How to Avoid Taxes on Stipends

By: Hunkar Ozyasar

The term "stipend" encompasses a broad range of payments to students and trainees. Scholarships, fellowships, financial assistance grants and many other forms of aid can can be referred to as stipends. However, the purpose of the payment, rather than the term used to refer to it, will determine whether the payment is taxable. When it is, tax management techniques such as deductions and income timing are helpful to minimize the taxes owed on stipends by the student, trainee or intern. Cash and non-cash aid may be taxable.

Negotiate the payment criteria. Stipends are not taxable if they will be used for a research project--even if the project will benefit the recipient by furthering his or her academic career. However, if the payment is provided directly to a student or a trainee and is intended to cover living expenses and other costs, it's taxable. If at all possible, channel any financial benefit you receive into scientific and academic projects with specific research goals as prerequisites for payment. This will make the payment non-taxable.

Receive financial benefits in the form of reduced tuition and fees. While direct payments made to you to cover educational expenses are taxable, an equivalent amount of financial aid in the form of a reduction in tuition usually is not. Try to negotiate to receive the same or comparable levels of financial assistance in the form of a reduction in tuition or other fees you must pay.

Deduct all relevant educational expenses. Expenses that are incurred in the process of advanced professional training are usually tax deductible. These include books, supplies, and equipment expenses--to the extent that they are necessary for your studies. While such expenses are not tax deductible during undergraduate college studies, they usually are if you are getting an advanced degree or if the training program is intended to further your existing career. A doctoral degree, for instance, is considered an advancement of your existing career because you would already be working actively in the field while getting a doctoral or post-doctoral degree.

Time your income to minimize taxes. if you can negotiate the timing of stipend payments, try to get paid during the tax year when your total income is lower. A payment that you can receive during December of this year or next January should be delayed until next year, if your income during the present year will likely be higher compared to the next. Generally, the less your income fluctuates form one year to the next, the less your total tax liability will be as you will avoid crossing into higher income brackets. Tax Deductions for Substitute Teachers

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