No past experience, but I did some research for next year, when I head to my program. Generally, tuition remission for grad students is tax-free, as are scholarships and grants where no employment is required.
Scholarships and grants where no employment is required are definately not "tax free" unless it is used for tuition, fees, books and other expenses
required by your program to complete your degree. The required part would extend beyond tuition, fees, books for things such as dental tools required by a dental program. Any scholarship or grant money used for living expenses or other "non-educational expenses" must be claimed on your tax form and taxes will be due, regardless if undergraduate/graduate program.
Graduate school falls under different IRS rules than undergraduate. If part of the fellowship was used for tuition and fees, that part could be claimed as an education deduction or an education credit further down on the tax form. This goes for tuition remission also.
You put this taxable part on the wages line and then, that part of the income that is scholarship or fellowship is listed to the left of that line with the abbreviation SCH. So, if you had $10,000 in wages including $5000 fellowship it would look like this.
Wages SCH 5000 10,000
If all was fellowship then it would look like this
Wages SCh 10,000 10,000
A stipend given for RA or TA work is taxable for the reason you mentioned (it's considered "payment for services"). I think some schools will regularly withhold this money from your paycheck, while others leave it up to the student to pay the taxes themselves (and budget accordingly).
The IRS doesn't give any leeway to the University on whether to withhold income tax or not if the money you receive is work related (TA, RA, etc). If it is work related, they
must withhold. Where some graduate students become confused is that some in the cohort will have fellowships and some TA/RA. Fellowships and Scholarships do not require withholding and most universities frequently do not hold back for income tax. In this case, you better be putting some aside for taxes you will still be responsible for.
This is a useful (if wordy) resource from the IRS website:
http://www.irs.gov/pub/irs-pdf/p970.pdf
Additionally, there is a current issue regarding graduate fellowships and tuition remission that is being played out with Universities and the IRS. The IRS has deemed that the tax law only allows complete tax free if
IRC §117 allows the exemption from taxation of tuition and fees waivers above $5,250 for individuals conducting teaching or research activities.
The IRS is currently not seeing tuition remission the same as tuition scholarships but some universities are. Since many fellowships don't REQUIRE these activities for receipt although you may be engaged in them for professions reasons, the amount of tuition remission above $5250 may be considered taxable by the IRS. Wisconsin and other Universities are currently in litigation with the IRS over this. Illinois State Universities have begun witholding taxes for tuition remission associated with fellowships at the rate of 25% even if you don't see the money. Here is a link explaining the Illinois Universities position.
IRC §117 allows the exemption from taxation of tuition and fees waivers above $5,250 for individuals conducting teaching or research activities.
On the other hand, Northwestern University in the same state, states this
The tuition portion of University fellowships and University scholarships that is paid directly to the student's account is tax free and does NOT have to be reported.
http://www.tgs.northwestern.edu/financialaid/moreinfo/faq/#cit
One of the differences taken into account is whether it is a tuition REMISSION or a fellowship that pays tuition on your behalf. Remission usually indicates that some part of the tuition is simply not paid to the university, they in effect lower what they charge for your tuition. At northwestern, fellowships may include tuition paid on your behalf by grants, etc rather than a remission.
As you can see, it is a complicated issue. You need to check with your individual university regarding tuition remission and fellowships (NOT TA/RA associated tuition remission) and see if they will be withholding. Even if they withhold, you will probably still get some money back as most single graduate students are in the 10% to 15% tax bracket, not 25%. But, that first year could be a killer.
CAUTION - Consult your own tax advisor (there may be some tax attorney/ accounting proffesors/ CPAs at your university willing to give you free advice at your university). My information is just that - information. In the end, regardless of what the university does or doesn't do, if the IRS comes calling, they will come calling for you, not the university, not me, and not the posters on any forum.
