m sorry to say I don’t have a great answer! Worst case scenario is that it’s fully taxable within your personal income.
So I am confused about how to collect My Income.
My Pay stubs totaled 39K
My 1098T Box5-Box1 was 7K
and my W2 was 3k.
Do I report the 29k difference as income as well? Or is that already reported in Box5?
For an in-depth exploration of definitions and methods, I suggest joining my tax workshop: https://gum.co/tax2019gradstudent
Has your stance changed on whether health insurance premiums paid directly by a fellowship are considered as qualified education expenses? Insurance is required at my university, although we do have the option to have an outside insurer. In my case, I have the university plan which is covered by a ~$3,300 fellowship. This amount is paid directly by the university. Based purely on my 1098T, this increases my tax burden by ~$600. It seems unfair I should be taxed on this. Thanks!
