@SusanY1 wrote:
It is correct that for the purposes of contributing to an IRA, the scholarships and fellowships must be reported in Box 1 of a W-2, as outlined in the definition of compensation in Publication 590-A as well as in Publication 970.
I'm not blaming turbotax for following the publication instead of the law, but both Turbotax and the IRS are wrong on the law.
1.
As I'm sure you know, Congress makes the law. That's here,
https://www.law.cornell.edu/uscode/text/26/219
"The term “compensation” shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study."
It doesn't make any difference between amounts paid for teaching assistants and for grants. (In fact, teaching assistantships, unless required for completion of a degree program, are already required to be reported as earned income, even if the bulk of the student's income is otherwise unearned income as a grant.)
2.
After Congress makes the law, the Treasury Department must implement the law by crafting a regulation and publishing it in the Federal Register for a 90 day comment period before it becomes final. Here is the regulation.
https://www.law.cornell.edu/cfr/text/26/1.219-1
It does not include stipends in the definition of compensation, but this page of the CFR has not been updated since 1980.
3.
Then after the Treasury Department finalizes the regulation, IRS employees write publications to explain the regulations in simple language to taxpayers.
If the publication contradicts the regulation, the regulation wins. If the regulation contradicts the law, the law wins. But here, the IRS skipped the crucial step of actually writing the regulation--there is no regulation stating that the stipend must be reported on a W-2, because the regulation was never updated. The IRS simply claimed an authority it does not have. It skipped a required step.
The IRS can only choose how to interpret the law within the scope of the written law itself. An unambiguous law does not give scope for alternate definitions or interpretations. Is there any way you could really interpret "aid in the pursuit of study" to NOT mean a grant?
And by the way, the W-2 rule is ineffective on its face. When I was a post-doc, I was paid on a W-2, but I was still exempt from employment taxes (boxes 3-6 were blank). How is that different from getting a 1099 or no tax document at all?
What does the W-2 rule even mean, if it were real? Does it mean earned income subject to employment taxes, or would it include unearned income that was exempt from employment taxes due to one of the student rules? How can it mean one or the other if it doesn't say which it means?
That's why I suggest contacting representatives and senators who voted for the law, especially those on the tax and finance committees, and get them to push the IRS to issue the regulation that conforms to the law, or at least post it to the FR for comment.
Again, I don't blame turbotax for following the IRS flawed process, but it is a flawed process, and the current W-2 statement in publication 590A has no foundation. The publication can only stand on the regulation and the IRS ignored that step.
