December 14, 2017
Just a few weeks ago, I was writing up this budgeting post to see if I could provide tips to other graduate students on how to stretch their stipend to cover their cost of living. The post was published right before the House of Representatives (House) and Senate passed their respective versions of tax reform bills. If you’re like me and haven’t taken a U.S. Government class since high school, a quick simplified refresher: a bill is a legislative proposal (like an idea or draft for a law) and will pass into law after being passed by the Senate and the House of Representatives and then signed by the president. But because the bills are two separate documents about federal tax reform, the House and Senate have to work together to reconcile the differences between the two to present a single final version that has to re-pass the House and Senate and then finally the president.
So what does the Tax Cuts and Jobs Act mean for graduate students? The direct impact comes from the House’s bill, which eliminates Section 117(d)5 of the current tax code, which states: “Gross income shall not include any qualified tuition reduction.” This is the section that says graduate student tuition waivers are not taxable. If this section is eliminated, our waived tuition will now be considered taxable income in addition to our stipend. On the positive side, the Senate’s version of the tax bill does not change this part of the current tax code. However, this discrepancy between the two bills means that the topic of taxable tuition will be discussed and is still a possibility. Curious about how this would affect graduate students at U-M? Keep reading because I’ve done the math for you.
For readers who are not familiar with graduate Ph.D. programs and how they work, here’s why this is such a big deal: Graduate students are important in furthering research in academia, and in some fields, they are the main conductors of research. Part of how schools attract top students to graduate programs is by “waiving” the student’s tuition. Doctoral graduate students don’t pay for their tuition out of pocket; instead, the graduate program or dissertation mentor’s funding covers the student’s tuition. For example, I am a Ph.D. student in immunology in the Program in Biomedical Sciences (PIBS) at U-M. During my first year, PIBS paid my tuition. For my second year, the immunology graduate program paid my tuition through a training grant (funded by the National Institutes of Health), and for my third and fourth years, the dissertation advisor whose lab I joined paid my tuition with her grant funds, because I’m currently not on a training grant. The tuition money passes from the department, program, or grant directly to the university and never goes through my personal bank account. In addition to waived tuition, many graduate students receive an annual stipend to cover living expenses. Currently, tuition waivers are not taxed; only our stipends are taxed.
So what are the specific numbers of the effects of the Tax Cuts and Jobs Act? The main example in this post will be for an out-of-state PIBS student.
At U-M and most U.S. universities, graduate student tuition varies based on the graduate student’s status within their program as well as their residency status. “Pre-candidate” students are usually first- and second-year students (candidacy exams usually occur at the end of the student’s second year) and “candidate” students are third year students and beyond. Example: the PIBS program at U-M is within the medical school. Out-of-state pre-candidate graduate (Rackham) students in the medical school have a combined fall and winter semester tuition of $45,248; the tuition for an out-of-state candidate student is $12,170. No spring/summer tuition is charged. This year, PIBS students are paid an annual stipend of $30,600. Currently, this $30,600 is considered gross income and is the starting point for income tax calculations. (Fun fact: Graduate student stipends were not considered taxable income until the Tax Reform Act of 1986, which was passed during the Reagan administration.)
Based on current 2017 income tax laws (which applies to both pre-candidate and candidate PIBS students):
After subtracting the standard deduction ($6,350) and personal exemption ($4,050) from the gross income (aka stipend amount) of $30,600, taxable income becomes $20,200 which breaks down to the following:
- First income bracket: $9,325 * 10% = $932.50
- Second income bracket: ($20,200 – $9,325) * 15% = $1631.25
This results in a federal income tax for 2017 of $2,563.75. After accounting for Michigan state income tax ($1,130.50, math not shown), annual take home is $26,905 which results in a monthly amount of $2,242 to live on. This is the starting amount to budget for rent, utilities, food, etc.
However, based on the House’s proposed tax bill (as an PIBS out-of-state pre-candidate):
Assuming the same stipend amount, the starting gross income becomes $75,848 (tuition + stipend). After subtracting the new proposed standard deduction ($12,000), taxable income is $63,848; personal exemptions are eliminated in the House’s bill.
The federal income tax would be:
- New first income bracket: $45,000 * 12% = $5,400
- New second income bracket: $18,848 * 25% = $4,712
This results in a federal income tax of $10,112 for pre-candidate PIBS students. That’s an annual increase of about $7,548 (almost a 300 percent increase) in federal income tax. This translates to a monthly take home of $1,612.13 which is a monthly decrease in pay of $629. For perspective, during my first two years as a graduate student, my monthly rent was $600.
Based on the House’s proposed act (as a PIBS candidate):
As a candidate, the tuition is $12,170; the medical school tuition after candidacy is the same for in-state and out-of-state graduate students. Gross income becomes $42,770 (tuition + stipend). After subtracting the new proposed standard deduction ($12,000), taxable income becomes $30,770.
