Are Fellowships Really Taxable? Avoid this Mistake + FAQs

Yes – in most cases fellowship stipends are taxable income unless they meet strict criteria for exemption.

A recent study found over 50% of fellowship recipients were unsure about their tax obligations. This comprehensive guide clears up the confusion and dives deep into U.S. tax rules for ALL types of fellowships.

Whether you’re a graduate student, postdoc, medical resident, or international scholar, we’ve got you covered with expert insights.

In this article, you’ll learn:

• Exactly which fellowships are taxable vs tax-free (and the IRS rules behind it).

• Key definitions – what counts as a fellowship, scholarship, or stipend for tax purposes.

• Federal and state tax rules for fellowship income (and how they differ, if at all).

• Examples and scenarios – from PhD stipends to medical residencies to international student grants.

• Common mistakes to avoid so you don’t get hit with surprise taxes or penalties.

Let’s build your understanding step by step and answer all your burning questions about fellowship taxation.

Fellowship, Scholarship, Stipend – What Do These Terms Mean for Your Taxes?

Before we dig into tax rules, let’s clarify what a fellowship actually is and how it differs from scholarships or salaries. Understanding these definitions is crucial, because tax treatment hinges on the nature of the funding.

What is a Fellowship?
A fellowship (or fellowship grant) is generally an amount of money paid to support an individual’s education or research. Unlike a salary, a fellowship is usually considered non-compensatory, meaning you’re not directly working a job for it. Instead, it’s an award to help you study, train, or do research.

Common examples include graduate research fellowships, postdoctoral fellowships, and medical training fellowships. In practical terms, a fellowship often provides a stipend (living allowance) and sometimes covers tuition or other educational costs.

Scholarship vs. Fellowship:
The IRS definitions of scholarship and fellowship are very similar. A scholarship typically refers to funds for an undergraduate or graduate student to aid in their studies.

A fellowship often refers to support for graduate or post-graduate study or research. Both are forms of financial aid. For tax purposes, there’s no hard line between the two – the tax code treats scholarships and fellowships almost identically. What matters is how the money is used and whether you’re a degree candidate. Essentially, think of a fellowship as just a scholarship by another name (often for higher-level study or specialized projects).

Stipend:

A stipend is the actual payment (cash) you receive from a fellowship or scholarship. It’s usually a fixed amount given on a schedule (e.g. monthly). For example, a PhD student might get a $30,000 annual stipend disbursed in monthly payments.

The stipend is what could potentially be taxable as income. When people ask “are fellowships taxable,” they’re mostly talking about the stipend portion – the money that goes into your bank account for living expenses.

Compensatory vs. Non-Compensatory Awards:

• Compensatory awards are basically payments where you perform services in return. If your funding requires you to work (teach, research, or fulfill duties) as a condition, it’s generally compensation. For example, a teaching assistantship (TA) or research assistantship (RA) where you must teach classes or work in a lab is compensatory – it’s a job, and you get a salary or wage (often reported on a W-2).

• Non-compensatory awards have no work requirement. The money is given to support you, not to pay for a job. Most pure fellowships fall in this category. You might have to maintain a certain GPA or make academic progress (conditions for receiving the fellowship), but you don’t have a specific job duty in exchange.

Why does this matter? Because compensatory pay is taxed like a salary, whereas non-compensatory fellowship income has special tax rules (which we’re about to explore in detail).

A key distinction: if you must work for the funds, you’ll be treated as an employee (with wages). If you don’t have to work, it’s treated as scholarship/fellowship income. Don’t worry – we’ll break down the implications of each scenario.

Bottom line: A fellowship or scholarship is financial support for education or research. If you’re not performing services for it, it’s not a wage – but it may still be taxable (depending on how you use the money). In the next section, we’ll answer when fellowship money is tax-free and when it’s taxable under IRS rules.

Taxable or Not? When Is a Fellowship Tax-Free (IRS Rules)

Here’s the crux of the matter: When can you enjoy a fellowship without paying taxes on it? The IRS does allow certain fellowship or scholarship funds to be tax-free, but only under specific conditions. Let’s unpack those rules.

General Rule – It’s Taxable Unless Excluded:
According to U.S. tax law (specifically Internal Revenue Code §117), scholarship and fellowship money is taxable income by default. However, there is a big exception: funds used for qualified education expenses can be excluded from taxable income. In plainer terms, if you use the fellowship to pay for school tuition or required fees, that portion is not taxed. Anything outside of that is likely taxable.

So, are fellowships taxable? Yes, they usually are – except for the part used on tuition and required course expenses (for students).

To understand this, let’s define Qualified Education Expenses:

Qualified Education Expenses (QEE):
These are the costs that the IRS says can be covered by a scholarship/fellowship tax-free. They include:

• Tuition and enrollment fees required to attend an accredited educational institution.

• Required fees, books, supplies, and equipment for your courses. (For example, if your program requires a $200 lab kit or specific software, that counts.)

Notably, room and board, travel, research equipment for your thesis (if not explicitly required for a course), and living expenses do not count as qualified education expenses. Money spent on those is non-qualified for the tax exclusion.

