PSF stipend: taxable?

[DarksideAllstar]

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For all of you that did a PSF, was your stipend taxed? I am trying to conjure up a theoretical budget (outpatient medicine is a bore) for next year.
Thanks.

 

[b&ierstiefel]

For all of you that did a PSF, was your stipend taxed? I am trying to conjure up a theoretical budget (outpatient medicine is a bore) for next year.
Thanks.

It depends. Is the stipend considered a scholarship/fellowship? Was your income reported to the IRS? And have you filed taxes before? (i.e., does the IRS even know you exist?)

If the answer to the first question is Yes and the answers to the next two questions are No then just wait until residency to start filing.

 

[yaah]

It was taxed. Like a regular job salary. I was employed similarly to a resident, although still considered a student for the purposes of maintaining my position in the med school class.

 

[sohsie]

It depends. Is the stipend considered a scholarship/fellowship? Was your income reported to the IRS? And have you filed taxes before? (i.e., does the IRS even know you exist?)

If the answer to the first question is Yes and the answers to the next two questions are No then just wait until residency to start filing.

While the IRS will probably not hassle you in this case since the income was not reported, that is not technically the right answer. I did a PSF year (actually, PJF year), and researched this topic thoroughly. The accountants who used to do my taxes claimed that since the money was from a fellowship, it wasn't taxable. They referred me to the section of tax law that actually showed that they were not correct. The fellowship money is in fact taxable.

The relevant topic on the IRS website states the following:

Topic 421 - Scholarship and Fellowship Grants

If you receive a scholarship or fellowship grant, all or part of the amounts you receive may be tax–free.

Qualified scholarship and fellowship grants are treated as tax–free amounts if all the following conditions are met:

You are a candidate for a degree at an educational institution that maintains a regular faculty and cirriculum and normally has a regular enrolled body of students in attendance at the place where it carries on its educational activities;
Amounts you receive as a scholarship or fellowship are used for tuition and fees required for enrollment or attendance at the educational institution, or for books, supplies, and equipment required for courses of instruction; and
The amounts received are not a payment for your services.

However, if you receive a scholarship award under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, the amount received is tax free without regard to any services you are obligated to perform.

You must include in gross income amounts used for incidental expenses, such as room and board, travel, and optional equipment, as well as amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant.

If any part of your scholarship or fellowship grant is taxable, you may have to make estimated tax payments. For more information refer to Topic 355 or to Publication 970 , Tax Benefits for Education.

Notice that if you are paid for services rendered (and thats whats happening in these fellowships, as you are paid for your grossing, writeups, calling clinicians, etc.), it is taxable. Also notice that if the money goes to anything beyond tuition and books (ie room and board, personal expenses, etc.), it is taxable. The fact that your institution does not report it does not let you off the hook.

Having said all that, the PSF is NOT subject to FICA taxes. This is a huge break since PSFs generally pay so little and FICA taxes would otherwise represent a much, much larger amount than the income tax you do have to pay.

I confirmed all of this by calling the IRS (twice) and having extensive discussions about this topic. (BTW, did you know that the IRS will answer your questions about taxes and their phone lines are staffed by people who actually know tax law quite thoroughly)

Hope this helps.

 

[b&ierstiefel]

It's good that you posted that, sohsie 👍 I do realize that my initial answer was not technically nor legally correct (as I will go into later below).

I remember thinking through this exact issue 7 years ago when I started MSTP. Our stipend earnings were not reported to the IRS and a good number of us hadn't filed with the IRS prior to entering med school. Again, I am assuming (maybe it's not a correct assumption) that PSF earnings represent fellowship earnings similar to MSTP stipends. But who knows.

Anyways, back then, it was my understanding that filing taxes on stipend earnings was analogous to some sort of Honor System. Our earnings were not reported to the IRS and if we hadn't filed taxes, how would they know we were doing anything wrong? We would, in essence just coast below their radar. Plus, even if they caught onto us, would they pursue a poor medical/graduate student? It would be a waste of their money and resources which would be better spent chasing down big-time tax evaders. This was our thought process when my fellow MSTP classmates were discussing this with the tax advisors here on campus.

It was communicated to us that NOT filing taxes as such would still be associated with finite risk. I ended up filing starting from my first year of med school because a postdoc in a lab where I had done a research rotation had told me that at his grad school, several years back, a bunch of students had been audited and severely fined. This got me all paranoid and I just opted to simply pay my dues to the IRS. Now I'm kicking myself for doing so since one of my classmates did not file for the first few years in MSTP. To my knowledge, he hadn't been audited. Clearly, we were advised that if we chose to NOT pay taxes, we should start filing 3-4 years prior to finishing the MSTP. That way we get into the system and when we start filing as residents, the IRS isn't gonna say, "Waitaminute...this guy is 30 and he's filing for the first time??? Let's do some digging around to see why this is."

Anyways, I went through the whole thought process before and am aware of the tax rules you posted. And I ended up doing the honest thing and starting filing taxes right from the get-go (of course, my classmate tells me that I wussied out ). In the spirit of this post, however, I do retract my initial recommendations to the OP. The OP, to not risk getting fined, santioned, and castrated by the IRS for failing to pay his dues, should just go ahead and file taxes on his PSF earnings.

 

[joedogma]

You DO NOT want to start your carrer with the IRS on your back. File taxes! The stipend is usually small so you will most likely get most, if not all, back in a refund (minus social sec. and medicare...)

 

[DarksideAllstar]

Thanks for all the info. In no way was I not going to pay the taxes (unless I didnt have to). I have been paying taxes since I was 16, might as well add another year of paying onto that.

 

[sohsie]

You DO NOT want to start your carrer with the IRS on your back. File taxes! The stipend is usually small so you will most likely get most, if not all, back in a refund (minus social sec. and medicare...)

The money paid for the PSF fellowship is NOT subject to FICA taxes (ie medicare, social security). It is only subject to income taxes.