Are Graduate Students “Losers” in the Upcoming Tax Reform Bill?

Graduate Student at the Solar Energy Applications Laboratory, via Wikipedia Commons / Public Domain

On November 2, 2017, the Tax Cuts and Jobs Act was introduced in the U.S. House of Representatives and is due for a vote this week. It is a State Congress bill that aims to simplify and reform the Internal Revenue Code (I.R.C.) of 1986. Amongst various other provisions, the bill calls for repeal of sections I.R.C. § 117(d) and 127.

Section 117(d) : Educational institutions, including colleges and universities, are permitted to provide their employees, spouses or dependents with tuition remissions that are excluded from taxable income. While, this “qualified tuition reduction” is for education below the graduate level, I.R.C. § 117(d)(5)[4] provides an exception for graduate students who are engaged in teaching or research activities in these institutions.

Section 127: Employers are allowed to offer $5,250 annually to their employees as tuition assistance which can be excluded from their taxable income. This proposal was driven by a two fold agenda – to increase the level of education and training in the workforce, and to simplify taxation on training and education benefits provided by the employer.

While the bill intends to simplify the tax code and to lower individual and corporate tax rates, it has been criticized to favour corporations over small businesses and middle-class Americans rearing the head of an all too familiar debate about the benefits of a trickle-down economy and a capitalist state. The House proposes to reduce the $1.5 trillion deficit resulting from lower taxes, by generating revenue through multiple means – one of them being the taxation of previously waived tuition. According to an estimate by the Joint Committee on Taxation, these repeal provisions along with a few others would rake in $45.1 billion over 2018-2027 and reduce outlays of $2.4 billion.

These gross numbers when studied from a graduate student’s perspective tell a different tale. Currently, a graduate student’s taxable income does not include “qualified tuition reduction” – provided they register for certain number of credits while being employed as a Teaching Assistant or Research Assistant. Most students pay federal taxes levied only on their stipends.

The new provision that repeals Sec. 117(d) under the House bill would imply that, students now have their waived tuition included in their gross income. Even after applying the standard deduction that was raised from $6,350 to $12,000, this would result in a sharp hike in tax rates, since the new bill does away with personal exemptions that could be claimed under single filer status with income less than $261,500.

Stipends vary across universities and programs, but, on average amount to $30,000 annually. At UCLA, tuition each year costs nearly $17,000 for residents and $32,000 for non-residents. Further, a study published by the National Center for Education Statistics, shows that private universities almost consistently have higher tuition than public ones. Thus, this increase in gross income would consequently push graduate students into a higher tax bracket and reduce the net stipend they receive. Over the past week, analysis of taxes at CMU and UC Berkeley have been making the rounds and are a qualitative indicator of the burden that could be passed on to the students provided this provision is retained in the final bill.

Several critics have been pushing back against this move stating it would have a ripple-effect. In a letter to the House of Representatives, the American Council on Education reported that in 2011-2012, 145,000 graduate students benefitted from tuition reductions with nearly 60% of those studying STEM fields. Some argue that the increase in taxes would not entirely deter students from attending graduate school, but others are weary of the message this move sends. Renegading the promise of a decent living wage might affect people’s ability to start a graduate program and if driven to accept loans, could mold their choice of future careers often steering them away from academia. This could potentially also adversely affect scientific research and severely impact those who rely on a waived tuition and a steady stipend to stay in graduate school.

However, there are more caveats to this story, as further debate on the tax bills unfold. Graduate students’ gross incomes are also exempted from tax on “qualified scholarship.” I.R.C. § 117a describes this as any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses. The new bill does not repeal this section, which could possibly open up the door for universities to waive tuition albeit under a different terminology as permitted by CFR 1.117-4, thus leaving graduate students largely unscathed.

It is crucial to also note that the Senate bill released on November 9, 2017, appears to leave these deductions and exemptions untouched. Following debate and reconciliation of the two bills, the government might not repeal the sections 117(d) and 127.

If the provision does indeed pass, in one of the many scenarios that could play out, graduate students would be placed under significant financial duress, at least in the short run. In the long term, universities and grant institutions could seek to increase stipend, reduce tuition, or use other provisions for deductions.

However, until this bill passes, there has been a resounding call to graduate students to be vigilant about the path that it takes and to hold their elected representatives accountable.