Distinguishing Between Earned Income & Investment Income

What is your earned income

Beyond the idealism of becoming your own boss and chasing down the American dream of business ownership, every entrepreneur gets in the game for one reason: to make money. Once you determine how to profit from your business, you face a different challenge from the Internal Revenue Service: determining what portion of your income is earned income and what portion is investment income. For small business owners, knowing the types of income is essential when filing a tax return.

Earned income is easy to understand. It’s any revenue you earned through your own efforts or through the direct involvement of your business. As a business owner, any guaranteed payment you make to yourself regardless of your business’ performance is considered earned income and should be treated and taxed as income. This includes income you receive from royalties on creative works you or another party sells. As a general rule, any time you actively perform any sort of work in order to receive payment, the income you or your business generates is earned income.

Investment income is generated by your involvement in a passive activity, a business venture or investment for which you provide funding and receive a return on your investment. For a business, this may be an increase in the value of stock holdings, selling real estate or another capital asset – not merchandise -- for more than its purchase price, or interest earned on an interest-bearing account. For business owners, this can be distribution payments from an LLC, payments that hinge upon a company’s performance, as classified by state and local law.

Businesses and business owners pay income taxes on their total amount of earned income. This figure may be adjusted considerably, with deductions and other write-offs reducing the taxable amount. As with individuals, tax rates vary by earnings for companies, but the average corporate tax rate was about 35 percent in 2011, according to CNN. Tax rates on earned income are almost always more than those applied to investment income.

The Internal Revenue Service doesn’t subject investment income to the same income tax as earned income. Investment income is taxed on a capital gains basis, with only income from investments serving as the tax base. Losses from failed investments may be claimed to offset gains, but investment income is largely otherwise unaffected by deductions. Gains tax rates vary by how long a company or individual holds the asset before it sells it for a profit.

Don’t confuse investment income from unearned revenue. Unearned revenue is a liability in accounting that represents money you collected but have yet to provide the good or service to earn. For example, if a customer pays three months of a gym membership in a single payment, the prepaid two months’ fees are listed as unearned income on the month’s ledger, then moved to earned revenue as they’re applied against the customer’s membership.

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.


What is your earned income

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As a self-employed person, you are responsible for taking out insurance for yourself. Make sure the sum is accurate. Then your pension will be accurate too. As will the rest of your social security.

Your insurance contribution is based on your earned income under the Self-Employed Persons’ Pensions Act (YEL). It is the sum that you could pay as an annual salary to someone doing the same work. You are the best judge of what that salary could be. That is why you must estimate your earned income yourself based on the earned income instructions given by the Finnish Centre for Pensions (the instructions are available in Finnish and Swedish). After receiving your estimate, we will confirm your earned income. If you are a full-time self-employed person we do, however, recommend that you set your earned income at a minimum of EUR 20,000–30,000. This will guarantee you sufficient pension and social security.

The most important aspect of earned income is that it is based on the value of your work input. However, earned income cannot be just any sum: it has a lower and an upper limit. Both change annually. If your earned income is at least equal to the lower YEL income limit, you have the right and the obligation to take out YEL insurance (PDF). In 2017, the lower limit for YEL income is EUR 7,645.25 (in 2016 EUR 7,557.18) and the upper limit EUR 173,625.00 (in 2016 EUR 171,625.00) per year.

Your earned income affects your entire life

Your earned income has an impact on two things: your pension and your other social security benefits.

The larger your earned income, the larger your pension. Your earned income also determines your YEL insurance contributions. Each and every one of them makes your pension grow.

YEL insurance brings you security for your entire life – and beyond. If you lose your ability to work or the provider of your family, YEL insurance will help. It also enables you to reduce your work input and retire on partial old age pension. The table shows you how your earned income affects your life and that of your family.


Frequently Asked Questions: Earned Income Tax Credit

Updated January 2015 | Comments: 0

Q: What is the earned income tax credit, and how do I know if I qualify?

A: The earned income tax credit (EITC) is a refundable credit. (A refundable credit is a tax credit that you may use to generate a refund even if you have no tax liability.) The EITC is available to certain individuals and families who have low to moderate levels of earned income (from wages, salaries, tips, bonuses and/or net earnings from self-employment) and are taking care of at least one child and up to three qualified children. In certain cases, a taxpayer with low earned income and no children may also qualify.

Q: Who is eligible for the earned income tax credit when both a child and a grandchild live with the grandparents of the grandchild?