Degree Candidate Requirement:
There’s another catch: to exclude those qualified expenses from income, you must be a candidate for a degree at an educational institution. In simple terms, you need to be enrolled in a program that leads to a degree (undergraduate, master’s, PhD, MD, etc). If you are, you get to apply the above rule. If you’re not a degree student (say you’re a postdoctoral fellow or doing an informal training), then none of your fellowship can be excluded under this rule – meaning the entire amount is taxable. (Don’t worry, we’ll talk about non-students like postdocs separately soon.)

Tax-Free vs Taxable Breakdown:

• Tax-Free Fellowship Portions: If you’re a degree-seeking student, any part of your fellowship used for tuition, mandatory fees, and required course materials is tax-free. Essentially, that part is treated as a qualified scholarship and you do not include it in your gross income on your tax return.

• Taxable Fellowship Portions: Any part of the fellowship used for living expenses (like housing, food, transportation, personal expenses) is taxable. Also, if you’re NOT a degree student, then all of your fellowship stipend is generally taxable because you can’t exclude anything under the qualified education rule.

Example 1 – Graduate Fellowship with Tuition:
Imagine you’re a PhD student with a fellowship. It pays $20,000 directly toward your university for tuition and fees, and gives you a $30,000 stipend for living costs. The $20,000 paid for tuition is qualified and tax-free – you won’t pay tax on that portion. The $30,000 stipend (for rent, food, etc.) is taxable income. You’ll need to report that $30k on your tax return.

Example 2 – Full Ride Scholarship:
You’re an undergraduate who received a scholarship covering full tuition ($15,000) and also a $5,000 housing allowance. You use the $5,000 to pay dorm fees. Result: the $15k tuition coverage is tax-free. The $5k for housing is taxable because room and board isn’t a qualified expense. Many students are surprised by this – that “housing scholarship” is actually taxable income to you.

Example 3 – Postdoctoral Fellowship (Non-Degree):
You finished your PhD and now have a one-year postdoctoral fellowship with a $50,000 stipend (and no required duties). Since you’re not enrolled as a student, the entire $50,000 is taxable. There’s no tuition to offset and you’re not a degree candidate, so nothing qualifies for exclusion under §117. You will owe income tax on the full amount.

Common Misconception:
It’s worth emphasizing: the label of the award doesn’t automatically decide taxability. People sometimes think “It’s a fellowship, so maybe it’s tax-free money.” Not true. The IRS cares about how the money is used and your student status. Unless you spend it on qualified education costs while being a student, it’s just taxable income like any other income.

The “No-Strings” Condition:
Remember, if the fellowship requires you to do work (like teach or research as a service), then that portion is actually wages, not a scholarship. Wages are fully taxable (even if you spend them on tuition, that doesn’t matter – wages are wages). So if you have an assistantship that requires teaching in exchange for a stipend and tuition waiver, the stipend is taxed as salary and the tuition waiver is tax-free by a different rule (more on that later). Pure scholarships/fellowships have no work requirement; if yours does, it’s compensation.

IRS Publication 970 Guidance:
The IRS explains these scholarship and fellowship rules in Publication 970 (Tax Benefits for Education), Chapter 1. It confirms that degree candidates can exclude scholarship/fellowship money used for required tuition, fees, books, etc. Everything else is taxable. Publication 970 also clarifies that things like room, board, travel, and equipment not required for classes must be included as income.

Case in Point – Tax Court Example:
To see these rules in action, consider the real case of Wang v. Commissioner (Tax Court, 2014). A Harvard PhD student received a fellowship: it paid his tuition and gave him an extra stipend. He tried to exclude a portion of that stipend on his tax return, claiming he used it for educational expenses. However, he couldn’t document that the money was used for qualified expenses – in fact, he had used some of it to pay student loan bills and other non-required costs. The Tax Court ruled that because he didn’t substantiate qualified educational use, the entire stipend was taxable. In short, if you can’t prove you spent it on tuition or required fees/books, you don’t get the tax break. The student ended up owing back taxes on the amount he tried to exclude.

The takeaway: Keep records if you’re using fellowship money for qualified expenses! Save receipts for tuition payments, required textbook purchases, etc. If ever questioned, you want to show that those funds were spent in a tax-free way. Otherwise, the IRS can count it as income.

Now that we’ve covered the core rule of when a fellowship is tax-free or taxable, let’s explore different kinds of fellowships and specific scenarios. Not all fellowships are alike, and it helps to see how the rules apply in context.

How Various Fellowships Are Taxed (Grad Students, Postdocs, Medical, and More)

Fellowship recipients come in many forms – from undergrads with a scholarship, to PhD candidates on prestigious fellowships, to postdoctoral researchers, even to physicians in training. In this section, we’ll break down different types of fellowships and funding arrangements and illustrate how each is taxed. This will build your understanding through real-world scenarios.

Graduate Student Fellowships (Degree Candidates)

Graduate fellowships are common in master’s and PhD programs. Typically, a grad student fellowship provides:

• A tuition scholarship (full or partial tuition coverage).

• A stipend for living expenses (sometimes called a maintenance allowance).

Tax treatment: As explained earlier, if you’re a grad student, you exclude the tuition portion (tax-free) and pay tax on the stipend portion. Let’s flesh this out with an example:

Example – NSF Graduate Research Fellowship:
The NSF GRFP (National Science Foundation Graduate Research Fellowship Program) gives a very generous stipend (around $37,000/year) and an education allowance for tuition/fees (around $12,000/year paid to the university). If you are an NSF fellow:

• The $12k tuition payment is not taxable to you.

