Reply to PhD fellowships and 529s: tax and spending advice

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[quote=Anonymous]DC is a new graduate student this year with a fellowship that covers tuition/fees plus a little more than a $30k stipend with no teaching requirement. The University does not report the stipend to the IRS or withhold any taxes. Legally/technically, students are supposed to pay income taxes, but the IRS does not know about the income. (https://www.irs.gov/taxtopics/tc421). So some/many students choose not to file or pay taxes on the stipend. DC chooses to report and pay taxes. We are giving her a gift equal to the taxes she's paying. When DC starts teaching, the university will issue a W-2 because the payment becomes wages and paying/filing taxes becomes unavoidable.

We closed DC's 529 when she graduated college. But we could have chosen to keep contributing in to it to get the state tax deduction and withdraw from it to send to her for rent. You only need to keep receipts as evidence of qualified education expenses. On the retirement account side, she has enough earned income for us to put $6000 in a Roth IRA in her name. [/quote]

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