Taxes
Fellowship stipends may be subject to income taxes. According to the Internal Revenue Service (IRS), universities are not responsible for withholding or reporting income taxes on fellowship payments for U.S. citizens and permanent residents and foreign national resident aliens for tax purposes. Fellows do not receive a Form W-2 on their fellowship income nor does the University report the fellowship payment as taxable income to either the state or federal government. However, the University is required to report fellowships to the IRS for informational purposes only on Form 1098-T, Tuition Statement. Taxability of the fellowship payment is a matter between the Fellow and the IRS. Therefore, no income taxes are withheld from fellowship payments.
Nevertheless, it is important to remember that the fellowship may be subject to income tax. The IRS requires a taxpayer owing at least $1,000 in taxes in a given calendar year after subtracting withholdings and credits to file estimated quarterly tax returns. Additional information about estimated tax payments can be found in Form 1040-ES (PDF). Penalties may be assessed for incorrect filing and underpayment of taxes. When students file their income tax returns, they should remember that a portion of the fellowship may be exempt from tax. Students are advised to keep receipts in case they are audited at some point in the future. The tuition waiver that comes with the fellowship may be exempt from tax.
More information on taxation of fellowships can be found in IRS Publication 970: Tax Benefits for Education (PDF), or by calling 1-800-829-3676.
Loans
Students with fellowships and traineeships who apply for direct loans will have their loan eligibility reduced by the amount of the fellowship or traineeship award. For more information about financial aid for graduate students, see http://www.osfa.illinois.edu/types-of-aid/loans
Assistantships
All students with assistantships in addition to their fellowships will receive a Form W-2 on the assistantship income. Students with assistantships may elect to have additional income taxes withheld from the assistantship income.