A: A qualifying child for the earned income tax credit (EITC) must meet three tests: age, relationship and residency. Your son or daughter or lineal descendant of your son or daughter passes the first two tests if he/she is either under age 19 or under age 24 and a full-time student. The qualifying child must also reside with you in your home for more than six months of the year. Temporary absences for illness or school are OK.

Q: Do I have to include the child support payments and alimony I receive in income when I compute the earned income tax credit?

A: Child support payments and alimony are not included as earned income, nor are they considered investment income, for purposes of eligibility for the earned income tax credit (EITC). Child support payments are also not included in adjusted gross income. However, alimony payments are included in adjusted gross income and will affect the amount of EITC you receive.

Q: Last tax season, someone claimed my dependents, and I did not send in information to prove I should claim them. Would this affect me getting the earned income credit this year?

A: No. Your eligibility for the earned income tax credit (EITC) for any given year is based on the set of facts for that particular.year. If you have a qualifying child, your earnings and adjusted gross income are within the requisite limits, and everyone has a Social Security number, you would qualify for the EITC regardless of how you filed in a prior year.

Through the AARP Foundation Tax-Aide program, AARP Foundation is providing online tax counseling as a public service, and cannot guarantee the accuracy of the information provided. Your taxes are your responsibility. You are solely responsible for what you do in your own tax situation.

The AARP Foundation Tax-Aide Program is a volunteer-run, free tax-preparation and assistance service offered to low- and middle-income taxpayers with special attention to those age 60 and older. Our volunteers are trained and IRS-certified to understand individual federal-tax issues. Our volunteers provide tax assistance as a public service and cannot guarantee the accuracy of the information provided.


More Americans Are Earning More Income – What Now?

September 25, 2016 by Diana

What is your earned incomeDid you know that majority of Americans are earning more income compared to 5 years ago? This is according to the data revealed by Gallup.com . When asked about their current financial situation, 68% of the respondents said that they are earning more compared to 5 years ago. Only 11% said that they earned the same amount while 20% said they earned less.

This is actually great news for a lot of Americans. The cost of living continues to rise and a higher income would mean more money to spend for everyday living expenses. It would mean more chances of improving the current financial position.

Then again, you need to ask yourself – what happens next? Now that you are earning more income, what should your next steps be?

While the decision to spend your salary is entirely up to you, this should never be done lightly. To maximize the benefits of earning more income, you have to plan how you will use it. You should not be quick to increase your spending. You have to determine what areas in your financial life will benefit the most from this increase in income .

3 ways you can use your extra income wisely

The truth is, there is no right or wrong when it comes to spending your salary. As long as the spending stays within your limit and not into debt, then it does not matter where you will put the extra money. But if you want to get tips on how you can be wise about any raise in your salary, here are three smart financial moves for your extra income.

Build up your emergency fund.

There is no question about it – you cannot live without an emergency fund. If you want your finances to be strong and secure, this is a must. This is the money that you will use in case of an unexpected expense. That means an expense that you did not plan and thus is not included in your budget. This is your reserve fund for emergency expenses like a busted transmission or a trip to the ER.

Most of the time, this is what puts people in the red in their finances. But if you are prepared for unexpected expenses, you do not have to worry about the future. You know that you have the money to spend to fix your car or your house. You do not have to think twice about getting medical help because you know that you have put aside some money to help you pay for it. As your emergency fund grows, the more you feel secure with the knowledge that you have the ability to face an unexpected financial problem which might come your way. These do not come announced and more often than not, catch people off-guard.

The second way that you can be smart about earning more income is to use to pay off your debt. To be specific – your high-interest debts. According to the data from Fool.com , the average household in America owes $90,000 in debt. This includes mortgages, credit cards, car loans, student loans, etc. Take note that this amount considers all households – including those who do not have any debt. If you only include the American households who are in debt, the average goes up to $130,000. The data also revealed that this amount of debt costs the average household $6,600 in interest. That is the amount of money that you pay for using credit.

Instead of using it to grow your finances, it only makes your creditors and lenders richer. This is why any extra income that you will make should go to your debt payments. You will not only get out of debt faster, you can also save a lot of money in terms of interest.

Invest your money.

Finally, you should seriously think about investing your money. Make your income work hard for you. This is possible through investments. Learn about the power of compound interest. As you put your money in any type of investment, you are forcing it to earn interest which you can use to increase your net worth. Most people seem to understand this concept as CNBC.com shares that about 90% of consumers would intentionally save or invest a part of their money. At least, this is what they plan to do if they were to get their hands on windfall money. That is comforting to know because it shows that American consumers are smarter when it comes to their finances.

