Michigan Future Educators Stipend

[djackowi]

Please assist:

My daughter is filing as a single taxpayer.  She completed her college degree (education program) by student teaching in the fall of 2022, finishing in December 2022.  During that fall, the state of Michigan was working out legislation to provide student teachers with a stipend to assist with college expenses.  Before 2022 ended, her college tuition bills were paid off, and her total college federal loan indebtedness was a little under $10,000.

She was awarded her stipend during the early part of 2023 - having already graduated - and that stipend of $9,600 was immediately used to pay off the entirety of her college debt.  

So...walking through TurboTax, the question is asked: Does the stipend involve work that's like your main job?  I obviously answered "yes," since student teaching, and now long-term substitute teaching, are identical.  The hit on her taxes was nearly $2,400.  

But...if I answer "no," - that it does not involve work like her main job - because she received the stipend AFTER student teaching AND in a different tax year, I am then asked: Did the stipend involve an intent to earn money?  Well, was accepting it to pay federal loans an intent to earn?  If I then say no to this, the tax liability is reduced to $1,032.

Please help.  I am truly baffled.  

Thank you very much for your help and insight.

Dave

[KrisD15]

I'm guessing this was reported on 1099-MISC. 

The reason for the difference in tax is that if it is like her work, it is taxed as Self-Employment and she pays Self-Employment (FICA / Social Security) tax.

If it is not like her work, she only pays INCOME tax. 

The fact that she used it to pay off school loans has no bearing on the type of income and/or tax unless it was granted with the stipulation that it be used to pay off student loans (which it wasn't) 

The real question is, was this income payment for services or something else? 

I understand this was for services she provided in 2022, but the payment was made in 2023. 

Did the student receive a 2022 W-2 for services she performed in 2022?  

If yes, I would ASSUME that this 9,600 would have been included in Box 1 on her W-2  (if it had been finalized in 2022) and therefore WOULD be subject to Self-Employment tax. 

ON THE OTHERHAND if this is considered a "Scholarship / Grant" (and the State of Michigan seems to refer to it this way), you could handle it like a school grant and pay only Income tax by answering "No" to the questions about work. 

If this was reported on a 1098-T, you would enter the 1098-T and the income would flow properly to Schedule 1, but it doesn't sound like this was the form they used. 

You'll need to contact the school where she taught to ask how they are reporting the income for active student teachers, as W-2 income (you'd answer YES to work and FICA tax charged) or 1099-MISC (you could answer NO to work and FICA tax not charged) 

According to the IRS:

“A scholarship or fellowship grant is generally taxable compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. However, for tax years beginning after 2019, certain non-tuition fellowship and stipend payments not reported to you on Form W-2 are treated as taxable compensation for IRA purposes. These include amounts paid to you to aid you in the pursuit of graduate or postdoctoral study and included in your gross income under the rules discussed in this chapter. Taxable amounts not reported to you on Form W-2 are generally included in gross income as discussed later under Reporting Scholarships and Fellowship Grants.”

“Include any taxable amount not reported to you in box 1 of Form W-2 on Schedule 1 (Form 1040), line 8r.”

[djackowi]

Thank you SO much, KrisD15, for your very thorough and clear response.  I truly appreciate it.  Your explanations were very helpful here.

Dave