Tax Information

=The Graduate Student and Taxes=

As the potential graduate student ponders the pros and cons of continuing education, it is important to consider how taxes might weigh in on the matter. Financial aid in the form of grants, scholarships, fellowships and assistantships will ease the financial burden of tuition expenses for some grad students. Many will fund their education through government and private loans. Fellowships and assistantships cover the cost of tuition and student health insurance plus include a monthly stipend. Generally, these stipends are considered as taxable income and are therefore subject to federal income tax. The full-time grad student is usually exempt from FICA and Medicare taxes pertaining to these stipends.

Two types of tax benefits available to graduate student are tax deductions and tax credits. A tax deduction is a reduction in taxable income. In other words, it is subtracted from the gross income before taxes are calculated. A tuition tax credit is a direct reduction in the amount of federal income tax after taxes are calculated. The IRS encourages the pursuit of higher education by offering the American Opportunity credit and the Lifetime Learning credit. The American Opportunity credit applies only to undergraduates. Graduate students may take advantage of the Lifetime Learning credit. This credit allows a reduction of up to $2,000 in federal tax liability, provided the taxpayer’s modified adjusted gross income (MAGI) is less than $61,000 for a single filer or $122,000 for a joint filer. This credit has no limit on the number of years that can be claimed by a taxpayer.

Deductions are important for the person contemplating higher education because there comes a time when the accruing student loans must be repaid. The interest paid on a student loan is deductible. This deduction, when applied to the individual’s annual income tax form, lowers the taxable income.

Another deduction is institution tuition and fees (along with books and supplies if purchased from the university). Living expenses, health insurance and transportation costs are not deductible. This can reduce the taxable income by up to $4,000 with a MAGI limited to less than $80,000 for a single filer or $160,000 for a joint filer. This deduction cannot be used with the Lifetime Learning credit. It is the taxpayer’s responsibility to select the option which provides the greatest benefit, as the IRS does not allow both to be claimed.

Publication 970,”Tax Benefits for Education”, has detailed information necessary to the graduate student. It can be downloaded from www.irs.gov. Remember, tax laws are subject to change so it’s not a bad idea to talk with a tax professional.