Tax Proposal Would Make Getting a PhD in the US Very Expensive (Multiple Updates)


The tax plan introduced by Republicans in the U.S. Congress last week would have drastic effects on graduate education in the United States, according to reports at The Chronicle of Higher Education and Inside Higher Ed.

[UPDATE: The rest of the original post is below, however, as commenters Genevieve and Michael E. Lopez point out (and as I acknowledge in a comment), is based on an error. (Though see the green text below for why, though I was mistaken, the bottom line about the tuition waivers being taxed under the proposal may nonetheless be correct.)

The section of the proposal from which I quoted appears to be about how to calculate one’s income for determining eligibility for an education tax credit (I believe it’s the “Lifetime Learning Credit” in the existing code and the “American Opportunity Tax Credit” in the proposal), and not about determining one’s taxable income. 

I apologize for the error.

As I mentioned in the OP, a few readers pointed me towards sources on this, including this piece in The Chronicle of Higher Education, which says, “The plan would also tax the tuition waivers that many graduate students receive when they work as teaching assistants or researchers,” and also this widely shared Twitter thread from a professor at UT Austin, which says “GOP tax bill would tax tuition wavers for grad students.” I thought I should fact-check these claims, and so I searched through to the tax code and the Republican proposal to see what they said about tuition. I found language that appeared to explain these claims, and wrote up the post. This was a mistake: tax law is complicated and can be written in a confusing manner. Though I included disclaimers in my original post, I should have checked with an expert. Lesson learned.

The question remains as to whether there is some other part of the proposal that explains the claims about tuition waivers being taxed. If there is, I did not find it, but I also did not spend much more time today looking. If you find anything relevant, please share it in the comments. Thank you.]

[UPDATE 2: Commenters believe that the relevant bit is “striking subsection (d) of section 117,” listed on p. 96 of the proposal. Here is what 117(d) currently says:

(d) Qualified tuition reduction

(1) In general
Gross income shall not include any qualified tuition reduction.
(2) Qualified tuition reduction
For purposes of this subsection, the term “qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in section 170(b)(1)(A)(ii)) of—
(A) such employee, or
(B) any person treated as an employee (or whose use is treated as an employee use) under the rules of section 132(h).
(3) Reduction must not discriminate in favor of highly compensated, etc.
Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of section 414(q)). For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by section 414(q).
((4) Repealed. Pub. L. 101–140, title II, § 203(a)(1), (2), Nov. 8, 1989103 Stat. 830)
(5) Special rules for teaching and research assistants
In the case of the education of an individual who is a graduate student at an educational organization described in section 170(b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, paragraph (2) shall be applied as if it did not contain the phrase “(below the graduate level)”.

 

Would this have the effect of counting tuition waivers as taxable income? Note that 117(a) and 117(b) would apparently remain in place. 117(a) and (b) say: 

 

(a) General rule
Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii).

(b) Qualified scholarship
For purposes of this section—
(1) In general
The term “qualified scholarship” means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.

(2) Qualified tuition and related expenses
For purposes of paragraph (1), the term “qualified tuition and related expenses” means—
(A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and
(B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization.

The worry, I believe, arises from 117(c), which excludes from the amount of “qualified scholarships” that are not to be counted as taxable income “that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction.” However, while stipends seem to fall under “that portion,” it is not clear whether tuition waivers do. For an argument that they do, see this comment by “C”.

Advice from experts welcome.]

The plan has many parts, but of particular interest to academics may be the clause that would require graduate students to pay taxes on the value of the tuition waivers they receive.

In philosophy, as with many other fields, most PhD students do not pay tuition—rather, it is paid, ultimately, by the university itself (in various ways, depending on scholarships, the budgeting structure, etc.). This amount varies from school to school, from around $14,000 per year at public universities like the University of South Carolina or the University of Colorado, Boulder, to around $48,000 at Georgetown University or Princeton University.

In addition to this benefit, most such students also receive a modest stipend, usually in exchange for being a teaching assistant, instructor, or research assistant. Though there are some exceptions, a PhD student’s take home pay is typically small, with students earning just enough to get by.

Currently, graduate students do not pay taxes on the value of the tuition waiver they receive from their universities. That amount counts as “qualified tuition and related expenses” and as such is not treated as part of their taxable income. According to Title 26Subtitle AChapter 1Subchapter BPart III§ 117 of the U.S. Code: “(a) Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree” at most universities, and “(b.1) the term ‘qualified scholarship’ means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.”

My understanding—please correct me if I’m wrong**, folks—is that the new proposal removes “qualified scholarships” from the “qualified tuition and related expenses” graduate students were previously not taxed on:

The amount of qualified tuition and related expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced (before the application of subsection (c)) by the sum of any amounts paid for the benefit of such individual which are allocable to such period as— ‘‘(A) a qualified scholarship which is excludable from gross income under section 117…

That’s from p.84 of the proposal, under “Subtitle C—Simplification and Reform of Education Incentives”, (sec.25A)(f)(2). (My apologies if this isn’t quite right; I’m not used to reading tax bills.)

If that’s correct, then a graduate student who receives a $20,000 stipend for being a teaching assistant, plus a $40,000 tuition waiver, will have to pay taxes on an income of $60,000.

[* I’m wrong. See the red update above.] [*But nonetheless the tuition waivers may count as taxable income. See the green update, above.] 

That leaves aside other credits and deductions, but note that even if the graduate student is receiving benefits that count as “qualified tuition and related expenses” under the new proposal, any tax credits for such expenses are “allowed only for first 5 years of postsecondary education,” with significant reductions in the fifth year, which means it will be unavailable for most graduate students for most of their graduate education (see p. 80 — Sec.25A(d)).

Suggestions about what to do in regards to this proposal are most welcome.

(Thanks to a few readers who suggested posting about this, one of whom recommended this Twitter thread from Claus Wilke (UT Austin) and another who added, “I remember that when the GOP took over congress in 1995 they proposed this and backtracked pretty quickly, but I think academics should pay attention this time.”)

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