What not to do with a higher income

If there is a list of what you should do after earning more income, you can bet that there is a list of what you should not do. Here are two things that you should think twice before you do.

Immediate lifestyle upgrade.

Lifestyle inflation is one of the more common financial pitfalls consumers tend to make as soon as they start earning more income. Let us be clear: there is nothing wrong about wanting to upgrade your lifestyle. After all, this is the reason why we are working so hard every day. However, you need to be cautious about it. Do not immediately buy a new house thinking that you can afford the monthly mortgage of a bigger property. You should not be quick to buy a new car – especially if you will borrow money to buy it. You need to consider carefully the expenses that would benefit from your income increase before you actually proceed with it.

You should also be cautious of buying more items. The truth is, it is okay to give yourself a reward. If you think that you deserve that new pair of shoes or a new designer bag – then go ahead. But do not make a habit out of it. Otherwise, you might end up overspending . Before you buy anything, think about what that product would mean to you after a year or so. If you want a reward, a trip for the family or a day at the spa is probably more preferable than just accumulating stuff. This is especially true if you only want to buy these things so you can appear more affluent. You do not have to prove anything to anyone. Make smarter choices about what you will purchase after earning more income.

These two are not really that bad but they have to be done in moderation. And before you think about them, make sure you consider your emergency fund, debts, and investment options first. Once the first three are met, then you can consider a modest lifestyle upgrade or a well-deserved reward.

Common questions about earning income

Question: How do I start earning income online?

Answer: There are various options to earn online – it really depends on what you can do. Some people earn extra money by setting up online shops. Other people earn through freelancing. Figure out what you want to first before you decide so you can narrow your options.

Question: How do I start earning income without a job?

Answer: It helps to look at your strengths and go from there. If you are good at baking, you can bake batches of cookies or cakes to sell. If you are good at arts and crafts, you can create products to sell online. In case you lose your job and you need to earn money, look into your habits. It can be a simple gardening job or a babysitting job.

Question: What are my options to earning income at home?

Answer: You can choose to earn through online jobs or an online store. You can also choose to sell products that you can create at home (e.g. baking or arts and crafts). It is possible for you to set up a business from your own house.

Question: How can I start earning income from a hobby?

Answer: First of all, you need to check if there is a market for any product or service that will come out of your hobby. Once there is a market, you need to figure out what would make them want to avail of what you offer. Then you can package your hobby to increase the chances of profiting from it.

Question: Is it possible to earn income during retirement?

Answer: Yes it is. There are special jobs for seniors that take into consideration your age and physical abilities. There are also companies who can hire you for consultation purposes – if you wish to continue working.


Earned Income: The Bane of the Graduate Student’s Roth IRA

This is my contribution to The Roth IRA Movement started by Jeff Rose at Good Financial Cents. The post will briefly touch on the advantages of the Roth IRA account but will focus on how graduate students can determine whether or not they have earned income (now: taxable compensation). For more posts with greater detail on various aspects of the Roth IRA, please visit the Movement’s page. Also, I am not a CPA or financial advisor, so please do your own research and consult with a professional!

Having, I’m sure, motivated you that saving for retirement while in graduate school is both beneficial and necessary, I’ll return to the recommendation I made at the end of the second post – the Roth IRA. First I’ll tell you why the Roth IRA is a great choice and then I’ll show you what I dug up concerning earned income, which is necessary to contribute to an IRA but that you may or may not have as a graduate student.

Why Should I Tie My Money Up in a Tax-Advantaged Account?

I’m going to assume that your retirement savings are actually meant for retirement, meaning you intend to not withdraw any money from them for several decades. You should have a separate emergency fund and savings for shorter-term goals like a house down payment. In that case, the government has given us amazing options to get out of paying taxes while our money is compounding with special tax-advantaged accounts

If you keep your retirement savings in a non-tax-advantaged account, you have to pay tax on your earnings every single year, like you do with a regular interest-bearing checking or savings account. If you think back to our compound interest example, you know that a small tweak in your rate of return can have massive implications after decades of compounding. The exact rate that you pay will be dependent on the type of earnings you receive (ordinary income, long-term capital gains, short-term capital gains) and the tax bracket that you are in, but whatever it is will be a drag on your rate of return year after year. So if you know the money will be used only for the long-term, go for the tax advantaged account.

What Kind of Tax Advantaged Account Should I Use?

