My daughter is attending graduate school at the University of Montana, Bozeman. She is being paid 2500.00 per month to cover her expenses as well as an additional expense account to cover books and items like her computer. She has been told that she will not receive a form 1098 from the college.

She went to an H&R Block office in Bozeman to have her taxes done and the preparer told her that this money is a scholarship and she shouldn't have to pay any taxes on the money. My daughter argued the point with the preparer pointing out that some of her friends that are also being paid to attend grad school were penalized by the IRS for not paying taxes on the money they received. She finally got her preparer to create a W-2 and paid taxes on the income she received.

My questions are 1) is this correct? Why isn't she getting a form 1098? Does she also need to pay social security tax and medicare tax on this income, because her tax preparer didn't have her pay these?

Thanks in advance

“She finally got her preparer to create a W-2 and paid taxes on the income she received.”----->If what your suggesting is she wants to file her return before she receives the offical W-2 from her employer (say mid January rather than the end of Jan when W-2s must arrive by), by using the information from the year end pay stub - well it's possible but not a good idea. Understand that the W2 she gets is a paper form of some info from an in depth electronic filing report sent to the IRS by her employer. The IRS matches it to return info we provide, and confirms her employer actually paid over the amounts she is claiming to, etc. This is now all becoming very electronic, automatic, quick and accurate. ALL the information she reports better be represented EXACTLY like the employers report....including which boxes (and codes within those boxes when needed) were used, what ID numbers they filed it under, etc. Those are required by the electronic filing programs. Otherwise, if the info doesn't jive, there will be delays and problems for all!

“ Why isn't she getting a form 1098?”--->She is supposed to receive Form 1099-T; tuition Payments Statement is the information return that colleges and universities are required to issue for the purpose of determining a student's eligibility for the Hope and Lifetime Learning education tax credits. I guess she needs to contact here school administrator. IRS regulations require mailing her 1098-T to her permanent address. The school may have a invalid social security number or persona info. Or etc. on file for her.
“ Does she also need to pay social security tax and medicare tax on this income, because her tax preparer didn't have her pay these?”--->If she is paid $2,500 as an independent contractor, then she needs to file her Sch C and Sch SE as long as the amount on Sch SE line 4 is $400 or exceeds $400. If she is filing as a sole proprietor or a self-employed individual, then she generally should make estimated tax payments if she expects to owe tax of $1,000 or more when she files her return. The basic tax rate for the self-employed under SECA is 15.30 percent(13.5% for 2011 I guess) - twice the 7.65 percent rate that employees must pay on their paychecks as FICA tax - to reflect the fact that employees pay one-half the FICA tax and employers pay the other half.
If she receives $2,500 as an employee as her wage, then her employer automatically withholds her FICA Taxes, Soc Sec taxes, federal or state taxes from her paychecks each period as said above.

A little more clarification, my daughter told me that the money she is receiving from MSU is called a FELLOWSHIP, the school administrators told her that she was given a waiver to sign that stated she would not receive a 1098 or 1099 form from MSU. Clear as mud?

