Friday, April 3, 2009

How did my taxes get so complicated?

This is a horrible year for taxes for me. All I have is a W-2, a 1098-T, and a 1099-INT which seems like it should be easy enough. I have been doing my own taxes for years and I have no clue if I've got it right this year. None. Nada. I don't want to pay someone to do my taxes because I think on principle that I should be able to do them myself, but now I'm just not sure.

The main problem stems from my fellowship and the fact that UBC did not take taxes from my paychecks. Other people in the same situation at UBC have received all kinds of varying tax advice, including some very liberal interpretations of qualified educational expenses. Most of the students ahead of us have not paid taxes on the fellowship. My cohort is totally confused.

Tuition waivers further confuse the picture, though those are clearly qualified educational expenses. But, it appears that my waivers and my stipend both appear on my 1098-T. I have no idea how to interpret my 1098-T.

In addition to the fellowship and tuition waiver confusion, I received $3,000 in grants last year that were given to me personally, not administered by an institution. Apparently these are taxable. I have no idea how to deduct the research expenses that these funds were used for, or if I even can.

I'm 99% sure that I am supposed to pay income tax on all of the above, except for the tuition waiver. However, when I calculate my taxes using one of those online filing services, I only owe about 25% of what I set aside in anticipation of paying taxes. How can this be right?

Why can't I figure this out myself?!?!? Help? Suggestions?

On the bright side, I have only lived in one state this year.


Eugenie said...

My dad is an accountant, perhaps he could help with some advice?

Transient Theorist said...

Hey there -

I've been through stuff like this before, here's the key I've found (if what follows is confusing, feel free to give me a call).

Money reported on 1098 forms for fellowships usually doesn't have medicare and social security tax taken out of it. To calculate what you owe for these two items, you actually have to do a few forms as if you were a self-employed "consultant". This is probably why you don't seem to owe as much taxes as you expected, as the regular federal forms just calculate income tax, not Medicare or SS. (It's taken me a few years to figure this out, including once the hard way - ouch).

The good news is that if you're self employed as a "research consultant" you can take business expenses out of your self-employment earnings, so that can reduce things somewhat. You could probably count the purchase of your new laptop, and there's even a deduction for having a home office (which I think you have in your current apt.?)

Maybe that helps a little?


Liberal Arts Lady said...

You shouldn't have to pay taxes on the grant money as long as that money was actually spent on research/supplies/etc. Also, home office deductions are tricky; if you can't illustrate that you use it ONLY for work don't bother, as the IRS is starting to crack down on home office type deductions (or so I hear from people who got burned). You should include anything you paid out-of-pocket for conferences and travel, research, office supplies, etc. as a business expense, but you then have to itemize.

I have personally A) been really bad about filing correctly (at least as an early-stage grad student) and just ignored both grant money and medicare etc. B) found that using a real person got me up to $1000 back that I would have paid based on my personal calculations, and cost me about $100, which I found to be totally worth it, not to mention the savings in stress.

amused said...

I just sent in my taxes and was in a very similar situation (W2, 1099 INT, non-taxed fellowship on 1098-T)... based on my research (IRS website, calling them, going to a tax workshop, talking with EVERYONE in my department) I have determined that you need to enter as taxable income the amount in your 1098 box 5 MINUS the amount in box 1. This is everything you received minus what was qualified tuition expenses (unfortunately, insurance, books, and other things that are sometimes even included in tuition are not actually deemed qualified because they are not absolutely required to attend the university). As for the $3000 in grant money... I think you just have to pay taxes on that but I am not totally sure.

My effective tax rate ended up being only 9.36% so if you are not paying as much as you expected, don't be too surprised. You may have overpaid on your W2's and so some of that is offsetting the taxes on your fellowship.

IRS website about fellowships:

Also, I did my taxes on turbotax (free if you made under 30,000) and they have a section that specifically asks for taxable scholarship in the "less common income" section.

Finally, you actually shouldn't end up entering anything in the 1098 section. Its best just to ignore that you had tuition at all since it was paid by someone else and is completely tax free.

If you have any more questions, email me!

amused said...

also... you shouldn't have to pay social security or medicare as far as I understand (I have NEVER heard of anyone doing this with fellowhship money), OR file as an independent consultant... then you have to pay TONS of taxes!

Karina said...

Thanks for the comments, everyone. Amused, what you're saying sounds very much in line with the conclusions I was beginning to come to after quite a bit of research. I was even beginning to think that I had to subtract one box from another on the 1098-T! Thank you SO MUCH for posting about your experience in a similar situation.

Theo, it sounds like you may have overpaid. It is my understanding, as Amused wrote, that if you are enrolled as a student that you do not pay medicare or social security.

About my grants, I'm pretty sure I just have to pay taxes on them because I take the standard deduction. The last time I tried to itemize I didn't come anywhere CLOSE to the standard deduction. This year it might be close, but I'm just going to go with the standard one which theoretically includes my grant deductions. Oh well.

I think I'm going to try finishing my taxes now.

Transient Theorist said...

All I know is that the second year I submitted my taxes without filing the forms for self-employment earnings (grant money that supported my research as an undergrad), the IRS got knarly with me, fined me, and made me redo everything using those other forms and paying SS and medicare on what I earned. Not fun.

In the name of avoiding that, since then I have done the extra forms, and no problems. Online free e-file tax programs seem to be smart enough to fill all of them out and deemed it appropriate that I do so. Easier than figuring it out myself. Shrug.

I find it extraordinarily frustrating that everything should be this complicated and generally unintelligible, despite the fact that, with undergraduate (+) degrees, we're in the more highly educated portion of society. So far I have refrained from paying anyone to do my taxes for me as a matter of principle, but sheesh.

Karina said...

Theo, I'm doing my taxes on and it's not asking me to pay SS or Medicare. Were your grant funds for a summer stipend? Were you technically enrolled as a student when you received that grant money?

I had to pay SS and Medicare out of my TA stipend this past summer when I was teaching but not actually enrolled for the summer term. The university had to go back and retroactively deduct for SS and Medicare because their default was to not deduct them, and they didn't catch their mistake for several months.

amused said...

So glad I could help... and I have never heard of anyone in my program having to pay for SS or medicare, or even being questioned at all on their taxes (and they have done some shady things). Again, not sure about the grant situation, but it sounds like you know about that.

Good luck getting them done! I mailed mine in yesterday :)

Karina said...

Ok, I've completed my taxes to the best of my ability and submitted them.

What I did:
I reported the amount on my 1098-T that was [box 5-box 1] as taxable fellowship income when asked for
uncommon income (via freetaxusa). This amount was then included in my taxable wages.

I hope this is right.