hello, my name is benjamin rainey i am a tax professional and have worked in tax preparation since...

INTRODUCTION

• Hello, My Name Is Benjamin Rainey• I am a tax professional and have worked in tax preparation since 2010. • My contact: ben@christfellowship.us

410.491.4314

INTRODUCTION

•My Aim: 1. To make you familiar with the

tax provisions that specifically related to Clergy.

2. To help you understand minister compensation.

INTRODUCTION

•My Aim: 3. To understand specific reporting

on your 1040 related to Housing allowance and business expenses. (Note: Understand)

INTRODUCTION

•My Aim: 4. Offer a resource to help with

your questions.

RECENT DEVELOPMENTS:

• Health Care Reform• Individual Responsibility• Employer payments of individual health premiums•Health FSAs limits relaxed

RECENT DEVELOPMENTS:

• Court rejects Challenge to housing exclusion• Challenge to the Double Deduction

• IRS audits of churches

INTRO TO CLERGY COMPENSATIONSPECIAL TAX PROVISIONS FOR CLERGY

1. Exclusion of the housing allowance for income tax purposes and the fair rental value of a congregation-owned parsonage provided rent free to clergy.

2. Exemption of clergy from self-employment social security tax under very limited circumstances.

3. For social security tax purposes, treatment of clergy as self-employed as it relates to income from ministerial services.

4. Exemption of clergy compensation from mandatory income tax withholding.

5. Eligibility for a voluntary income tax withholding arrangement between clergy-employees and the congregation.

6. Potential “double deduction” of mortgage interest and real estate taxes as itemized deductions and as excludable housing expenses for housing allowance purposes for clergy living in clergy-provided housing.

INTRO TO CLERGY COMPENSATIONWHO IS CLERGY?

• Employed by a congregation and ordained, commissioned, or licensed.

Four Tests:

1. Administer the sacraments

2. Are considered to be a religious leader by the church

3. Conduct worship services

4. Management in control, conduct, or maintenance of you congregation

INTRO TO CLERGY COMPENSATIONSOCIAL SECURITY STATUS OF CLERGY

• Clergy engaged in the exercise of ministry are always treated as self-employed for social security tax purposes.

• Earnings…not from the exercise of ministry are generally subject to social security tax under FICA and SECA as applied to all workers.

INTRO TO CLERGY COMPENSATIONINCOME TAX STATUS OF CLERGY

• Does the employer have control of what you do, and how you do it?

• Clergy employees should receive W-2s, and are eligible to claim unreimbursed expenses on Schedule A (subject to 2% of AGI floor).

INTRO TO CLERGY COMPENSATIONINCOME TAX STATUS OF CLERGY

• Evangelist – Self-employed for both income and self employment tax purposes. (Receive Form 1099 from churches)

• Missionaries – Treated as Self-employed. (Receive Form 1099 from national office)

4 KEY ELEMENTS OF CLERGY COMPENSATION

•The Housing Allowance•Compensation and Fringe Benefits•Business & Professional Expenses•Income & Social Security Taxes

THE HOUSING ALLOWANCETHE BEST FRIEND OF CLERGY

• Parsonage Allowance covers expenses such as furnishings, personal property insurance, utilities etc.• Housing Allowance covers mortgage/rent payments of personally secured housing.

Housing Allowance Rules:

1. The allowance must be officially designated by the congregation.

2. The housing allowance must be designated prospectively. (Not Retroactive)

3. Only actual expenses can be excluded from income.

4. An annual comparison by clergy of housing expenses to the housing is required.

5. The housing allowance exclusion cannot exceed the fair rental value of the housing, plus utilities.

Parsonage Allowance

Allowable expenses: Utilities, repairs, furnishings, and appliances. (Note: If you incur extra expenses, you cannot exclude it from your income.)

Parsonage Allowance

Out-of-pocket expenses for the maintenance of a congregation-owned parsonage reimbursed with full accounting are not figured into income.