• The $37k stipend is taxable. You must report it as income, even though NSF or your university won’t issue a W-2.

Reporting: Most universities will list the scholarship amount on a form called Form 1098-T (Tuition Statement) each year, which shows payments or scholarships applied to tuition. Box 5 of the 1098-T shows scholarships/fellowships the school processed on your account. For grad students, Box 5 often shows the sum of your stipend plus any tuition scholarships. Don’t be confused: the 1098-T is just informational; it isn’t reported to IRS in a way that calculates tax. It’s mainly used to claim education credits, but the presence of an amount in Box 5 is a clue that some of your funds might be taxable. You will use your own records to determine how much of that was for qualified expenses vs. stipend.

Assistantships vs Fellowships: Some grad students have teaching or research assistantships where they’re technically employees. If you’re on a TA/RA:

• You’ll receive a W-2 for your stipend since it’s a wage, and taxes (and possibly Social Security/Medicare) may be withheld.

• You might also get a tuition waiver (which, for graduate assistants, is generally tax-free under a separate rule for educational institutions).

• In terms of net outcome, whether you’re a fellow or an assistant, you pay income tax on the money you use to live on. The difference is just how it’s reported and whether FICA taxes apply. (If you’re a full-time student employee, often FICA is exempt, so many PhD TAs don’t pay Social Security tax either.)

Key point: For graduate students, fellowships and scholarships are great for covering school costs, but remember any stipend is taxable. Plan for that when budgeting your take-home pay.

Postdoctoral Fellowships (and Other Non-Degree Research Fellowships)

After earning a Ph.D., many researchers move on to a postdoctoral fellowship. These are typically research awards that provide a salary-like stipend for a couple of years of advanced training. Since postdocs aren’t enrolled as students, the entire fellowship is taxable.

However, postdoc fellows often encounter unique situations:

• No W-2 Provided: Postdoc fellows funded by external grants (like NIH NRSA fellowships or foundation grants) might not receive a W-2. The institution may give a “courtesy letter” or just a statement of what was paid. Sometimes they issue a Form 1099-MISC (Box 3, “Other Income”) for the stipend. Either way, it’s on you to report the income.

• No Tax Withholding: Usually, taxes are not withheld from fellowship stipends. So a postdoc might receive the full stipend during the year, then owe taxes in April. (We’ll talk later about how to handle estimated taxes to avoid a nasty surprise.)

• Not Subject to Payroll Taxes: The good news – because it’s not a wage, a fellowship stipend is typically not subject to Social Security and Medicare (FICA) taxes for U.S. citizens and residents. That saves you about 7.65% in payroll taxes compared to a normal salary. (One downside: time on fellowship doesn’t contribute to Social Security earnings for retirement, but for a few years this is usually fine.)

• IRA Contributions: Historically, fellowship stipends did not count as “earned income” for IRA retirement contributions – meaning postdocs couldn’t put fellowship money into an IRA. This changed in recent years: now fellowship stipends are treated as compensation for IRA purposes. So, if you get a fellowship, you can contribute to an IRA up to the allowed limit, even though it’s not wage income. This is a small perk thanks to a tax law update.

Example – NIH NRSA Postdoctoral Fellowship:
The NIH National Research Service Award is a common postdoc fellowship. If you have an NRSA:

• You’ll get a monthly stipend (the amount depends on your experience level).

• No taxes are taken out by NIH or your institution; you receive the full stipend.

• At tax time, you must report the full yearly stipend as income. It’s taxed at your regular income tax rates.

• You will not owe self-employment tax on it, because it’s still a fellowship (non-compensatory). It’s not considered business income; it’s a grant for your training.

One confusion point: Sometimes fellows wonder, “Should I pay self-employment tax (SE tax) on my fellowship since no one withheld FICA?” The answer is generally No – fellowship income is not self-employment, and the IRS in fact prohibits treating it as such. (Self-employment tax is meant for business owners or independent contractors.) As long as your fellowship is for your training and not a contract for services, you are not subject to SE tax on it. We’ll see an exception below when a fellowship blurs into contract work.

Note on External Fellowships vs Employment:
If a postdoc is hired as an employee on a research grant (like some university postdoc positions), then they’re not considered fellowship recipients for tax purposes – they’re just employees (W-2, normal withholding). Make sure you know your status. Titles can be confusing (some places call all postdocs “fellows” even if they’re paid as staff). Check if you get a W-2 or not. If you do, you’re an employee and taxes are handled through payroll. If not, you likely have a true fellowship and need to handle taxes yourself.

A Cautionary Tale – Fellowship or Contract Work?
In rare cases, what is called a “fellowship” might actually be compensation for work disguised as a grant. For instance, if a company gives you funding to conduct specific research that benefits them, even if they label it a fellowship, the IRS might see it as pay for services. In the earlier court case example (Wang v. Comm’r), the PhD graduate had a side arrangement where a company paid him to do research on their project (and issued him a 1099). He thought it was similar to a research fellowship, but the Tax Court decided that money was compensation for work (and even hit him with self-employment tax on that part). The lesson: If your “fellowship” requires you to deliver research results to the payer or otherwise serves their benefit, it might be taxable as work income, not just a grant. Most academic fellowships won’t have this issue, but be aware in industry-sponsored situations.

