Tax Do’s and Don’ts of Reporting a Fellowship Award

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Julian Block
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Congratulations, you are a writer who has been awarded a fellowship to the tune of $10,000. But don’t lose part of the largess by needlessly overpaying your self-employment tax.

While you’re liable for income taxes on the $10,000, you’re not liable for self-employment taxes on the amount. How come? Because, like other writers, you aren’t in the business of receiving fellowships.

Therefore, don’t report the $10,000 award on Form 1040’s Schedule C, along with, say, payments for articles and book royalties. Including the $10,000 in the figure for profit on Schedule SE means you’ll needlessly overpay self-employment tax to the tune of $1,413, enough to cover most of the cost of a ticket to Hamilton.

Report properly. Where should the $10,000 entry appear on a tax return? On Line 21 (other income) on page one of Form 1040. As the source of the income, note “fellowship” in the box to the left of where the amount is entered.

The law doesn’t require the institution awarding the fellowship to issue you a 1099 form for the money. Therefore, it’s important to keep any offer letter and bank-deposit records in the event of an audit.

Maximize deductions. For an in-residence fellowship that requires you to live temporarily away from home, IRS Publication 463 cites basic rules regarding business-related travel, entertainment, gift, and transportation expenses that can be deductible. Ordinary and necessary expenses are 100 percent deductible. That is, so long as the expenses are “reasonable.”

For example, the IRS doesn’t care whether you rent a hotel, motel, furnished apartment, or turn to Airbnb during the fellowship period. Even a two-bedroom apartment qualifies for a full deduction if the second bedroom is used for work. But the IRS might question whether renting a three-bedroom unit is a reasonable expense.

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