Equity Allowance

Some churches offer an equity allowance for pastors living in parsonages. The Equity Allowance is taxable for both income and SE taxes unless directed into a qualified 403(b).

Housing Allowance (Clergy Owned)

Housing allowance is the Lowest of the following:

1. Reasonable compensation

2. Amount used to provide a home from current congregational income

Housing Allowance (Clergy Owned)

Housing allowance is the Lowest of the following:

3. Amount prospectively & officially designated.

4. Fair rental value of furnished home, plus utilities.

Many ministers make the mistake of automatically excluding all designated housing allowance from their reported income. This may cause a significant underpayment of income taxes. (See example on Page 10)

Designating a housing allowance:

1. Clergy estimates housing-related expenses.

2. The congregation then adopts a written housing allowance.

3. At the close of the year clergy provides housing comparison.

Designating a housing allowance:

1. Clergy estimates housing-related expenses.

2. The congregation then adopts a written housing allowance.

3. At the close of the year clergy provides housing comparison.

•Fair Rental Value?

• It is the responsibility of the clergy to get estimate.

•Remember:

• Housing Allowance in excess of Actual Expenses must be reported.• Actual Expenses in excess of designation are not excludable.

•Retired Ministers

• Are allowed a housing allowance from withdrawals of a denominationally sponsored 403(b).

Resources:

Sample worksheets and housing designations are available in the work book pages 13-15.

410.491.4314

COMPENSATION AND FRINGE BENEFITS

• Business and professional expenses

• Accountable Reimbursement Plan• Examples: Mileage, travel, subscriptions, and entertainment• Not taxable, not reportable

• Business and professional expenses

• Non-Accountable Reimbursement Plan • Example: Car allowance• Must be reported as income• Can be deducted on Sched. A (2%)

•Club dues and memberships

• A/G/Potomac Minister’s Tithe•Professional or Public Service Dues are deductible or reimbursable.• Recreational and health clubs are taxable income.

•Club dues and memberships

• A/G/Potomac Minister’s Tithe•Professional or Public Service Dues are deductible or reimbursable.• Recreational and health clubs are taxable income.

•Disability Insurance

• If congregation pays… premiums are excluded from income.• Payments received are taxable.

•Disability Insurance

• If clergy pays… premiums are included in income.• Payments received are non-taxable.

•Educational Reimbursement Plan

• Congregation Required• Costs paid directly or reimbursed are not included in income.

• Requirements:

1. Is required by your church to keep your job.

2. Maintains or improves skills required in your current position.

• If previous requirements are met, expenses may still not qualify if:

1. Is required to meet the minimum educational requirements for you work.

2. Is part of a program of study that will qualify you for a new occupation.

•Entertainment Expenses

• Must be associated with the work of the congregation.• Must not be excessive or extravagant.• Deductible up to 50%, reimbursable at 100%

•Flexible Spending Account (Cafeteria Plan)

• Pre-tax dollars to cover Medical, Dental and childcare.• FSA contribution limit is $2500/yr. Adjusted for inflation.• The money is the account holders to use during the year, but is “owned” by the employer. (Note: Use it or lose it relaxed)

•Health Insurance

• Church paid minister-employee qualified group health insurance premiums directly to insurer are tax free.• However, if self-employed premium amounts are taxable income.

410.491.4314

•Health Insurance

• Note: Under the Affordable Care Act churches cannot discriminate in favor of highly compensated employees.

•Health Reimbursement Arrangements (HRA)

• Must be a written and designated.• Is integrated with the church’s group health insurance plan, and be funded by church funds. Excess carries over.• Pays deductibles, coinsurance, and non-covered amounts paid by individuals.

•Health Savings Account (HSA; $3,300/6,550)

• Part of an Individual, High Deductible Health Plan• The interest bearing account is held by bank or insurance company.• It is individual, portable, tax-free as long as monies are used for qualified medical expenses. (See Pages 18-19)

•Life Insurance/group term

• Group life coverage that doesn’t exceed $50,000 paid by the church is not taxable income.• Group-term life policies that exceed $50,000 are taxable.