Medical and Clinical Fellowships (Medical Residents, Clinical Fellows)

The term “fellowship” is also used in medicine for physicians in training. For example, after residency, a doctor might do a “cardiology fellowship” – essentially a specialized training job. It’s important to distinguish these from academic fellowships because the tax treatment can differ:

• Medical Residents (and clinical fellows in hospitals) are generally employees. They receive a salary (stipend) that is fully taxable and reported on a W-2. Even though they’re called “fellows,” they are working as doctors in training. They have work schedules, treat patients, etc., in exchange for pay. So from a tax perspective, a medical resident’s stipend is just like any worker’s wages. Taxes are withheld, and they also pay FICA taxes (though there was a past debate about whether they’re students – the IRS concluded medical residents are full-time employees for FICA).

• Academic Medical Fellowships: If a medical student or a doctor gets a grant to support research or education (not an employed position), it can be treated as a fellowship. For instance, a medical student taking a year off for a research fellowship from Howard Hughes or NIH would get a stipend similarly to a grad student. That would be taxable to the extent not used for tuition/fees (if they’re simultaneously earning a degree) or fully taxable if they’re not in a degree program during that time.

Summary: If you’re in the medical field and you hear “fellowship,” determine if it’s an actual job (with W-2) or a grant.

• If it’s a job (residency, clinical fellow at a hospital), it’s taxed as normal income and you probably don’t have to worry about self-reporting anything – your employer handles withholding.

• If it’s a research/educational grant (like a scholarship to do a research project or an external fellowship program), then treat it like the other academic fellowships we’ve discussed.

Fellowships vs. Assistantships: A Quick Comparison

Many graduate students have to choose between (or experience both) a fellowship and an assistantship during their studies. It’s useful to compare their tax implications:

As you can see, either way you end up paying income tax on the money that’s for living expenses. The main difference is how you pay it: upfront via withholding (assistantship) or later on your own (fellowship). With fellowships, you also skip FICA, which slightly increases take-home pay in the short term.

One more difference: Unemployment insurance and benefits. As a fellowship recipient, you’re not an employee, so if your funding ends, you can’t claim unemployment benefits. Assistantships, being jobs, sometimes come with benefits like health insurance, and while students typically can’t get unemployment after, being an employee does have some legal protections and benefit options. This is outside taxes, but worth noting as a pro/con factor for those deciding between opportunities.

Now that we’ve explored the landscape of different fellowships and how they’re taxed domestically, let’s discuss a special category of fellowship recipients: international students and scholars. The rules can get a bit more complex there due to tax treaties and visa regulations.

International Students and Fellowship Tax: Special Rules to Know

If you’re an international student or scholar in the U.S. receiving a fellowship or scholarship, you face all the rules above plus an extra layer: nonresident tax regulations and tax treaties. Here’s what you need to know:

Nonresident vs Resident for Tax Purposes:
International students on F-1 or J-1 visas are typically considered nonresident aliens for U.S. tax purposes for the first 5 calendar years in the U.S. (J-1 scholars often 2 years). Nonresidents follow a different tax regime:

• They file a 1040-NR tax form (if required to file).

• Different deductions/credits rules apply, and tax treaties can override general rules.

After the initial period, many students become resident aliens for tax (meaning they count as U.S. residents in the eyes of the IRS, even if not citizens or green card holders). Once you’re a resident for tax, the normal rules for U.S. citizens apply to you; tax treaties might or might not still give benefits depending on the treaty’s terms.

Withholding on Fellowship Payments to Foreign Students:
There’s a special requirement: U.S. institutions are generally required to withhold federal income tax at a 14% rate on any taxable scholarship/fellowship payments made to nonresident alien students on F, J, M, or Q visas. This 14% withholding applies only to the portion that is taxable (i.e. the stipend or other non-qualified expenses). Why? Because the IRS knows international students might not file or pay taxes, so they ensure some tax is collected upfront.

• Example: You’re a nonresident international PhD student with a $20,000 stipend (taxable) and $20,000 tuition scholarship. The school will likely withhold 14% of $20,000 = $2,800 for federal tax throughout the year (often deducted monthly from your stipend). The $20k tuition part is not taxable, so no withholding on that portion.

If 14% seems arbitrary, it’s the rate set by tax regulations for scholarship income to nonresidents. It’s somewhat low or high depending on your actual tax bracket, but it’s a flat amount withheld.

Tax Treaties – Your Best Friend (or Confusing Friend):
The U.S. has tax treaties with many countries that often provide benefits to students and researchers. A treaty can override the normal rule and make your fellowship tax-free (or partially tax-free), even if it would otherwise be taxable.

• Example: China Treaty: Under the U.S.–China tax treaty, a Chinese student in the U.S. can generally exclude up to $5,000 of income per year from taxation (and scholarship/fellowship money for study or training can be exempt entirely when certain conditions are met). This means a Chinese grad student’s stipend might be partially or wholly tax-exempt by treaty.

• Example: India Treaty: The U.S.–India treaty also offers Indian students an exclusion (including the standard deduction, uniquely). Indian students can use the standard deduction and may exclude fellowship income similar to U.S. students if certain criteria are met.

