I think a good place to start is to read through IRS Publication 970, available at http://www.irs.gov/publications/p970. There is a whole section on Scholarships and Fellowships.

The Publication says that you should report the taxable Fellowhip along with other taxable wages on Line 7 of the 1040, and put the notation "SCH" in the margin next to where you put the number.

Based on my understanding of the Publication, it appears that any unreimbursed professional expenses should be claimed as a miscellaneous itemized deduction. These expenses will only benefit you if they exceed 2% of your adjusted gross income, you itemize your deductions, and you aren't subject to the Alternative Minimun Tax.

Let me know if you get a different understanding of the rules once you have a chance to read through the section of IRS Publication 970 on Fellowships.

Zip Code: 01801

March 9, 2008

Dear Andrew:

Thank you for your prompt and "early" response. I have read thru Pub. 970 several times and reread it again at your suggestion.

As you accurately point out, the section dealing with Fellowship Income only deals with the tax character of the income and whether a degree seeking recipient spending the stipend on any of five specific categories of expense renders that income as non-taxable. Those circumstances do not apply in this instance.

Similarly, Chapter 12 dealing with Business Deduction for Work Related Education does not appear to apply because it deals with taxpayers (income recipients) who are employees or self-employed and who are specifically subject to employment taxes.

I understand your reference to deducting the expenses as miscellaneous itemized deductions on Schedule A, but have specifically avoided that section because the 2% floor makes achieving a meaningful deduction under that section difficult.

I am attracted to the language of Code Section 212(1) dealing with deductibility of expense "for the production of income". That is the exact languare used to describe Fellowship income on the Yale University and Stanford University sites dealing with taxation of Fellowship income to postdoctoral students. The language is also repeated in the letter from our University informing us of the taxability of the Fellowship income.

From my layman's perspective, I do not understand why the income cannot be offset by the expenses required to produce it. I find it analogous to rental income, where the expenses to produce the income are deductible on Schedule E and which is not subject to employment taxes.

However, my objective here was to get your opinion on whether these expense can be deducted against the Fellowship income and if so how. Presuming your position is that the expenses are only deductible subject to the 2% floor, I will have fulfilled my responsibility.

I thank you for your time and for your thoughts as well as any other suggestion your might have.

Tom

Zip Code: 18103