As a graduate student you don’t have access to your university’s 403(b), so assuming you don’t have any other employers (including yourself), you are limited to IRAs for tax-advantaged retirement accounts. There are two types of IRAs available: traditional and Roth.

The major difference between the traditional and Roth IRAs is when the money is taxed. It’s true that the contributed money grows tax-free, but you will be taxed when you put it in or when you take it out. With a traditional IRA, you contribute money pre-tax and the withdrawals from the account are taxed. With a Roth IRA, you contribute money post-tax and the withdrawals are tax-free. So the first thing you have to ask yourself is: will your tax rate in retirement be higher or lower than it is now? You have to weigh your current income against your retirement income as well a guess whether overall tax rates will increase or decrease. For graduate students, the answer is almost certainly that our tax rates are lower now than they will be in retirement – at least, we all expect to be making lots more money post-graduation! So the Roth IRA is likely the better choice.

Briefly, there are some other features of the Roth IRA worth knowing about (for more detail, visit The Roth IRA Movement):

  • You may only contribute earned income (more on this next) up to $5,000 per year (if under age 50).
  • There are income limits for contributing the full $5,000 – your modified AGI must be less than $107,000 for singles and $169,000 for married filing jointly (no problem!).
  • You can begin removing money from the account at age 59.5.
  • Removing money early will result in taxes and penalties unless it is a qualified distribution, such as in the cases of death, disability, or buying a first home (up to $10,000).

Note: What I’m about to cover is not well-understood among graduate students and there are many different opinions. I have talked with several administrators at my university about this issue and have called the IRS hotline a few times but still have not found a totally satisfactory explanation of the situation, especially from the IRS. You may not like what I conclude, and honestly I don’t like it either. If you disagree with what I’ve written or find it inaccurate in any way, please comment and I will look into your objections.

Roth IRA (and traditional IRA) contributions must be “earned income.”

“Earned income includes all the taxable income and wages you get from working. There are two ways to get earned income: You work for someone who pays you or you work in a business you own or run.” (source)

Basically, the IRS is trying to prevent people who don’t have any incomes other than interest and dividends, child support, unemployment benefits, etc. from participating in and benefitting from tax-advantaged accounts. You have to work for the money that you contribute! But of course we do work for our universities, and they pay us – right? Not so fast…

Unfortunately, and crazily, for graduate students, we can get caught up in this definition of non-work as well. Many graduate students are paid by fellowships – in fact, it is prestigious to be paid by a fellowship.

“Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.” (IRS Publication 590 p. 7)

So if you are paid by a fellowship during the year and you receive something other than a W-2 at tax time (like a 1099-MISC), that pay does not count as earned income. If you receive a W-2, no matter if the source is a fellowship or a grant or something else, that is earned income.

“Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported by you to the IRS on any form.”

That means if you are paid by a 1099-MISC, your university is not paying you for any services such as teaching or research. There are not supposed to be any conditions requiring you to work for that money!

That is ludicrous and insulting. Of course we have to work to pursue our graduate degrees. We do research, we take classes, we teach. A PhD student woudn’t be retained by his program if he didn’t do the work expected of him, no matter how he was paid. We have the same jobs whether we receive 1099-MISCs or W-2s.

So perhaps there is a glimmer of hope for those receiving 1099-MISCs. Although I doubt your university’s very sophisticated tax professionals made a mistake, you could at least inquire at payroll as to why you received a 1099-MISC instead of a W-2. Perhaps (slim-to-nil, I imagine) there are conditions on your fellowship that you work and they should have given you a W-2 instead and you will be able to contribute to a Roth IRA.

In summary, here is how the way you are paid relates to your ability to contribute to a Roth IRA:

Remember that if, in a calendar year, you receive any earned income, you can contribute up to that amount to a Roth IRA. For instance, if the bulk of your pay comes in the form of a 1099-MISC but during one semester you were paid with a W-2 for teaching, you can contribute to a Roth IRA in that year, up to $5,000 or the amount you were paid on the W-2, whichever is less.

In my next post I will suggest ways that graduate students being paid with 1099-MISCs can save for the future despite their lack of earned income.

  1. Tax-advantaged retirement accounts can make your contributions grow super fast.
  2. Roth IRAs are great vehicles for graduate students with earned income.
  3. If you are paid by a W-2, you have earned income.

Did this post inspire you to contribute to a Roth IRA? What do you think about the earned income debate for fellowships?

