When it comes to tax related-issues, students are often uninformed or ill-informed. It is important for students to know the tax implications of scholarships or fellowship grants. Dorothy Lawrence, the CEO of the Dorothy Butler Law firm, believes that understanding taxes is very important for students. She constantly engages in teaching people about taxes and other legal issues. We asked Dorothy Lawrence about the most important and common questions of students related to taxes, and we would love to share her answers with you.
What are the important things, in terms of taxes, grad students should keep in mind before taking a scholarship or fellowship grant?
The most important thing students need to remember about a scholarship or fellowship grant, in terms of taxes, is that they should use their scholarship money or fellowship grant money strictly for educational purposes, such as buying books and supplies or paying the tuition fee. As long as they use the money only for their educational expenses, it will be tax-exempt.
Under which situations is a scholarship or fellowship grant not tax-exempt?
If students use their scholarship or grant money for non-educational purposes, such as paying rent on a room or partying, it will become a part of their gross income on which they will pay tax. The educational purposes should be directly related to and benefit only the student. If a student gets paid by a professor for helping him or her with research, that money will be taxable. Make sure you read the terms and conditions of your scholarship or fellowship grant before you sign up for it.
It is very important for students to know and understand which educational expenses are tax deductible and which aren’t. Tuition and fees used to be tax deductible but aren’t anymore after 2020. Similarly, work-related educational expenses are also no longer tax deductible. However, if the student is self-employed and their education directly enhances their business or trade-related skills, they may be able to deduct education expenses. If you took a student loan and used it strictly for educational expenses, it is deductible.
If a student has no income other than his or her fellowship, should he or she file taxes?
Students should file taxes and be encouraged to learn how to file them. Legally, students are required to file taxes only if their income exceeds the IRS filing threshold. If a student’s sole source of income is his or her fellowship or scholarship, he or she doesn’t need to file taxes.
Should international students file taxes?
The general rule is that students should pay taxes if their income is above the threshold defined by the IRS. However, it also depends on where the student is from. In many cases, there are certain treaties between the United States and other countries that exempt foreign students from taxes. It is, therefore, very important for students to reach out to tax professionals and see if they qualify for such exemptions. If you need any help in this regard, contact the Dorothy Butler Law Firm.