Education, Taxes, & Benefits

Duke University August 22, 2017 Megan Hutchinson, CPA Senior Manager - Tax

Raleigh Office DISCUSSION POINTS

TYPES OF INCOME TAXABLE v NON-TAXABLE QUALIFIED v NON-QUALIFIED EXPENSES REPORTING DOCUMENTS TAX RETURN FILING IRAs – EARNED V UNEARNED INCOME EDUCATIONAL TAX CREDITS & DEDUCTIONS TAX PAYMENTS In the eyes of the IRS………

All are sources of taxable income

Unless………… You tell them differently by filing an income tax return

TYPES OF INCOME

Scholarships - $ for the purpose of general education expenses (undergrad) generally not taxable Fellowships - $ for to aid in the pursuit of study or research (grad) sometimes taxable Research grants - may be taxable, depends on use Research Assistant - almost always taxable Teaching Assistant - almost always taxable BUT can be exempt from SS tax TYPES OF INCOME

Stipends - A form of salary – generally taxable

Lower than permanent salary for similar work. Carries other benefits - accreditation, instruction, food, and/or accommodation. Universities usually refer to money paid to graduate students as a stipend, rather than as wages, to reflect complimentary benefits NON-COMPENSATORY COMPENSATORY

A Duke student receives financial support to do research A faculty member is working on a project and pays a solely for her thesis that is needed for her degree. The student to assist with the research. The student research is not for, nor does it provide a benefit to a participation is not a degree requirement/ If the student faculty member. was not assisting with the research, the faculty member would have to hire someone else to do the work or do it himself.

A student is paid a stipend to participate in a conference A student is paid a stipend to attend a faculty member’s directly related to their graduate studies. No work is conference, arrange seating, mail invitations, and performed. provide chauffeur service to/from hotels.

As part of a degree program, a Duke student is paid to A student is paid as an intern in a Duke department for participate in summer internship program at an outside providing research assistance. There is no program organization where he will focus on learning research designed to train students as part of their degree techniques. He will not be providing a service to the requirements. The student is providing a needed outside organization, but is in a learning role. service. TAXABLE v NON-TAXABLE

For Scholarships/Grants/Fellowships

Tax-free or taxable – depends on type of expenses paid with the funds and whether you are a degree candidate QUALIFED EXPENSES

Tuition and fees – required for enrollment

Course-related expenses (fees, books, supplies, equipment) – must be required of all students in the course NON-QUALIFED EXPENSES

Insurance Medical expenses (including student health fees) Room and board Misc. Fees (Recreation, Parking, Activity) Research Travel Clerical help Equipment & other expenses that are not required for enrollment TAXABLE vs NON-TAXABLE

For Scholarships/Grants/Fellowships

Degree Candidate – Portion used to pay “Qualified Expenses” is not taxable

Not reported on tax return TAXABLE vs NON-TAXABLE

For Scholarships/Grants/Fellowships

Degree Candidate – Portion NOT used to pay “Qualified Expenses” is taxable

Reported on tax return TAXABLE vs NON-TAXABLE

For Scholarships/Grants/Fellowships

Non-Degree Candidate – Fully taxable Reporting Type of Income Documentation

Wages W2 ie/ Teaching Assistant, Work-study, compensatory internships

Scholarships, fellowships, non-compensatory internships & post-doctoral awards with tax 1099-Misc withholding

Scholarships, fellowships, non-compensatory internships & post-doctoral awards without Courtesy Letter tax withholding

Duke administered financial aid posted directly to the Bursar Account 1098T (Does not include financial aid administered by third parties)

Earnings that fall within the scope of a tax treaty, scholarships, fellowships, non- 1042S compensatory internships & post-doctoral awards

Issued by Duke Payroll Services to: students who have a work requirement in order to receive their scholarship, grant or fellowship money. all employees of Duke University and Duke University Health System who are US citizens, permanent residents or residents for tax purposes. to foreign national employees who are not eligible for or do not claim a tax treaty. to foreign national employees whose earnings exceed allowable maximums of a tax treaty.

1099-MISC

Issued by Accounts Payable to students who are US citizens, permanent residents, or residents for tax purposes, and who receive payments through the non-compensatory payment system. . Any scholarship and fellowship payment for which the student elected to have taxes withheld. . All postdoctoral scholars and student internship payments.

Box 3 Non-compensatory payments - payments Duke University makes to individuals who are receiving payments for scholarships, fellowships, summer internships, or post-doctoral training activities. Individuals receiving these payments are not considered a Duke employee, and are receiving funds through Duke University for educational enrichment opportunities.