• Many other countries (Germany, Canada, UK, France, Japan, etc.) have treaty clauses for students, typically allowing some amount of scholarship or even teaching income to be exempt during their studies. The specifics vary widely: some allow a fixed dollar exemption (e.g. $5,000), others exempt anything from abroad or certain grants.

How to Claim Treaty Benefits:
If you’re eligible, you have to claim the benefit; it’s not automatic. Usually, you’ll fill out Form W-8BEN (for scholarship income) or Form 8233 (for compensation, if you’re also working) and give it to your university’s payroll/tax department to reduce or eliminate withholding. At year-end, if a portion of your fellowship was exempt under a treaty, you’ll get a Form 1042-S (Foreign Person’s U.S. Source Income) that shows the amounts exempt by treaty and amounts taxed. You’d then use that when filing your 1040-NR to show what part was treaty-exempt.

Important: Tax treaty benefits are often limited to individuals who remain nonresident aliens. Once you become a resident alien for tax, some treaty benefits (especially those targeted at students) might no longer apply. Always check the treaty article language or consult a tax advisor if you transition to resident alien status but are still on a visa.

State Taxes for International Students:
U.S. tax treaties do not automatically apply to state taxes. So even if your fellowship is exempt from federal tax by treaty, your state of residence might still tax it fully (since states generally don’t honor federal treaties, with a few exceptions). For example, you could pay no federal tax on a fellowship due to a treaty, but still owe, say, 5% to the state. Some states have their own guidelines for nonresidents, but in general, expect to report the taxable portion on your state return.

Reporting and Filing:
Even as a nonresident, if you have any taxable scholarship income (above a low threshold), you’re required to file a U.S. tax return (Form 1040-NR). You’ll report fellowship income on there, and also report any treaty-exempt portion (so it’s not taxed). If your institution withheld 14%, you’ll claim that as tax paid and either get a refund or owe more depending on your total income. Don’t skip filing because you think “they already took 14% out, I’m done.” You might be due a refund if 14% was too much or if a treaty covers you.

International Postdocs and Researchers:
If you’re a foreign postdoc on a J-1 research scholar visa receiving a fellowship, similar treaty rules can apply (some treaties have clauses for researchers/professors too). Note: J-1 research scholars are typically nonresident only for 2 years, not 5, under the substantial presence test rules.

One more nuance – Foreign Source Fellowships:
If you receive a fellowship payment from outside the U.S. (say your home country’s government or an international organization supports your study in the U.S.), that might be considered foreign source income. U.S. taxes generally apply to U.S.-source income for nonresidents. So a grant from abroad that you bring with you might actually be not taxable by the U.S. at all (it could be tax-free for federal purposes because it’s not U.S. sourced). This is a complex area, but worth mentioning: some international students studying on funds from their home country may not owe U.S. tax on that particular income (though their U.S. source stipend would be taxed).

As you can see, international fellows have a lot to juggle: U.S. rules plus treaty benefits plus possibly home country tax implications. Always double-check with your university’s international tax office or a tax professional about your specific situation. Now, let’s circle back to the domestic side and talk about how states tax fellowship income – an often overlooked aspect.

Federal vs State Taxation: Do You Owe State Tax on Fellowship Stipends?

We’ve focused on federal income tax so far, but what about state income tax? If you live in a state that has an income tax, generally yes, your fellowship stipend is subject to state tax as well. Here’s the breakdown:

Federal Alignment: Most states use your federal adjusted gross income (AGI) as a starting point for state taxation. Since we’ve determined that fellowship stipends count as income federally (unless excluded for tuition), they will be part of your federal AGI. When you do your state return, that income flows through.

No Special Exclusion: States typically do not have unique exclusions for scholarship income beyond what federal law provides. If you excluded tuition scholarships on your federal return (reducing your income there), your state will automatically exclude it too (because it’s not in your AGI). Conversely, if you had taxable fellowship income federally, the state will see it as taxable as well. For example, California and New York tax fellowship stipends just like the IRS does. There’s no extra break – they both consider it part of gross income.

State Tax Withholding: Unlike the IRS, states usually don’t mandate withholding on fellowship payments. It’s relatively rare for a university to withhold state income tax on a fellowship stipend, even for international students (though they do withhold the federal 14%). This means if you’re in a state with income tax, you may need to make state estimated tax payments to avoid owing a lump sum (similar to federal, which we’ll discuss next).

States with No Income Tax: If you’re lucky to be in a state like Texas, Florida, Washington, etc., there’s no state income tax at all. In that case, you only worry about federal taxes on your fellowship. For example, a grad student at a Texas university will pay federal tax on their stipend but nothing to the state. (However, if that student is originally from a state that taxes income and maintains domicile there, there could be complications – but that’s a rare scenario. Most often, you pay tax where you reside.)

Part-Year or Moving: If you move states (say you attend school in one state and then do research in another mid-year), you’ll file part-year resident returns. You’ll still include the fellowship income as appropriate for the portion of the year you were in each state. The concept doesn’t change: it’s taxable by whichever state(s) you were resident or earned it in, proportionally.

Unique State Rules: A few states have quirky tax rules:

• Pennsylvania, for example, taxes income by category and might not tax scholarship income if it’s not considered compensation. (PA tends to tax only compensation, business income, etc. There’s some interpretation that pure scholarship might not fall under a taxable category in PA. But if you are a student doing an assistantship, PA definitely taxes that as compensation.)

