Congratulations! Your proposal was successful! You’ve been awarded a fellowship or grant! These are great words to read, and overall it’s a good thing to get a fellowship or grant as an early career researcher. But there are hidden costs to these awards, both in terms of your immediate finances and the risks you take when you accept them.
To begin, I should state – or at least I assume I’m supposed to state, since all the universities do – that I am not a financial or tax professional. 1 Nothing in this post should be construed as advice, and you should consult your financial advisor before making any financial decisions. (Hahaha! You’ve got one of those, right? A financial advisor? Yeah, me neither.) This post consists of things you merely might want to consider.
The first thing to know about a graduate or postdoctoral fellowship or grant is that the amount you receive is considered personal income. That means that you are required to pay personal income tax on it. That might seem logical for a fellowship that covers your salary. But it’s true for grants, too. A small research grant to do a pilot project? Taxable to you personally. A travel grant to go to a conference? Taxable to you personally. This is in contrast to a grant that your PI receives. When your PI gets a grant, it’s technically the university that is the legal recipient of the grant. Your PI is really just the grant administrator – she gets to use the funds in the grant, but the money is not hers. And this means she is not liable for taxes on it.
But you are. So you’ll likely need to think ahead about the tax implications. If you assume you’re taxed at about a 20% rate for the combination of federal and state taxes, then you essentially lose 1/5 of your grant money. $500 for conference travel? It’s really only worth $400. $3000 grant to do your fieldwork? Nope. More like $2400. If you’re brave, you could consider putting the amount you’ll have to pay in tax in the budget of your grant proposals. (I’ve rarely done this, assuming that the people reading the proposals are not tax-savvy and will not understand why I’m requesting extra money to pay taxes when no one else does.)
Now whether you’ve got a fellowship or grant, another important thing to know is that no one is going to automatically withhold any of your money for taxes – or even keep track of it for you. If you’ve been paid for anything more than a small job in the U.S., you know that your employer will withhold some federal and state 2 taxes from every paycheck. Then early each year, you receive a W-2 form that lists all the money you earned the previous year, along with how much was withheld for taxes. You use this form to help fill out your federal and state tax returns.
For any money you receive as a fellowship or grant, you will not get a separate W-2, and any W-2 that you do get (for TAing, for example) will not include amounts you got as fellowship or grant money. So what does that mean? It means that your grant and fellowship were not reported to the government, but that you are still responsible for self-reporting these amounts. How do you know how much you got? You’re supposed to keep track of all that information yourself. (Joy!) If you’ve been paid on a fellowship exclusively for a year, you can use your last pay statement of the year to see your annual income on that fellowship – it will say something like “gross year to date.” If you have mixed income that year – some fellowship and some paid work, your last pay statement of the year might help, if it records the different types of income separately. What I have done when that statement isn’t helpful is to very nicely ask a finance administrator to send me my total fellowship income for the year.
Where do you report it on your tax return? The amount is reported on the line that reads “Wages, salaries, tips, etc.” (i.e. line 7 on 2015’s forms 1040 and 1040A or line 1 on 2015’s form 1040EZ). You add together the fellowship amount with all the amounts you have on your W-2s for this line. And then you write on the dotted line “SCH” and the amount of your fellowship. (Yes, “SCH” stands for scholarship. The tax code is very confused about the differences between undergrads and grad students and postdocs. You can find official instructions for 2015 in IRS publication 970.)
Example of recording a fellowship of $30,000 on a tax form that also has $18,559 earned income.
Now: withholding. In my experience, most fellowships do not have taxes automatically withheld. But you really do want the taxes automatically withheld. If you don’t have taxes withheld, you are supposed to file quarterly taxes – that is, file your taxes 4 times per year. (Sounds like fun, right?) If you don’t withhold and don’t pay quarterly, you may have a substantial (hundreds of dollars) tax penalty to pay at the end of the year, not to mention the hefty end-of-year tax bill itself. So how do you get taxes withheld? You ask. You very nicely talk to your finance administrator and ask if you can have taxes voluntarily withheld. In my experience, most places (but not all) will allow you to do this. (If they don’t, you’re stuck with paying quarterly taxes.) Follow your administrator’s instructions on how to fill out the necessary forms.
When you do eventually file taxes for your fellowship year, there are some things you should know. First, you probably won’t (but may!) get a statement from your university saying how much you received. (If you do, it might be on a 1098-T form, so check that out if you receive one.) The total fellowship and grant amount is considered unearned income. That is: it’s like you won the lottery – someone just gave you money, and you aren’t considered to have worked for it. That means it’s treated slightly differently than income you earned (like as a TA or RA).