Box 7 – Nonemployee Compensation Unlikely that you would receive independent contractor compensation from Duke or another funding agency for your role as a graduate student. Self-employment is indicated by income reported in Box 7 of a 1099-MISC. If you receive Box 7 income from your role as a graduate student, you may want to double-check with the issuing body that they have issued you the correct form. Courtesy Letter Courtesy Letter

Issued by Payroll Services to students …………..who are US citizens, permanent residents, or residents for tax purposes, …………who receive scholarships or fellowships through the non- compensatory payment system, and ………….who choose not to have tax withholdings taken from their payments

Duke is not obligated, and doesn’t report this amount to the IRS. This does not mean, however, that the payments are not taxable. It is up to the student to determine whether or not this is reportable income. This information is provided as a courtesy.

1098T

 Box 2 The amount of qualified tuition and related expenses billed through your Bursar account. It is not the amount you paid.  Box 5 The amount of scholarship and fellowship payments posted to your Bursar account. ______

 1098-T is issued by the Bursar’s Office to students who are US citizens, permanent residents, or residents for tax purposes, and only to those students who had tuition & qualified fees billed during the calendar year that exceeds grants & scholarships posted during the same period.  Payments from Duke posted to your Bursar account for university billed charges such as tuition and insurance are reported in Box 5 as scholarships or grants and should be included when adding up your scholarship and fellowship income. Four Steps to Reporting

1. Add up how much you received in scholarship and fellowship income. 2. Determine how much you paid towards qualified educational expenses. 3. Calculate the taxable portion of your scholarship and fellowship income. 4. Report the income and educational expenses on your tax return. 1 – Add up your Scholarship & Fellowship Income

Potential sources for the information...

W-2 Form 1099-Misc, Box 3 Courtesy Letter Form 1098-T, Box 5 Bursar Account Detail 2 – Determine how much you paid towards Qualified Expenses

Two potential sources…….

Form 1098-T Box 2 Personal records (checks, paid receipts, credit card statements) 3 – Calculate Taxable Portion of Scholarship & Fellowship Income

Example

Worksheet 1-1, IRS publication 970 4 – Report the Income and Educational Expenses on your Tax Return Turbo Tax EARNED v UNEARNED INCOME

Any income reported on Box 1 of a W-2 (or Box 7 of a 1099-Misc) is earned income.

All other sources are unearned income. EARNED v UNEARNED INCOME

Wages, salaries, etc. Wages you receive for providing personal services are compensation – could be stipends/TA/RA services

Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2 - which is rare!! EARNED v UNEARNED INCOME

IRA or Roth IRA contributions

Must have received taxable compensation (earned income) during the year SOCIAL SECURITY EXEMPTION

Temporary Student Exemption

Work full-time in registrar’s office and take advantage of tuition-free enrollment – NO

Attend school full-time and work part-time contingent on continued enrollment – YES (TA/RA income) TAX DEDUCTIONS vs CREDITS

Deductions - subtracted from your income; they are amounts you don't have to pay taxes on. If your tax rate is 15%, your tax savings will be only 15% of the amount of the deduction.

Credits - subtracted from your tax liability so you save 100% of the amount of your credit.

Example, a $1,000 credit will reduce your taxes by $1,000, but a $1,000 deduction (in the 15% tax bracket) will reduce your taxes by only $150. EDUCATIONAL TAX CREDITS/DEDUCTIONS

American Opportunity Credit

Lifetime Learning Credit

Tuition and Fees Deduction EDUCATIONAL TAX CREDITS/DEDUCTIONS

All require the use of qualified expenses

Cannot use same expenses as those used to reduce taxable scholarship/fellowship income EDUCATIONAL TAX CREDITS/DEDUCTIONS

Student Loan Interest Deduction

Reduce income subject to tax up to $2,500 Loan solely to pay qualified education expenses Loan NOT from related party Income limits EDUCATIONAL TAX CREDITS/DEDUCTIONS

Student Loan - Capitalized Interest

Unpaid interest added to the outstanding principal

Treated as interest for tax purposes

Is deductible as payments of principal are made on the loan (allocated)

No deduction allowed in a year in which no loan payments were made. TAX PAYMENTS

W-2 – WITHHOLDINGS 1099-MISC – WITHHOLDINGS CALCULATION WORKSHEET – WITHHOLDINGS TAX PAYMENTS

SHOULD MAKE ESTIMATED TAX PAYMENTS

FOR 2017

IF YOU EXPECT TO OWE

AT LEAST $1,000 IN TAX FOR 2017 TAX PAYMENTS

……after subtracting your withholding and credits and if you expect your withholding and credits to be less than;

the smaller of 1. 90% of the tax to be shown on your 2017 tax return, or 2.100% of the tax shown on your 2016 tax return (110% if adjusted gross income exceeds $150,000) TAX PAYMENTS

QUARTERLY PAYMENT DUE DATES

1ST QTR APR 15, 2017 2ND QTR JUN 15, 2017 3RD QTR SEP 15, 2017 4TH QTR JAN 17, 2018 TAX PAYMENTS RESOURCES http://www.irs.gov/pub/irs-pdf/p970.pdf RESOURCES http://www.personalfinance.duke.edu Megan Hutchinson, CPA [email protected] 919-825-4251