Tax treatment of stipends

[abababba]

How are stipends taxed? Income or no? do you pay social security and or state and federal income tax?

 

I am wondering whether I should contribute to a 401k and rollover to an IRA while in the 25% tax bracket. With a 10% penalty and income tax I am wondering whether I will be better off paying the taxes and penalty after starting grad school than paying taxes now. I guess I also get deferred growth until then but my 401k plan isn't fantastic.

 

Plan would be to use the money to pay for educational expenses but I am cheap so there is also a chance if I do get a stipend that I won't spend the money and can keep the IRA.

 

Are forgone tuition credits also taxable?

 

I just googled it and found that stipends, TA and RA money are all taxable at the federal and state level, however medicare and social security taxes don't apply.

 

Still interested in any comments.

 

I guess another interesting plan might be to rollover balances into a roth during school if I don't use the money. How much over stipends do people ussually go anyway in terms of spending and how much money comes in from summer employment if that is even common?

 

This is getting long, but does anyone know if the 5 year withdrawal rule applies to traditional IRAs? Qualified higher education expense seem to be an exception but not sure if I still pay the penalty becasue I have held the account less than 5 years.

[Jhai]

Any money that you get that does not go towards qualified eduacation expenses (that is, tuition, fees, books, supplies, etc), is taxable income. Many grad students pay quarterly taxes, rather than just at April to smooth out their incomes, as they have to pay a huge chunk of money every tax day otherwise.

 

As an undergrad with a full ride (tuition, room, and board), I find doing my taxes very depressing. It'll be even worse this year because my summer income wasn't automatically taxed, but I'll have to declare it as taxable income.

 

If interest rates stay low and the economy decent, it can actually be profitable for a student to take out the max in loans, even if they don't need it, and then put the funds into something fairly safe with a decent, like mutal funds linked to a stock index. Since you don't have to start paying off your loans until graduation, and you don't have interest accumulating, you can make a decent buck if you know what you're doing. Of course, if you're bad with money (can't keep from spending it if you have it), then this is a VERY BAD idea.

[abababba]

What is the availability of loans like for graduate students for living expenses? What kind of interest rates do they offer?

 

Are you saying you don't have to pay taxes on the amount of the stipend you spend on those qualified expenses you listed?

[Jhai]

As an undergraduate, I have to pay taxes on the portion of my scholarship that goes towards room and board expenses. I don't have to on the part that goes towards tuition, fees which are required to attend the university, and $450 in books & supplies each year. If you can make a good claim that you're spending money on things *necessary* to your education, that you would not have spent if you weren't attending college (you'd have to eat and live somewhere, even if you weren't in college), then you can probably get away with writing it off as an educational expense. Remember that the US tax code is mostly based on an honor system - you aren't called on your claims unless you're audited.

 

As far as loans go - if you're a US citizen or permenant resident, you have a lot of loan options from the goverment (and state, to a lesser extent), which often have below-market interest rates. If you're not, then your main recourse is private loans, which will offer loans based on your credit history and the market. For an explanation of the type of federal loans available, see this page: http://studentaid.ed.gov/students/publications/student_guide/2003_2004/english/types.htm

[psylocybha]

Something to check, if you are a US citizen or resident, is whether your university withholds and reports your stipend income. Mine does neither, but this is unfortunately not the case for us foreign students.