Update 10/5/2015: The IRS has updated its language so that you now need “taxable compensation” to contribute to an IRA. This term supplanted “earned income,” but they have the same meaning with respect to grad student stipends. If your grad student stipend is reported on a W-2 (typical for assistantships), you can contribute to an IRA from it. If your grad student stipend is not reported on a W-2 (typical for fellowships), you can’t contribute to an IRA from it.

Update 9/1/2014: This has proved to be the all-time most popular post on this blog! I’m impressed that graduate students are so interested in the proper way to save for retirement! One note to update it is that in 2013, the under-50 IRA contribution limit was raised to $5,500. If you found this post helpful, I hope you will entertain helping the blog out in one or both of these ways:

1) Please share this post on social media using the buttons below so more graduate students can see this vital information. Who knows, you may even spark an unexpected conversation among your friends!

2) Please consider using our Amazon affiliate link for your next purchase or even bookmarking it to use every time in the future. The user experience and prices will be exactly the same for you but we’ll get a small commission on the sale, which helps to keep the lights on around this blog. Thanks!

What is your earned income

131 Responses to "Earned Income: The Bane of the Graduate Student’s Roth IRA"

I love your dry erase board! That is a nifty idea.

I also love the Roth IRA. It’s suuuuuuuuuch a great vehicle to invest for retirement!

Wow, I didn’t know how confusing the earned income issue could be. Thanks for bringing this issue up

Nice work for someone who isn’t a CPA (at least I think you aren’t!).

My favorite part of the post? “Sucks to be you.” I can’t tell you how many times I would have liked to have written that on a dry erase board….

Um, no, not a CPA. Probably should put that in the post somewhere…

I’m glad you liked it! I was pretty PO’d while researching this!

Okay but what about those of us (me) who have Traditional IRAs? Do I roll everything over to a Roth? Do I open a Roth in addition to the traditional, even though I’ll probably just barely max out the traditional?

Why are you dissatisfied with your traditional IRA? If you want to convert it to a Roth there is a procedure for that – I don’t know the details but you basically just pay the income taxes you would have owed on what you contributed. So that’s an option, or just leaving it in the traditional IRA. As for opening a Roth IRA as well, you can only contribute up to $5,000 per year between the two accounts combined.

A lot of the reason people are so gung ho about the Roth IRA is because they already have 401(k)s so they have some taxable income for retirement and want to mix it up with non-taxable income. What’s your overall situation?

I never realized how complicated the phrase “earned income” really is! Great explanation.

Young Professional Finances recently posted..Roth IRA: My Meager Savings

I’ve been wary of Roth IRAs lately. It seems that there is more than a fair chance income tax structures will reduce in the near future. There also seems to be a large interest in other tax revenues other than income taxes.

No one can predict the future, but I have doubts we’ll be paying as much in income taxes in the decades to come. Maybe it’ll be a carbon tax, VAT or national sales tax.

You make a good point. I definitely think we’ll be paying more taxes in the future but perhaps they won’t be in the form of income taxes alone. Personally I’m still confident that I’m paying a low enough rate now to favor the Roth, but for people who are not confident I guess the best strategy is to have both pre-tax and post-tax accounts to hedge.

Hah! You were right, yours became a rant, too! The interesting thing is, we both want our Roths, but the IRS is our problem. Ack!

I’m curious how/why a universities decide to use the MISC-1099 vs W-2. Is there some incentive for them to use one over the other? Or is one required based on where the fellowship/stipend/salary comes from?

We haven’t moved the $ yet, but this post did remind me that we need to make N’s 2011 contribution to his Roth IRA before April 15th. Thanks!

I have an email in to someone at my university that will hopefully answer your first question. I would imagine it has something to do with getting out of paying the employer’s side of Social Security and Medicare. In my limited investigation so far the administrators have told me if you’re on a fellowship you get a 1099-MISC, if you’re on your advisor’s grant you get a W-2. They have not yet mentioned this fellowship-in-exchange-for-services option that should go on the W-2. It might be a unicorn.

I’m not a graduate student, but I’m sure those who are will appreciate the thorough explanation you provided. If graduate students are indeed working for their money, and they receive a 1099, they should speak with someone at the university about issuing them a W-2. The fact that the university screwed up shouldn’t change the nature of the income. If it’s earned it’s earned.

I remember trying to open an IRA with Washington Mutual during my freshman year of college. At the time, the minimum was $1,000. Yeah. That was way too much money to tie up for a struggling college student. Although, now I wish I’d found a way to come up with the cash. Nowadays, there are so many options. You can open an IRA with very little money.