• New Jersey explicitly follows federal treatment for scholarships: if it’s taxable federally, it’s taxable in NJ. If it’s tax-free federally, NJ also excludes it.

• Rhode Island (as noted by Brown University’s tax guidance) taxes fellowship stipends and assistantship stipends alike as income, just like federal.

These differences are minor, and for the most part, you can assume state = federal in terms of what portion of a fellowship is taxable.

Deductibility of Qualified Expenses: Some states might not mirror every federal deduction or credit. But since the exclusion for qualified scholarships isn’t a deduction but an exclusion in defining income, states generally honor it.

Bottom line: Don’t forget about state taxes when tallying up what you owe. If you made $30k in taxable fellowship stipend and you’re in a 5% state, that’s another ~$1,500 in state taxes due. Many fellowship recipients overlook this, budgeting only for federal tax.

Next, let’s get practical: How exactly do you report fellowship income on your tax return? What forms are involved, and what steps should you take to pay any tax due? We’ll cover that in the following section.

Reporting Fellowship Income to the IRS (Forms and Best Practices)

Handling the taxes on fellowship income isn’t just about understanding theory – you also need to file correctly. It can feel confusing since you might not receive the usual tax forms like a W-2. Here’s a step-by-step guide on how to report fellowship or scholarship income and pay any taxes due:

1. Documentation You May Receive:

• Form W-2: If part of your funding was through a job (assistantship or teaching duties), you’ll get a W-2 for that portion. Pure fellowship payments generally do not generate a W-2.

• Form 1098-T: As mentioned, your school will send this tuition statement. Box 1 shows amounts paid for qualified tuition. Box 5 shows scholarships/fellowships received. Important: The 1098-T is not directly entered into your tax return for reporting income. It’s mainly for claiming education credits. However, if Box 5 exceeds Box 1, that could indicate you have taxable scholarship income. For example, 1098-T might show $30,000 in scholarships (Box 5) and $20,000 in tuition (Box 1). The difference, $10,000, likely went to you as a stipend and is taxable.

• Form 1099-MISC or 1099-NEC: Some external fellowship granters issue a 1099. If they do:

  • 1099-MISC: They might put your stipend under Box 3 (Other Income). This is the correct place for fellowship stipends on a 1099 form.

  • 1099-NEC: NEC stands for Nonemployee Compensation, usually for contractor pay. If a fellowship provider mistakenly issues a 1099-NEC for your stipend, the IRS might think you’re self-employed. Do not panic. You can still report it as scholarship income (not business income) on your return – but you have to take care how you input it so it doesn’t trigger self-employment tax. (Often, tax software will ask if some of the 1099-NEC income was scholarship/fellowship – you can say yes and it will treat accordingly. Otherwise, you might list it on a different line and attach an explanation. If unsure, get tax help in this scenario.)

• Form 1042-S: If you’re an international student/scholar, you’ll get this form for any fellowship payments that had withholding or treaty exemptions. It will show gross amount, amount exempt by treaty, and tax withheld. This form is used when filing 1040-NR. (U.S. citizens/residents don’t get a 1042-S.)

You might also simply get a letter from your university or funding agency summarizing your fellowship payments. Keep that with your tax documents.

2. Determining the Taxable Amount:
Using your records:

• Calculate total fellowship/scholarship received for the year.

• Calculate the portion of that used for qualified tuition/fees/books while you were a degree student. (If you’re not a student, this is zero.)

• Taxable scholarship = (Total received) minus (Qualified amount). If you’re not a degree candidate, it’s simply total = taxable.

For example, you got $25,000 stipend and $5,000 went to tuition. Taxable = $20,000.

3. Reporting on Form 1040:
For U.S. citizens and residents (filing Form 1040):

• Add taxable scholarship/fellowship to your income. There’s a specific line for it. In recent years’ forms, it appears on Schedule 1 (Additional Income), typically on the line for “Scholarship and fellowship income” (Line 8r in 2022 Schedule 1). Some tax software might direct you to input it under “Less common income -> scholarship not on W-2” or similar.

• When reported properly, it will show up on your 1040 as part of “Other income” and often is annotated with “SCH” next to the line amount. This notation tells the IRS that this income was from scholarships/fellowships, which helps them not to misclassify it.

• Do NOT list fellowship stipend as self-employment or as wages. Unless you actually performed contract work (rare), it should not go on Schedule C (business) and you shouldn’t pay self-employment tax on it.

• If you had both a W-2 for part of the year and fellowship for another part, you will include the W-2 wages as usual, plus add the fellowship amount separately. Both will sum into your total income.

For nonresidents (Form 1040-NR):

• You will report scholarship income on the “Scholarship and Fellowship Grants” line (which is part of the income section on the 1040-NR). If part is treaty-exempt, you’ll only list the taxable portion there and attach a Form 8833 or simply note the treaty article and exempt amount as required.

• You’ll also account for any federal tax withheld (the 14% or otherwise) by claiming it on the return, so you get credit for that pre-paid tax.

4. Paying Estimated Taxes (if needed):
One of the biggest practical issues for fellowship recipients: since typically no taxes are withheld, you might need to pay quarterly estimated taxes to the IRS (and state). The IRS requires individuals to pay tax throughout the year, either through withholding or estimates, if you will owe a significant amount. If you wait until April to pay it all, you could face an underpayment penalty.

