MIT and Harvard don’t prepare student for Stipend Tax

It’s always annoyed me how movies and TV shows always have these geniuses who know everything hat exists in the world of knowledge. That can’t be possible.

revenge of the nerds

But they don’t understand love! That’s their curse!

Anyway, the defendant in today’s case sounds like the background story of one of these brainiac movie characters: graduated from MIT with a bachelor’s in Being Awesome (a.k.a. the court case didn’t say), then went on get a Ph.D. in biophysics at Harvard (if it were Hollywood, he’d also have graduated from high school at the age of ten). That’s some cool stuff. Unfortunately, it didn’t prepare him to correctly handle his stipend tax. Or his self employment tax.

While at Harvard, he was awarded a fellowship grant that covered all his tuition and fees, along with a cash stipend. He claimed a portion of the stipend was not taxable, because it went to pay off student loans and other expenses related to his undergraduate and graduate studies. He offered no records to back up that claim.

Fellowship grants, if they are used to cover qualifying education expenses like tuition, books, fees, and supplies, are tax free under Section 117. However, the stipend portion isn’t included in that tax free amount, instead falling under Sec. 61(a), which is the catch-all of “gross income includes all income from whatever source derived.”

So a stipend tax must be paid in full.

He could have gotten the normal deduction for his education expenses and such, but he needed to keep documentation, which is right there in Accounting 101. Either he fabricated how he spent the money, or he didn’t keep a paper trail. And if Hollywood has taught me anything about geniuses, it’s that they’re disorganized, so I’m going with the latter.

Defendant’s second problem is really his dad’s fault (and not in a weird “daddy issues” kind of way). Defendant did some research for his dad’s company, which his dad paid him to do from grant money his dad’s company had received. When the 1099-MISC was issued for the work, it indicated that the the recipient (a.k.a. Defendant) didn’t need to pay payroll taxes on the cash.

Unfortunately, 1099-MISC money only gets around payroll taxes unless it was paid for noncompensatory reasons. And the honorable Tax Court didn’t consider medical research in support of a grant “noncompensatory,” no matter what “new therapies related to cardiovascular disease” are discovered from the work.

Hopefully the dad will at least help foot some of that payroll bill, or it’ll probably be rough Thanksgiving dinner this year.

Side note: if you ever go to tax court, kiss your privacy goodbye. While I’ve left plenty of personal details out here, a quick Google search for TC Summary Opinion 2014-39 will tell you the defendant’s name, his dad’s name, the company he worked for, how much he was paid, etc. It’s crazy.

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