What YOU NEED To know Tax Advice and tips for clergy

1. What YOU NEED To knowTax Advice and tips for clergy Professor Francine Guice

2. Famous Quotes………………….. Certainty? In this world nothing is certain but death and taxes. Benjamin Franklin  I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. Milton Friedman 

3. Eric Butterworth says….. The starting point in changing your life from financial reverses to an experience of abundance is the realization that you can change your life by altering your thoughts. You begin by taking responsibility for your own life. As long as you are hung up on paranoid thoughts such as “It is what they are doing:’ “It is what is happening in Washington”, “Office politics!” and “The IRS is harassing me,” then you cannot find help of any kind through Truth.

4. Who is a “minister of the Gospel? Section 107 of IRS regulations; Minister is distinguished by the duties he or she performs.

5. Recognized categories of “ministers” Traditional roles of priest, pastor, rabbi, who perform sacerdotal functions and conduct worship; Individuals who work for secular organizations and perform sacerdotal functions and conduct worship; Individuals who control and manage religious organizations at the local church or denomination level; and Teachers and administrators at seminaries.

6. Two key issues in the determination Whether the service of the clergy worker is conducted under the authority of a church or denomination; and Whether their duties are encompassed in Section 107. People who are under the control of a church in performing their predominant duties are in the strongest positions.

7. Regulation 1.1402(c)-5 provides help….. An ordained chaplain at a university who teaches a religious class, provides spiritual counseling and conducts worships services is a minister; An individual performs the duties of a minister while conducting religious worship and performing sacerdotal functions even if other employment is not ministry related.

8. Regulation 1.1402(c)-5 continued…….. An ordained minister who directs an agency of the denomination will qualify – an example is a social service outreach; An ordained minister who is assigned by his or her denomination to advise a company in the publication of a book about the denomination is considered a minister.

9. Note……………. The IRS has stated that it will no longer issue private letter rulings addressing the issue of whether a taxpayer meets the definition of a minister.

10. Dual Status Even though for social security tax purposes, clergy are considered self-employed as related to your ministerial work, you may be considered an employee for income tax purposes or retirement plan purposes. For income tax or retirement plan purposes some of your income may be considered as wages and some as self-employment income.

11. Tax Rules Unique to Ministers Ministers are eligible for housing allowance and parsonage exclusion; Considered self-employed for Social Security tax purposes; and Ministers are exempt federal income tax withholding; Ministers may have an option to ask churches to not withhold or to withhold income tax.

12. Which is applicable? You are generally considered an employee if your employer (generally the church through its Board of Directors or Trustees) has a legal right to control both what you do and how you do it. Your salary is considered wages. Amount received from the congregation directly such as fees associated with performing marriages, funeral, etc are self-employment income “Love” offerings……………….

13. Housing Allowance (Parsonage) Provided for in Sect. 107; exclusion from gross income to the extent that a minister’s employer pays for their housing costs; Employer can pay for the housing costs (parsonage) or provide cash that the minister uses to pay for housing costs (housing allowance); Manse amount can be changed (subject to board approval) in the middle of the year if the following cases occur: Change of marital status, purchasing a house, or job change.   

14. What Does Housing Include? Rent Mortgage payments (principal and interest) Utilities insurance Lawn care Furnishings Maintenance

15. Requirements for Housing Allowance Employer must designate the amount of the housing allowance in advance; Amount limited to the lesser of: the amount designated by employer and the FMV of the rental; or the actual expenses incurred; Church BOD or trustees should approve the amount of the housing allowance prior to the minister earning it; Begin the discussion in October for the following year; Put it in the minutes of the BOD and have church secretary give minister a letter in January along with the W2 for the previous year, designating the amount.

16. Housing Allowance tips…. IRS instructs that housing allowance cannot exceed the FMV rental of the minister’s residence + the cost of utilities; Find out what the upper limit of the housing allowance would be by using the internet or print sources that document local rental values; When you are reaching the upper limit of your area, make sure to retain the documentation to support the claimed housing allowance to utilize in the event of IRS audit.

17. Self Employed Status Ministers are considered self-employed for social security tax purposes; Self-employment tax is accessed on taxable compensation and housing allowance/parsonage. The rate of tax is 15.3% (12.4% for social security and 2.9 for Medicare); New ministers usually find this challenging as they are used to only paying ½ of this rate in secular jobs.

18. Self Employment tax tips… Increase withholding on taxable compensation; Estimate and pay quarterly; You can claim an exemption from SET by electing to be excluded from the SS system by claiming an opposition to accepting public insurance payments for disability, death, retirement or medical care based on religious convictions. MORE

19. More on SET Exemptions.. Remember that you are objecting to receipt of benefits (SS or the like) from a public insurance system…NOT the payment of SET. Must have IRS approval and is irrevocable. File Form 4361; must be filed by the due date of your tax return (including any extensions) of the 2nd year in which you make $400 in self-employment income; Have your tax practioner consult Regs. Sec. 1.1402(e) and instructions for Form 4361.

20. Accountable Plans Expenses must have a business connection-you must have paid or incurred deductible expenses while performing services for the church or religious organization; You must adequately account to the church for the expenses in a reasonable amount of time; (60 days) You must return any excess reimbursed monies within a reasonable amount of time; (120 days) If you expenses equal the reimbursement then there is no deduction; if the expenses equal more than the reimbursement you can deduct for SE tax and IT purposes.

21. Accountable Plans continued….. Church needs to keep good records in a log, diary, etc in order to meet IRS substantiation requirements; If reimbursement for minister travel is made at the same/regular time of wages, travel reimbursements needs to be in a separate check; IRS has said that if examiners see travel-related expenses that show a “pattern of abuse” they should declare the church’s plan as “nonaccountable” and all reimbursements paid under said plan should be considered taxable income to the employee; the shipping of materials, should be diligently tracked and reported in exact amounts to maintain an accouCosts for airfare, bus, taxis, limos, etc along with telephone and fax charges and ntable plan. Federal per diem rates can be used to substantiate hotel/lodging, meals and vehicle use or rental

22. Nonaccountable Plans Anything excess reimbursement which you fail must return to the employer; Reimbursement of nondeductible expenses related to your employer’s business; Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages and salary and will report the total in Box 1 on your W2;

23. Stuff …….you might like to know…. The Freedom From Religion Foundation, Inc have sued Timothy Geither in his official capacity, Douglas Shulman, in his official capacity and Selvi Stanislaus in her official capacity as Executive officer of the Calif. Franchise Tax Board to have the housing allowance/parsonage eliminated since ministers can also take the mortgage deduction on a residence which has been paid for by a housing allowance.

24. More stuff………….. The argument is that non clergy taxpayers do not have this advantage and clergy are able to “double dip”. The real argument is that the federal and state governments are impermissibly benefiting religion. Sen. Chuck Grassley has been conducting a senate hearing into the financial dealings several “mega ministers” and their churches; no findings yet.

25. References Internal Revenue Service Regulations: IRS.gov; Publication 517 of the Internal Revenue Service; Kiplinger Tax Letter: Current lawsuit pertaining to the housing allowance/parsonage. Case No. Civ. 2:09-2894 WBS DAD.

26. What YOU NEED To knowTax Advice and tips for clergy “Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do.” (Mark Twain)