POLICY TITLE: Tax Status of Graduate Student Awards at Carnegie Mellon University

DATE OF ISSUANCE: This policy appears in the current issue of the Graduate Student Guidebook.

ACCOUNTABLE DEPARTMENT/UNIT: Accounting. Questions on policy content should be directed to James Gartner, director of financial services, x86469.

ABSTRACT: Explains the three types of income taxes affecting graduate students at Carnegie Mellon and the requirements for student compliance with the tax code.

MISC: All references to Personnel Action Notices (PANs) in the text now apply to the on-line DRIVE system.

Tax Status of Graduate Student Awards

Three types of income taxes affect graduate students at Carnegie Mellon. To be in compliance with the tax code, students must understand their tax status.

U.S. Income and Tax Status for U.S. Citizens and Permanent Residents

Graduate students receiving financial awards that are scholarships, fellowships, teaching assistantships, research assistantships and other analogous stipends are required to pay U.S. income tax on these funds as follows:

• If a student is not a degree candidate, all award funds are taxable.

• If a student is a degree candidate, the amount of any award used for tuition, fees and required books, supplies and equipment is not taxable. The amount used for other expenses such as room, board and travel is taxable.

• The part of any award that represents payment for the student's services such as teaching, research or other service (e.g., writing, administrative assistance, etc.) is taxable.

In computing student taxes for W-2s, the university can determine centrally the part of a student's non-taxable income that covers tuition and fees, since the university establishes these costs. But the portion of stipends required to cover other expenses varies among departments and/or individual students. If a department submits a standard figure that represents known, fixed, documentable fees for required non-tuition educational expenses, these fees may be excluded from the taxable income a priori. In all other cases, graduate students must establish how much of their award is used for required educational expenses (i.e., books, supplies and equipment) and how much for a living stipend.

As a matter of standard university practice, the university will exclude the amount of the student's award that is used for tuition and fees from taxable income; that part will not show on a Form W-2. This amount will not have to be reported by the student as taxable income on form 1040 or 1040-EX (the only two forms that students who receive scholarships and grants can use if any part of the award goes toward living expense).

The university will exclude an amount for other educational expenses in those cases where departments have identified known, documentable, excludable expenses. Those identified amounts should be included with the tuition amounts and so entered on the Personnel Action Notice (PAN) under a tax type 01. In all other cases, the balance of the award will be shown as taxable income on the PAN and the appropriate taxes will be withheld.

Should a student have a question about their Federal Income Tax status, please refer to IRS publications 520, "Scholarships and Fellowships," and pages 12-18 of Publication 901, "U.S. Tax Treaties," or contact any of the numbers listed at the end of this document.

Foreign Students and Permanent Residents

Note: These rules do not necessarily apply to foreign students.

For tax purposes, citizens and permanent residents are considered residents but foreign students may be residents or non-residents. Information on residency status can be found in IRS publication 519. Some foreign students may benefit from specific tax treaties between the U.S. and their country. Information on tax treaties is contained in IRS publication 901. The Office of International Education (OIE) sponsors seminars every spring on these tax issues. For more information on these seminars contact OIE; for more information on specific taxation questions, contact the IRS Technical Services Department at 281-0112, use *44 to reach Technical Services.

Pennsylvania Individual Income Tax

According to the regulations of the Pennsylvania Individual Income Tax Act, fellowship awards and stipends are taxable compensation for service if the recipient is required to apply his skill and training to advance research, creative work, or some other project or activity, unless he or she can show that the recipient is a candidate for a degree and the same activities are required of all degree candidates for that degree as a condition to receiving the degree.

As long as the services rendered by a graduate student are a standard part of the degree requirements for students in a program, no tax must be paid or withheld. At Carnegie Mellon, where graduate students are required to render services, those requirements are generally a standard part of the degree program for all students similarly situated; as long as departments document this fact, the university will not withhold Pennsylvania Individual Income Tax from monthly checks. Department documentation (Certification of Graduate Student Nontaxable Status for Pennsylvania State Income Tax) should be submitted with the PAN to Payroll Services.

Should a graduate student have a problem with the Pennsylvania Department of Revenue seeking to tax some or all of their award, Payroll Services will provide the student with a letter to explain the situation. The letter should be sent to the Pennsylvania Department of Revenue. Further tax information from Pennsylvania can be obtained from the Pennsylvania Department of Revenue Tax Bureau Assistance by calling 565-7540.

City of Pittsburgh and School District of Pittsburgh

Under regulations issued by the City of Pittsburgh that cover both entities, payments made to "a ... post graduate student who has not yet achieved the degree they are seeking, for services rendered in connection with their educational advancement and as part of the program for obtaining this degree, are not subject to the Earned Income Tax when such payments are in the nature of a fellowship, grant or stipend." Regulation 202 (m), Chapters 245 and 246, Pittsburgh Code of Ordinances, Revised: December, 1986. Based on this regulation, Carnegie Mellon does not withhold earned income tax from graduate students who are living within the city, town, municipality, borough, township or school district.

Should the city notify a student that they should be paying the city and school district earned income tax, Payroll Services will issue a letter explaining the situation to the city and the reason we believe the stipend to be non-taxable by the city and school district. For further information, contact the City of Pittsburgh at 225-2511.

Contacts, Forms and Phone Numbers

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