Ask yourself:

• Will I owe more than $1,000 in tax at year-end after subtracting any withholding? If yes, you should be making estimated payments.

• Roughly, if you’re receiving say $30,000 of untaxed fellowship stipend, that could result in maybe ~$3,000 of federal tax (just as an example, actual depends on your other income and deductions). That’s definitely over $1,000, so estimates needed.

How to Pay Estimates:

• Use Form 1040-ES vouchers, or easier, the IRS Direct Pay website or EFPTS system to pay online each quarter.

• Due dates are usually April 15, June 15, Sept 15, and Jan 15 of the following year (odd schedule).

• Pay at least enough to cover what you think you’ll owe. To be safe from penalty, you can pay 100% of last year’s tax (110% if you’re higher income) as a total across estimates. But if last year you had no tax (say you were not in the US or had no income), you’re technically safe from penalty if this is your first year with income – but still, it’s wise to pay during the year to avoid a huge bill.

Tip: Some universities allow fellows to opt into voluntary withholding on stipends – essentially, you fill out a form and the university will withhold a flat additional amount from another paycheck or process to forward to the IRS. This is not common, but check with your payroll or financial aid office. If not, it’s on you to do estimates.

5. Deductions and Credits:
Just because you have fellowship income doesn’t mean you can’t benefit from tax deductions/credits:

• You can still take the standard deduction (or itemize if applicable) on your return, which will reduce taxable income.

• If you paid tuition out-of-pocket beyond what the fellowship covered, you might qualify for education credits like the Lifetime Learning Credit (graduate students) or American Opportunity Credit (undergrads, first 4 years). But careful: you cannot double-dip by excluding tuition covered by a fellowship and also claim a credit for that same tuition. Only tuition you paid with taxed income or loans can count for credits. People sometimes accidentally try to claim a credit for tuition that was actually paid by a tax-free scholarship – that’s not allowed.

• Student loan interest deduction: If you used fellowship money to pay student loan interest, you might still take the student loan interest deduction (as long as you meet other requirements and weren’t claimed as dependent).

6. Special Cases – K–12 and Prizes:
It’s rare, but if you got a fellowship or scholarship and you’re not in college (say a high school scholarship that gives cash), those follow similar rules: if used for qualified school expenses (e.g. private high school tuition), possibly not taxed; otherwise taxed. Also, merit awards or prizes (like winning a science fair scholarship that isn’t for college) could be taxable. Always refer back to: is it a gift or prize (taxable) vs an educational scholarship (maybe tax-free if used for schooling)?

7. Keep Records:
Maintain a folder with:

• Your award letters (they show you were awarded X fellowship of $Y).

• Receipts or account statements for tuition and fees paid.

• Any tax forms or letters from the university/foundation.

• These support documents might be needed in case of any question or if you seek advice.

Reporting fellowship income properly ensures you stay compliant and avoid IRS trouble. It might feel like extra homework, but after doing it once, you’ll have the hang of it. Next, let’s weigh some pros and cons of receiving fellowship income – because taxes are one piece, but there are other financial implications worth noting.

Pros and Cons of Fellowship Stipends (Tax Perspective)

Receiving a fellowship can be financially rewarding and academically prestigious, but it comes with some unique tax and financial implications. Let’s break down the advantages and disadvantages of fellowship income compared to regular salary or assistantship pay:

In short, fellowships offer some tax perks (like no FICA, possibly tax-free tuition portions), but they require proactive tax management. Now, knowing all this, what pitfalls should you be careful to avoid? We’ll cover the common mistakes next.

Common Mistakes to Avoid with Fellowship Taxes

Navigating fellowship taxation can be tricky, and people often slip up. Here are some common mistakes fellowship recipients should steer clear of:

• Assuming “No Tax Form = No Tax.” One of the biggest errors is thinking that if you didn’t receive a W-2 or 1099, the money isn’t taxable. Wrong! The IRS expects you to report taxable fellowship income even if you got no formal tax document. Always report your stipend (except the qualified part) or you could face penalties for underreporting income.

• Not Setting Aside Money for Taxes. It’s easy to treat fellowship stipends like financial aid and forget about taxes until filing time. Many students have been burned by a hefty tax bill in April because they didn’t reserve part of each payment for taxes. Avoid this by estimating your tax and setting aside that percentage from each stipend payment in a savings account.

• Missing Quarterly Tax Payments. If you have significant untaxed income, failing to pay quarterly estimated taxes is a mistake. The IRS can charge an underpayment penalty if you wait to pay all at once. Mark those quarterly due dates on your calendar.

• Overlooking State Taxes. People often budget for federal tax but forget state. For example, if you’re in a 7% state tax state, that’s $700 per $10k of income – not trivial. Don’t get caught off guard by a state tax bill.

• Not Documenting Qualified Expenses. If you exclude, say, $10,000 of fellowship as “used for tuition,” but you lack records, you’re in trouble if audited. Keep receipts, tuition statements, and any documentation that shows what your fellowship paid for. Without proof, the IRS could reclassify that portion as taxable.

• Double-Dipping Educational Benefits. This mistake is more technical: trying to exclude scholarship money and also claim an education credit or deduction with the same expenses. For instance, you can’t use a $5,000 tuition expense to justify excluding income and claim the Lifetime Learning Credit for that $5,000. Choose one or allocate different expenses to each benefit. Otherwise, the IRS may reject the credit or count income back in.

