What counts as taxable income for a grad student with scholarships and assistance?

So I have this close friend who's in graduate school right now and basically has zero earned income. I'm thinking it might be smart for them to convert some of their old 401k into a Roth IRA to actually use some of the standard deduction that's just going to waste otherwise. The thing is, I'm not sure what actually counts as taxable income in their situation. Their main support comes from scholarships - but are those taxable? Also, they get some food stamps to help make ends meet - do those count as income for tax purposes? Honestly, I'm trying to help them make the most of their standard deduction without accidentally going over it because we missed something that's actually taxable. Any other types of support or benefits I should be considering as potentially taxable income? Just want to make sure we don't mess up their taxes while trying to be clever with this Roth conversion strategy.

0 coins

18 comments

Daniel Rogers

•8M

You're being a great friend by helping plan this tax strategy! Here's what you should know: Scholarships can be partially taxable. The part that covers tuition, fees, books, and required supplies is NOT taxable. However, any portion covering room, board, or providing a stipend for living expenses IS taxable income. Your friend needs to check what their scholarship documents specify. Food stamps (SNAP benefits) are NOT taxable income, so don't worry about those at all. Other potential taxable income sources to consider: any part-time work (even small amounts), interest from bank accounts, any investments generating dividends or capital gains, unemployment benefits if received, and certain education benefits beyond qualified expenses. For the 401k to Roth conversion - that's a smart strategy for someone in a low tax bracket! The converted amount will count as taxable income in the year of conversion, so you'll need to calculate carefully to stay under the standard deduction threshold.

0 coins

Daniel Rogers

•8M

The teaching assistantship portion is generally considered earned income, not scholarship money. It should be reported as wages on a W-2 form from the university. This is important because earned income might qualify your friend for other tax benefits like the Earned Income Credit, depending on their total income and status. If your friend receives a stipend for teaching that's not clearly defined as wages, they should check with the university's payroll or financial aid office to clarify how it's being reported to the IRS. Some universities structure these payments differently.

0 coins

Ella Russell

•8M

I went through something similar when helping my sister figure out her grad school taxes. Check out this tool I found called taxr.ai (https://taxr.ai) - it was actually super helpful for figuring out what's taxable income in complicated situations like scholarships. I was confused about whether her research stipend was taxable since it wasn't clearly labeled on her documents, and this tool helped identify exactly which portions counted as taxable. You upload the scholarship documents and it breaks everything down for you. Saved us a ton of guesswork about what's taxable and what's not.

0 coins

Ella Russell

•8M

For university housing benefits like RA positions, the tool analyzes whether the housing is provided as a condition of employment (which might not be taxable) or as compensation (which would be taxable). It looks at the specific terms in your housing agreement and employment documents to make that determination. As for accuracy, I was skeptical too at first. The tool uses updated IRS regulations and tax code specifically for education benefits. It's not just making guesses - it references the actual tax rules for different types of educational assistance. I double-checked some of its findings with a tax professional and they confirmed it was correct for our situation.

0 coins

Gavin King

•8M

Just wanted to follow up - I actually tried taxr.ai after my skeptical comment. Uploaded my cousin's complicated fellowship letter that had research funding, travel grants, and a living stipend all bundled together. The tool correctly identified that the research and educational components weren't taxable but the living stipend portion was. It even cited the relevant IRS publications! Saved us from a major headache since we were about to report the whole thing as non-taxable. My cousin used the analysis to properly report just the taxable portion and it made her Roth conversion strategy way more precise. Definitely worth checking out if you're dealing with weird scholarship/stipend situations.

0 coins

Nathan Kim

•8M

If your friend has been trying to contact the IRS to get clarity on what's taxable income for their specific scholarship situation, good luck with that! I spent WEEKS trying to get through on the phone about a similar question. Eventually discovered this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 15 minutes instead of the usual endless hold times. They have a demo video of how it works here: https://youtu.be/_kiP6q8DX5c I was able to get official clarification about how my research grant should be reported directly from the IRS. The agent walked me through exactly which parts were taxable and which weren't, and gave me the specific publication numbers to reference if I got audited. Honestly saved me so much stress since the university financial aid office and my tax software were giving me conflicting information.

0 coins

Nathan Kim

•8M

It uses an automated system that navigates the IRS phone tree and waits on hold for you. When an actual agent picks up, you get a call connecting you directly to them. It's basically doing the waiting part for you so you don't have to sit listening to that terrible hold music for hours. I was super skeptical too! I've spent literal days of my life on hold with the IRS over the years. The difference is that their system can manage hundreds of calls simultaneously, so they have a much better chance of getting through than any individual person calling. It's not magic - just efficiency at scale.

0 coins

Lucas Turner

•8M

OK I need to eat my words here. After posting that skeptical comment I decided to try Claimyr because I was desperate to figure out if my teaching fellowship was taxable income. Got a call back in about 45 minutes and talked to an actual IRS agent who explained exactly how to report my specific situation. The agent confirmed that the teaching portion was earned income (needed to be reported on line 1 of my 1040) while the research portion wasn't taxable since it directly related to my degree requirements. This changed my whole tax strategy because I didn't realize I had enough earned income to qualify for retirement contributions. Definitely worth it for complex situations where you need an official answer.

0 coins

Kai Rivera

•8M

The health insurance subsidy itself (Premium Tax Credit) isn't counted as taxable income. However, the amount of subsidy your friend qualifies for is determined by their income - so the Roth conversion could potentially increase their income enough to reduce their subsidy amount. If they're near a subsidy cliff (where a small income increase results in a large subsidy decrease), they'll want to calculate very carefully. Converting too much might push them over a threshold where they lose more in health insurance subsidies than they gain in tax benefits from the Roth conversion.

0 coins