My developing understanding (though I’m still looking into it) of the justification of paying us with not-“earned income” is that the requirement is that we work (do research, etc.) to stay in the program but not explicitly for the fellowship money. Like, if you did no work they would kick you out of the program maybe at then end of the year? But it’s strange because when people are on fellowships and they take a leave of absence I believe their pay ceases for that time.

I agree that $1,000 is a high minimum. When I opened my IRA several years ago Fidelity had an account option of a monthly transfer of $50 or $100 but didn’t need a minimum balance. When I looked again for my sister a couple months ago, that option was no longer there and the minimum monthlys were about $200, which was too much for her. She decided to aggressively pay down debt and then save up the $3,000 needed to open a Vanguard IRA. While I hope she sticks to that plan, I think her savings would have been much more certain if she had been able to open the account right away.

This just kills me – absolutely kills me! I worked like crazy to be able to get my university’s presidential graduate fellowship and was receiving my stipend through that method for a year. I then applied for and received, after a LOT of hard work – an extremely competitive national fellowship from the department of defense (NDSEG). My stipend increased and I thought everything was great with the world.

However, I thought it was weird that the EITC and child tax credits didn’t seem to add anything to my federal return for 2010 even though that was the year we had our first child. I just assumed everything was right in the tax software and didn’t look into it. My wife and I had a second child in 2012 and while starting to file taxes for 2012 the total credit back was even less than in 2010 and 2011! With our current income we should be eligible for a hefty EITC as well as $1000 per child in alternative child credits. BUT these credits are all based on the amount of my “earned income.” If my wages were simply on a W-2 form then our refund for this year would be about $5,000.

So from the tax years 2010 – 2012 my wife and I will have missed out on about $10,000 – $12,000 in tax credits because our income came on a 1099-MISC form instead of a W-2 form! I feel like smashing my keyboard while typing this. These fellowships were developed to award exceptional academic candidates who EARNED them, but in the end I get payed just as much or sometimes less than my peers who didn’t get the fellowships and who are doing the exact same kind of WORK that I am.

I brought this up multiple times with the Department of Defense and I only get the answer that they are sorry for the “inconvenience” and that that is just the way it is in their contract. They have to send the funds straight to me and can’t set up a negotiation with my university to have them pay me the exact same money through a W-2.

Who wrote this law, and where is the common sense? My peers in the same department are “earning” their income doing the exact same work that I am!

Seriously, I better stop before I smash my keyboard.

Brad, I don’t know how to respond to you except to say that I’m sorry that you lost out on those tax credits due to the ridiculous tax arrangement between the universities and the federal government. I know you must be highly qualified to receive an NDSEG and it isn’t fair that your income is different from that of your labmates and classmates. I hope that the stipend increase makes up for the loss of the tax credits or at least that having those fellowships will boost your resume enough that you will get other funding or jobs that will make up for the loss of earned income over these years. I’m not surprised that the DoD was inflexible on this issue. Thank you for alerting me to your circumstances regarding these tax credits – it’s probably unusual for a student receiving unearned income to be married with two children, but that doesn’t mean that you shouldn’t receive the credits that other parents do (in a reasonable tax arrangement). How does the amount of your wife’s income play into being eligible for these credits – will earning more qualify you two?

I just discovered the same thing on my taxes this year. I was receiving a stipend based on teaching and got a W-2. Then I switched to a fellowship. The pay only went up about $50 a month. I did not receive a W-2 this year and after inquiring in to it discovered that I am on a fellowship and don’t receive one. Therefore, just like you I have no “earned” income and don’t qualify for credits and can’t contribute to a Roth. I have 2 kids and a wife as well. So, for me it means I miss out on over $7,000 a year in credits. Unfortunately, that $7,000 was always my safety net to pay for things like dental care, tires, summer vacation with family, etc… So, it puts us in a huge bind. I really hope the IRS changes this ruling for the exact reasons that you laid out that it is for work.

I don’t know what to say except that I’m very sorry you’re in this situation. Maybe you can talk to your advisor about how much this fellowship is costing you and have your funding source switched?? Or you or your wife could generate a side income?

I’ve hoping to get some work study in grad school.. and my recollection (hopefully I’m right)is that that’s W-2 income. Fingers crossed. I still want to max out my Roth IRA for 2013 if there’s any possible way.

When I did work-study in college I was paid with a W-2. And there’s “work” in “work-study” after all – they are explicitly paying you for some kind of service.

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