• Misclassifying Fellowship as Self-Employment. Some recipients, confused by the lack of W-2, incorrectly file their fellowship under self-employment on Schedule C. This leads to unnecessary self-employment tax (15.3%). In almost all cases, fellowship stipends are not self-employment. Don’t pay extra tax by misfiling it. (If you did consulting or side work separately, that goes on Schedule C, but not your fellowship unless, as discussed, it was truly a contracted service.)

• Ignoring Tax Treaties (for internationals). International students sometimes pay tax they didn’t need to because they or their payroll office didn’t apply a treaty benefit. That’s a mistake that can cost thousands. If you’re from a country with a treaty, make sure to claim what you’re entitled to. Conversely, some assume a treaty covers them when it doesn’t – always verify the exact terms (mistakenly not paying when you should could lead to later tax bills).

• Assuming Fellowship = Prize or Gift. A few people think of a fellowship as a gift or award and don’t realize it’s taxable. While fellowships can feel like “free money you won,” the IRS doesn’t treat them like personal gifts (which would be tax-free to the recipient). It’s taxable income unless specifically excluded by the rules we’ve covered. Never just omit it thinking “it’s like a grant, I don’t have to count it.”

• Failing to File a Return. If your income is below the standard deduction, you might not be required to file. But careful: taxable scholarship income for a dependent does not get that full standard deduction shield – beyond $2,200 it can be taxed (kiddie tax rules). So, for a student who is claimed as a dependent, if you have say $5,000 of taxable scholarship, you do need to file even though $5k is below the standard deduction. Many dependent students overlook this and don’t file when they should (or their parents don’t include it properly on the kiddie tax form). Make sure you understand your filing requirement.

By being aware of these pitfalls, you can confidently handle your fellowship income and avoid letters from the IRS later. As a final wrap-up, let’s address some frequent questions that arise about fellowship taxation in a concise FAQ style.

Frequently Asked Questions (FAQ) about Fellowship Taxes

Q: Are fellowships considered taxable income?
A: Yes. Fellowship stipends are taxable income unless used for tuition, fees, or required educational expenses by a degree student. In most cases, any portion for living expenses is taxable.

Q: Do I pay taxes on a PhD stipend?
A: Yes. A PhD stipend from a fellowship is taxable. The university may not withhold taxes, but you are responsible for reporting it and paying income tax on it (except any part covering tuition).

Q: Will I get a 1099 or W-2 for my fellowship?
A: Usually No. Pure fellowships typically do not issue a W-2 (no employer) and often no 1099 either. Some external fellowships send a 1099-MISC. Many schools just report it on a 1098-T or a letter, so you must self-report.

Q: Is fellowship income subject to Social Security or Medicare tax?
A: No. Fellowship stipends are not wages, so they are not subject to Social Security or Medicare (FICA) taxes. You do not pay those taxes on fellowship income, and it’s not reported on a W-2.

Q: Do I have to pay quarterly estimated taxes on my fellowship?
A: Yes, if you’ll owe over $1,000. Because no tax is withheld from stipends, fellows should often pay quarterly estimated taxes to cover federal (and state) tax liability and avoid penalties.

Q: Can I claim the American Opportunity Tax Credit or Lifetime Learning Credit if I have a fellowship?
A: Yes, if you have eligible expenses you paid out-of-pocket. You cannot use expenses paid by tax-free fellowship funds for the credits. Only tuition and fees you (or loans) actually paid can count.

Q: I’m an international student – is my fellowship taxable in the U.S.?
A: Generally yes, unless a tax treaty applies. The U.S. taxes fellowship stipends for nonresidents at 14% withholding. Many countries have treaties that exempt some or all of a student’s scholarship income, so check your country’s treaty.

Q: Does a fellowship count as earned income for IRA or the Earned Income Credit?
A: For IRA: Yes (now). Fellowship stipends count as compensation for IRA contributions, allowing you to contribute to an IRA. For Earned Income Credit (EIC): No. Fellowship income is not “earned” income for EIC purposes, so by itself it won’t qualify you for the EIC.

Q: If my fellowship paid for my tuition, do I report that money?
A: No. Do not include the portion of fellowship used for tuition, required fees, or course materials in your taxable income. That part is excluded (tax-free). Only report the portion used for non-qualified expenses.

Q: Are Fulbright grants taxable?
A: Yes, generally. Fulbright grants (for U.S. citizens) follow the same rules: amounts for tuition or school fees are tax-free if you’re a degree candidate; amounts for living expenses are taxable. If you’re abroad, you might also owe tax in the host country (but the grant isn’t exempt from U.S. tax just because it’s overseas).

Q: Can I treat my fellowship as a gift? My professor said it’s a gift from the university.
A: No. Scholarships and fellowships are explicitly not treated as tax-free gifts in the eyes of the IRS. They are considered income (with the specific educational exclusion rules). You must report and pay tax on the taxable portion.

Q: Do states tax scholarship or fellowship money?
A: Yes. State income tax generally applies to the taxable portion of scholarships/fellowships just like federal. If you have $10k of taxable stipend, your state will include that as income on your state return (if your state has an income tax).