The federal income tax as a PIBS candidate student would now be: $30,670 * 12% = $3,692.40. That’s “only” an annual increase of about $1,128 compared to current tax laws, which translates to a monthly decrease in pay of $94. But this is after paying $20,224 in taxes during the first two years as a pre-candidate.
See the table with my calculations of the effects of the proposed tax bill on a U-M PIBS Ph.D. student here. For comparison, I’ve also included another example of a U-M Ph.D. program with a higher pre-candidate tuition but an overall lower stipend, showing how the Tax Cuts and Jobs Act would hit these students even harder.
For those who want to calculate their increase in taxes under the House’s proposed bill, graduate students at the University of California, Berkeley created a tax calculator for graduate students.
I have to emphasize that for me (and hopefully many other graduate students), the issue isn’t just that we’re paying more taxes—I’m happy to do so if my taxes are increasing in a reasonable and livable level and are contributing to federal services—but based on both the House’s and Senate’s proposed tax bills, our taxes could increase three-fold, but corporations will get a tax cut from 35 percent to 20 percent. Additionally, both tax bill versions raise the estate tax exemption from around $5.5 million to $11 million (think of the exemption as the amount of someone’s inheritance that is not taxed—inheritance amounts past the exemption are currently taxed at 40 percent) where the House’s version plans to completely repeal the estate tax by 2024, benefitting only the wealthy. The Senate’s bill also removes the Affordable Care Act mandate which could lead to a long term impact of an estimated 13 million people without health insurance. The Congressional Budget Office, a nonpartisan agency, estimates that the deficit will increase by $1.437 trillion or $1.414 trillion over 10 years due to the changes in the House’s and Senate’s tax bills, respectively. In 10 years, like many of my peers, I will be just a few years into my career, and a trillion-dollar deficit increase is not something we want to inherit.
The House’s bill also targets other education-related tax breaks. Many graduate students already have debt from student loans taken out for their undergraduate studies. The student loan interest deduction is eliminated in the House’s tax plan (but not changed in the Senate’s version). The House’s plan also effectively repeals the Lifetime Learning Credit.
Overall, taxes will become an overwhelming financial burden, particularly for incoming students, which might turn prospective students away from pursuing higher education. Graduate students often lead undergraduate discussion classes, grade assignments, and hold office hours. Additionally, fewer graduate students will result in a shortage of trained researchers in the future. All together, research of all fields could drastically slow in the United States, with many students either not pursuing higher education or pursuing higher education in other countries.
In addition, graduate school is already a difficult road. The median time to get a science Ph.D. is around eight years which lands most graduating students in their 30s. It’s not uncommon for graduate students to work 60+ hours a week, working on weekends and through holidays. In addition, our stipends are often paid via grants or fellowships. In many cases, as a result, we don’t receive W-2s, and our stipend, while taxed as income, is not considered “earned income” for IRA contributions. Additionally, because we’re not considered “employees,” we don’t get 401(k)s. Many of us will only be able to start saving for retirement once we get jobs after we graduate, when we’re in our 30s.
For the vast majority of early and prospective graduate students, graduate school will no longer be financially feasible if our tuition becomes taxable income in the final version of the Tax Cuts and Jobs Act. Many of us are young adults who are just getting by. We chose to go to graduate school despite knowing all the negatives it entails, in order to pursue our passions and contribute to research that might one day improve society.
If the House and Senate decide to tax tuition waivers and it passes into law, universities will need to re-evaluate how “tuition waivers” are defined and work. Some have suggested changing the status of our tuition to scholarships which are not taxed. Others have suggested increasing our stipends to help cover tax costs but that would put additional financial burdens on graduate programs and dissertation advisors who cover our stipends in addition to student tuitions. The system would have to do an overhaul.
The House-Senate conference committee is moving quickly to settle differences between the two tax bill versions. The committee is aiming to unveil the final version tomorrow with the expectation that the House and Senate will vote on it early next week. If you think this is an issue that will impact you or someone you know, or if you think this is unfair in general, make your voice count and heard, especially for those who can’t (like international students who pay taxes but can’t vote in the United States)! Please call and/or email your Congressional representatives to fight for graduate students and higher education.
Look up contact information for your Senators and Representatives here. In particular, the list of conference committee members can be found here. Here and here are two helpful links about what to say/what information to provide. Rackham also linked this website which helps you draft an email to your representatives about this issue.
*** Note: I’m a biomedical Ph.D. graduate student with no tax expertise. I’ve included relevant links in the hope that it gives you a start in doing your own research!
The views expressed in this post are the author’s and do not necessarily reflect those of Rackham Graduate School or the University of Michigan.