•Social Security Tax Reimbursement

• Some congregations reimburse a portion of the SECA tax liability.• This must be reported as taxable income.

• Tuition and Fee Discounts

• Must be employed by the church-operated school.• Discounts are a tax free benefit

•Vehicle/personal use of congregation-owned vehicle

• Use of a church owned vehicle is a taxable fringe benefit.• Fair market value must be included in reported income, unless minister reimburses the full value to the congregation.

BUSINESS & PROFESSIONAL EXPENSESThree Categories of Business Expenses:

1. Expenses for which you are reimbursed through an acountable plan.

2. Expenses for which you are reimbursed through a non-accountable plan.

3. Expenses for which you are not reimbursed

BUSINESS & PROFESSIONAL EXPENSESBusiness Expenses must be both ordinary and necessary.• Ordinary means common to your field.• Necessary expenses are those that are

helpful and appropriate in your field.

BUSINESS & PROFESSIONAL EXPENSESAccountable Reimbursement Plan Requirements:

1. A business purpose for the expenses

2. Substantiation of the expense to the congregation

3. The return of excess reimbursements.

BUSINESS & PROFESSIONAL EXPENSESAccountable Reimbursement Plan Requirements:

There are two methods of reporting: Fixed Date and Periodic Methods. (Explained on page 22)

These Reimbursements are not reported as income on W-2.

BUSINESS & PROFESSIONAL EXPENSESNon-Accountable Reimbursement Plan:• Clergy provides no substantiation• Amounts are included in taxable income

and are deducted on Schedule A (2% Floor)

• Allowances are taxable (with exception of the housing allowance)

BUSINESS & PROFESSIONAL EXPENSESDocumenting Business Expenses:• Third party documentation• The 5 Ws – Who, What, Why, When,

BUSINESS & PROFESSIONAL EXPENSESAuto Expense Deductions• Standard Mileage Rate (2014 = $.56/mi)• Actual Expense Method• NOTE: If you use Standard Mileage

Deduction in the first year you can switch to Actual Method, but you can’t switch back.

• Personal & commuting miles excluded

BUSINESS & PROFESSIONAL EXPENSESAuto Expense Deductions

Documenting Mileage requires the following:

Date, Destination, Business purpose, and Odometer readings.

Form 2106 or 2106EZ

BUSINESS & PROFESSIONAL EXPENSESOther Business and Professional Expenses• Business Gifts• Entertainment• Personal Computers – eligible for

depreciation under some circumstances.• Subscriptions and Books• Telephone• Cell Phone

THE DEASON RULE

The Deason Rule requires that all expenses be reduced in relation to the ratio of one’s housing allowance to compensation.

Example: If housing allowance makes up half of your total compensation, then your expenses are only deductible up to 50%.

* Note: This is the Litmus Test for tax preparers.

INCOME & SOCIAL SECURITY TAXES

• Federal Income Tax is a pay-as-you-go tax.• Voluntary Tax Withholding: Voluntary church withholding for est. payments.• Churches should not withhold FICA taxes for ministerial employees, but should for non-clergy employees.

Estimated Taxes• The method used to pay income and self-employment taxes for income not subject to withholding.• Avoid underpayment penalties when you pay at least 90% of the previous year’s tax liability.• Due Dates: 4/15, 6/15, 9/15, and 1/15

Social Security Taxes• Self-employed persons (clergy) pay social security taxes under the SECA tax. It is reported on Schedule SE.• Opting out of Social Security• Self-Employment tax deductions: ½ of your SE tax liability is deductible. (Line 27 Form 1040)

COMPLETING THE FORM 1040

See pages 30-33

See Handout Form 1040

COMPLETING THE FORM 1040

Examples pgs. 34-61

hello, my name is benjamin rainey i am a tax professional and have worked in tax preparation since...

congregation slide

clergy of housing expenses

relaxed slide

retroactive slide

housing allowance purposes

housing allowance compensation

housing allowance rules

secured housing

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