Like many other postdocs supported by an individual fellowship, I have struggled to determine whether I was supposed to pay U.S. income taxes and how. Every year around tax time, my fellowship sponsor sent me a photocopy of the same 1994 letter from an independent consulting firm, telling me in no uncertain terms that as a postdoc I was not "self-employed" for tax purposes. The 1099 form I received each year showed my stipend in the "other" box. Beyond this guidance, I was responsible for figuring out whether I owed any tax and on what, and how to list my income on the tax forms.
Recent conversations with postdocs and university administrators have convinced me that I was lucky to receive even that guidance. Many institutions do not report postdoc income to the IRS, much less provide the postdoc any information on tax issues. And if the system is confusing to a person who has lived in the United States her whole life, imagine what it is like for a person trying to navigate international tax treaties.
Often out of frustration comes the energy to act. Armed with access to a legal database search engine, encouragement from postdocs, and tantalizing tidbits from administrators, I decided to get to the bottom of the tax mystery for postdocs. What follows is my understanding of current laws regulating taxability of fellowships, employee-employer relationships, and special rules for trainees. Because I am not a lawyer, accountant, or tax specialist, I strongly urge you to seek the advice of a professional in determining your specific responsibilities.
And just imagine, last year at this time I was in the lab performing TUNEL assays and Westerns.
Do I Need to Pay Income Taxes on a Postdoc Fellowship?
Yes, unless you are an international scholar covered by a tax treaty.
Before 1986, the IRS did not consider "noncompensatory" fellowships and scholarships to be taxable income. However, a series of court cases persuaded lawmakers that existing tax law didn't make clear the meaning of "compensation." Thus, the Tax Reform Act of 1986 revised Section 117 of the Internal Revenue Code ("Income Taxes: Qualified Scholarships"). The revisions shifted the question of scholarship and fellowship grant income from the nature of the grant (i.e., whether the grant was compensation for services) to the use of the funds (i.e., whether used for tuition). The law as it currently stands, reads:
"Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at a [specified] educational organization."
Furthermore (for those graduate students reading this), gross income does include "any amount received which represents payment for teaching, research, or other services."
Thus, because postdocs are not degree candidates, they must pay taxes on fellowship income. However, in the case of an individual who is not a candidate for a degree, the IRS specified an exclusion that applies to the first 36 months an individual receives a fellowship (see 2002 Treasury Regulation 26 CFR 1.117-2). You can deduct from your gross income an amount not to exceed $300 multiplied by the number of months for which you received the fellowship grant during the taxable year. For example, say you just received your Ph.D. in 2001 and accepted a postdoc fellowship for February to December 2002 that paid you $30,000. You are entitled to exclude $300 x 11 months, or $3300, from your gross income. [ Note added after publication: This exclusion applied to fellowships granted before 1989. See the Jan 2, 2003 PDN News for more information.]
The Hope Tax Credit of 1998 seems to apply to graduate students and may also apply to some postdocs who take courses and pay tuition. For those postdocs who are fully engaged in degree-granting programs such as a master's in public health, stipends can be considered as scholarships under the provisions of Section 117. [ Note added after publication: The Hope Tax Credit is only applicable to those still in their first two years of postsecondary education, and therefore is not available to postdocs. See the Jan 2, 2003 PDN News for information on the Lifetime Learning Credit, which can be claimed by postdocs paying tuition and fees.]
After that, things are as clear as mud. "Compensation" was not defined by the Tax Reform Act of 1986, and neither was the term "fellowship." Not surprisingly, IRS audits have addressed this oversight and offer some additional clarity.
Are Postdoc Fellowships Gifts?
Determining whether fellowships were gifts was once contingent upon whether services were required of the fellow. Case law dating back to the 1950s sets up the dichotomy between individual and institutional grants. (Quick aside: The 16th Amendment to the U.S. Constitution established personal and corporate income taxes in 1913.) Fellowship grants to individuals "made primarily to assist scholars and creative artists to carry on their own works of research and artistic creation" for which the grantor has no control over the outcome of the research were considered gifts ( Stone v. Commissioner, 1954; 23 T.C. 254). In contrast, funds received by an institution and used to appoint research fellows at that institution are considered compensation for services and subject to income and employment tax ( Loo v. Commissioner, 1954; 22 T.C. 220).
Because the law had uncertain application, legislators amended the 1954 Internal Revenue Code, adding Section 117 to distinguish fellowships and scholarships from gifts. Section 74 ("Prizes and Awards") of the Internal Revenue Code now specifies: "General Rule: Except as otherwise provided in this section or section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards." Prizes and awards are defined as requiring (1) no action on the part of the recipient to be selected and (2) no future services as a condition of the award. For postdocs who submit fellowship applications, the resulting award is not a gift.
Still, Congress did not define "scholarship" or "fellowship." Currently, treasury regulation § 1.117-4 ("Items not considered as scholarships or fellowship grants" 26 CFR 1.117-4 (c)(2)) provides the best guidance:
[A]mounts paid or allowed to, or on behalf of, an individual to enable him to pursue studies or research are considered to be amounts received as a scholarship or fellowship grant for the purpose of section 117 if the primary purpose of the studies or research is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation or payment for the services described in subparagraph (1) of this paragraph. Neither the fact that the recipient is required to furnish reports of his progress to the grantor, nor the fact that the results of his studies or research may be of some incidental benefits to the grantor shall, of itself, be considered to destroy the essential character of such amount as a scholarship or fellowship grant.
So the answer to the question ""Is a fellowship compensation?" remains one of interpretation. Developing case law has focused on the relationship between fellow and the granting agency. Does the fellowship sponsor expect anything from the fellow? For example, is the grant made contingent upon past, present, or future service? Does the grantor hold rights to the products of the research? Is the fellow performing services?
These questions will be addressed in Part 2 ("Principal Investigator vs. Individual Grants") and Part 3 ("Are Postdocs Employees?") of this series.
Have comments or questions? Please contact Postdoc Network Editor Laure Haak at firstname.lastname@example.org. If you would like to receive an automatic notice informing you of the posting of further articles in this series, sign up for PostdocNet alerts.