“A little more clarification, my daughter told me that the money she is receiving from MSU is called a FELLOWSHIP, the school administrators told her that she was given a waiver to sign that stated she would not receive a 1098 or 1099 form from MSU. Clear as mud?---> I see, actually I didn’t know that part; correct.Iguess a fellowship can have several different definitions, depending upon the extent of the fellowship, what it offers, and what it requires. She doesn’t receive the Form 1098T as she received the Fellowship. Since she is a candidate for a degree at an eligible educational institution , and she uses the fellowship to pay her qualified education expenses, then, the fellowship is tax free; so, the tuition portion of the school fellowship that is paid directly to the student’s account is tax free and does NOT have to be reported; However,any amount which exceeds her tuition is considered taxable and needs to be reported. If she files Form 1040, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, then she should enter “SCH” and the taxable amount on the dotted line next to line 7.And she MAY need to pay her estimated taxes on the exceeding portion of the fellowship. For reference, taxable portion of the fellowship is the stipend she receives minus the money she spends on required materials for her courses ,i.e. equipment, textbooks or etc. The stipend is the money that she actually receives from the fellowship; it is not any money that the fellowship contributes toward her tuition and fees. This does not mean that all of her fellowship is non-taxable! Actually, most of the fellowships that graduate students receives MAY have taxable portion. Nontaxable fellowship is the money that she spends on required materials for her course study plus the money that her fellowship contributes to qualified educational expenses i.e. tuition. So if applicable, she will need to make sure to report her fellowship income on her federal, state, and local(ifapplicable) returns.
If it is the fellowship stipend(I am not sure if it is), the stipend portion of the University fellowship is taxable. The school doesn’t issue a W2 meaning there is no withholding of income or FICA tax from stipend payments (as distinguished from wage and other payments), or 1099 for registered students receiving University fellowships, unless she has requested a specific dollar amount to be withheld. In that case, only the withholding amounts will appear, not her total stipend award. It is the responsibility of the student to report appropriate stipend amounts to the IRS. The University will not automatically withhold federal or her state income taxes from her fellowship stipend, even if she has filed W4 form for federal or state claiming any exemptions. She must request the Payroll Office of theschool. Also, for the period of the fellowship, she may deduct from the stipend expenses for books, supplies, equipment required for courses, and required fees. For example, if she received a stipend of $4,000 and she spent $1,000 on books, then she would report $3,000 on her tax return. She must be able to show appropriate documentation for these expenses for proof if asked. Iguess youned to contact the IRS by calling 800/829-3676.
Please visit the IRS website here; Publication]Publication 970 (2010), Tax Benefits for Education 970 (2010), Tax Benefits for Education

Thank you for your explanation, but I still have a question: Does she have to pay social security on this money? Can she deduct living expenses from the money she is receiving, as in grad school housing or rent? Thank you for your help.

“Does she have to pay social security on this money?”---->It depends; your daughter’s Fellowship amounts are subject to FICA only if they are deemed to be her WAGES for employment tax purposes. Whether fellowships are wages is an inherently factual determination, requiring consideration of all relevant facts and circumstances of the program. So, I do not know if her fellowship is her wage or not. I guess you need to contact her school, OK? Her University will not withhold from her non-employee fellowship payments. Therefore, as said previously, she needs to determine whether or not she should be making estimated tax payments with respect to her fellowship income. Therefore, it is important to keep her own records or to seek a summary from her department in order to have the information necessary to prepare her personal tax return. As you can see, the federal income tax system is a pay-as-you-go system. That means you pay taxes as you earn income throughout the year. So, the GENERAL RULE is that your daughter must make estimated tax payments( to avoid paying less tsaxes) if she expects to owe at least $1,000 in tax for the current year, after subtracting her withholding and tax credits, AND if she expects her withholding and credits to be less than the smaller of: 90% of the tax liability on her current year return, or 100% of the tax liability on her prior year's return.
“Can she deduct living expenses from the money she is receiving, as in grad school housing or rent?”----> No, your daughter CAN’T deduct room and board incidental living expenses and other expenses not required for enrollment in or attendance at university. In general, those portions of her fellowship, used to pay tuition, fees, books, supplies, or equipment are classified as a "Qualified Scholarship" and are not includible in her gross income, NONTAXABLE, I mean, under Internal Revenue Code section 117 since your daughter is a candidate for a degree. Any portion of her fellowship that does not correlate to the five items mentioned above is includible in her gross income which means that it is subject to fed and state( if applicable) or even local( if applicable) taxes. Please keep this in your mind; a fellowship is any amount paid or allowed to, or for the benefit of, a person to aid such person in the pursuit of study or research. A fellowship may take the form of: payment(s) to the recipient, such as stipend payments; reimbursement or payment of expenses, such as travel expenses, to or on behalf of an person; or a credit against an existing term bill or a reduction in the amount owed by the recipient to an educational organization in connection with the pursuit of study or research.