If you (and your spouse, if married filing jointly) only have fellowship income for the year, you are not eligible for several things. First, you can’t take the earned income tax credit. Even if you’re a single person living off a small fellowship and you’re technically living below the poverty line, you cannot claim it. (There are a bunch of other restrictions, too.) How much should you care? If you’re single and without kids, the most you can earn and still get any credit is about $15,000. If you’re married and without kids, the cap is about $20,000. If you have at least one kid, the threshold starts at around $40,000 and goes up for being married or having more kids. The credit itself (if you’re eligible) is likely to be between $50 and $300 if you don’t have kids, and between $500 and $3000 if you do. So this credit can be substantial for someone on limited income, like many grad students. Again, if your only income is fellowship, then you can ignore this credit; you’re not eligible. But if you have some other type of “regular” income (or your spouse does) in addition to fellowship, you may be able to claim this credit.
Another thing to know is that if you (and your spouse, if married filing jointly) only have fellowship income for the year, you are not allowed to contribute to an individual retirement account (IRA). Yeah, yeah, you might say, but I make too little for that anyway. But you really should be thinking about contributing to your retirement as soon as you possibly can. Because of compounding, the amount you put into a retirement account when you’re younger will be worth more than larger amounts you put in ten years from now. Try to put in a little bit each year – it adds up. Well, unless you only had fellowship income, in which case you’re not allowed to contribute to your own retirement.
While we’re on the topic of retirement, let’s consider another potential downside to fellowships (as opposed to earned income): you don’t pay social security taxes. While that’s a nice thing in the short term (you get to keep more money!), in the long term many years without earned income might mean you have to work longer into retirement age or take a lower social security payment in retirement. Is this a big deal? You can think about it like this: your social security benefits are based on your top 35 years of earnings. If you start out working when you’re 22, and have 5 years of fellowship income, that means you need to work until least 62 years of age to get fully social security benefits, which seems pretty reasonable. This assumes, though, that nothing happens in your life that causes additional years of low or no income. So while the fact that while you are on fellowship, you are losing years of social security contributions isn’t a huge deal, it is something to be aware of.
Something that is perhaps a bigger issue is the disability coverage that social security provides. This was completely off my radar until the husband of a friend was diagnosed with cancer a few years ago. He was the sole income-earner for the family of four, and he was suddenly unable to work for an indefinite period of time. If find yourself unable to work due to a disability that is going to last for at least a year, you can apply for social security disability payments. But you won’t be eligible for them if you haven’t “worked” enough recently – and fellowships don’t count. In particular, if you’re young and most of your adult income has been through fellowships or other jobs that don’t pay into social security (like many teaching jobs), you may not be eligible for disability payments at all. So if you’re on fellowships for extended periods of time, you might look into purchasing long-term disability insurance. (And while you’re at it, you might consider short-term disability insurance, too.)
Finally, one more risk and expense to consider if you’re living off a fellowship: health insurance. If you are a grad student on fellowship, it is likely (but not guaranteed) that your health insurance will look like that of your peers on TAs and RAs, and it’s likely (but not guaranteed) that your premiums will be the same. If you’re a postdoc, however, being on a fellowship can mean anything from zero coverage to full coverage, depending on the origin of the fellowship, your institution, and how that institution classifies you. I highly recommend looking into health insurance and other benefits before accepting a fellowship, because if you don’t get coverage through your institution, it may be prohibitively expensive to find health insurance on your own (which you are legally required to do). Even for fellowships that provide a health insurance stipend, that stipend is likely not enough to cover your full costs, meaning that the fellowship is worth less than its face value.
And again, none of this blog post should be considered professional advice – it’s merely things to think about. For those of you who are professors of various stripes, please do consider having your department hire a professional to come in and give a two-hour tax workshop for your grad students and postdocs once per year. The U.S. tax code is tricky for students who aren’t undergraduates (i.e. graduate students) and for those on fellowships or receiving grants, financial situations vary widely, and early career researchers often don’t have the means to hire financial advisors on their own.
1. I’m not a professional, but I have filled out more than the average number of tax returns. Having a predilection for complex systems with detailed minutia, I used to volunteer as a tax preparation assistant for AARP, helping low-income and elderly people file their taxes. ^
2. Note that not all states have a personal income tax. If you live in one of these states, you only have to worry about federal taxes. ^
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