Clergy Taxes Blog

You need the most current information on clergy tax to stay on top of ways you can save money and have financial peace of mind. The Clergy Advantage® blog provides timely information on clergy tax preparation, financial planning, retirement concerns, and insurance, specifically for clergy and church workers.

Want to know more about your clergy housing allowance? Or, do you need advice or accurate information like our clergy tax guide? Access the latest information on these topics and more. Feel free to comment below or contact us with questions.

Social Security Allowance is a Confusing Topic for Churches

Ministers or church leaders often ask our advice on how to figure the amount of the Social Security Allowance. The IRS does not require churches to pay a Social Security Allowance to its minister staff and provide no guidance on how to structure it. As a result, many churches have devised many ways to structure the Social Security Allowance. While there is not a right or wrong way to do this, many churches make the calculation too complex and confusing.

First, we suggest that the amount be set at whatever the church would be paying in “Employer Social Security and Medicare Taxes” to a non-pastor staff member with that same level of pay. This would be 7.65% of their total pay and would be paid to all ministers regardless of whether the minister has opted out of Social Security.

There is a compelling simplicity and a sense of fairness for a church to say: “For all of our workers, we will pay a Social Security (and Medicare) amount equal to 7.65% of their total pay (up to the Social Security ceiling of $110,100).” For non-pastors this comes in the form of the government-required employer contribution to Social Security and Medicare. For pastors, it comes in the form of a Social Security Allowance equal to 7.65% of salary and housing.

While I totally understand the initial inclination to exclude pastors who are exempt from Social Security and to reduce the Social Security Allowance for ministers who are contributing to a 403(b) retirement account, I suggest that it might be more ‘fair’ and appropriate to not exclude exempt ministers and not reduce the Social Security Allowance for ministers who contribute to a 403(b) retirement account.

In making this suggestion, we are proposing that the church base the Social Security Allowance only on the worker’s total pay and on the current Social Security and Medicare tax rate for employers, rather than basing the Allowance on the minister’s actual Social Security tax liability.

This is an important distinction. The minister’s actual Social Security tax liability can be impacted by various other factors including un-reimbursed ministry expenses and the existence of income from other sources which could conceivably push some minister’s work income beyond the $110,100 Social Security ceiling, thus reducing the amount of Social Security tax that they pay on their church income.

In addition,

paying a larger Social Security Allowance to ministers who do not contribute to their retirement account could appear to be a subtle bias toward having ministers not make 403(b) retirement contributions.
Similarly, paying a Social Security Allowance to ministers to have not opted out, but withholding it from ministers who have opted out, could conceivable be seen as unfair by those who have opted out.

There is a practical reason for ignoring 403(b) retirement contributions when setting the amount of the Social Security Allowance: The IRS allows employees to change the amount of their elective contributions to 403(b) from time to time. Having to change the Social Security Allowance every time a minister changes their 403(b) contribution makes things unnecessarily complicated.

We realize that it sounds quite odd to suggest paying a Social Security Allowance to ministers who have opted out of Social Security! My additional rationale for proposing that is this:

Those ministers who have opted out of Social Security will need to invest in other programs (alternatives to Social Security) to make sure that they – and their families – are covered for retirement, survivor benefits, and disability benefits.

Generally, the decision to opt out of Social Security significantly reduces the future benefits that those ministers will receive from Social Security. As a result, we strongly advise ministers who have opted out of Social Security to set aside an amount comparable to what they would be paying in Social Security taxes, and use those comparable funds to pay for increased life insurance, dramatically increased retirement funding, and perhaps disability insurance

This entry was posted on Tuesday, January 31st, 2012 at 3:40 pm and is filed under Blog, Blog Home Link, Client Resources, Tax Tips for Ministers, Tips. You can follow any responses to this entry through the RSS 2.0 feed.

Overlooked tax deductions

Listed below are some frequently overlooked tax deductions that might help reduce your tax bill. Please remember that whenever we talk about taxes, the following caveats apply: “It depends,” and “these deductions may not apply to all taxpayers.”

If you have any questions about these or any other tax-related matters, please let us know. We look forward to talking to you or seeing you soon!

Charitable contributions: In addition to the usual cash donations that you have made throughout the year, you may be able to deduct the cost of using your vehicle if you volunteer your time or provide a service to a qualified charitable, educational or nonprofit organization.

There are two options available for claiming vehicle expenses and, naturally, the IRS requires you to have “reliable written records” for either method:

To use the standard charitable mileage rate of 14¢ per mile, your records must show

1. the name of the organization,

2. the dates you drove your car for your charitable work and

3. the number of miles driven.

To use the actual vehicle expenses, your records must show the costs of operating your vehicle that directly relate to your volunteer work.

You can also deduct parking fees and tolls regardless of which method is used.

Additionally, money spent out of your own pocket within the scope of your volunteer work may be deductible. These expenses might include office supplies, uniforms, and even travel expenses if you were away from home while performing your charitable service. Documentation requirements for out-of-pocket expenses are:

1. You must have “adequate records” to prove the amount of the expenses.

2. Obtain an acknowledgement from the organization before you file your tax return that contains a description of the services you provide, a statement that says you were not reimbursed for the expenses, and that you receive no tangible (other than religious) benefit from the organization.

The final point under the category of charitable contributions, is simply a reminder regarding noncash contributions: In recent years the IRS has stiffened the required documentation for donations of clothing and other household items to nonprofit organizations like the Salvation Army or the Goodwill Industries. “Three bags of clothing” or “two boxes of books” is not an adequate description of the donated items to claim the deduction. You must have:

1. A list of the donated items along with their fair market value

2. And some form of receipt or acknowledgement from the organization.

Here are a few handy websites to help you evaluate your noncash items:

Two different Salvation Army evaluation guides can be found here:

http://www.satruck.com/ValueGuide.aspx

http://www.salvationarmysouth.org/valueguide.htm

You can download an evaluation guide from the yellow box in the middle of this Goodwill Industries web page:

http://www.goodwill.org/get-involved/donate/taxes-and-your-donation/

This Usedprice.com link contains Blue Book valuations for different categories of noncash donations from television sets and computers to guns, musical instruments, power tools and more:

This entry was posted on Monday, January 23rd, 2012 at 12:08 pm and is filed under Blog, Blog Home Link, Tax Tips for Ministers, Tips. You can follow any responses to this entry through the RSS 2.0 feed.

Housing Allowance for Secondary Residence?

The Driscoll v. Commissioner Tax Court case where the court allowed the clergy housing allowance on the minister’s primary house PLUS his lake house has caused a bit of controversy that we’d like to address.

We are very familiar with the case and have been following it closely. Remember that the IRS has appealed this case and has not acquiesced to the Tax Court decision. We are anticipating a ruling from the Appeals Court sometime during 2012.

Because of that, our recommendation is to NOT rely on the Tax Court decision, but instead, wait for a ruling from the Appeals Court. After the Appeals Court rules on this case, we will provide a complete analysis to anyone interested.

In the event a minister has a second house, we recommend that the employer designate a housing allowance in an amount that will cover the housing expenses of both homes in the event the Appeals Court rules in favor of the Taxpayer. However, do not exclude from gross income the housing expenses of the second home until we complete our analysis of the Appeals Court decision.

This entry was posted on Wednesday, December 28th, 2011 at 1:11 pm and is filed under Blog, Blog Home Link, Client Resources, Tax Tips for Ministers, Tips. You can follow any responses to this entry through the RSS 2.0 feed.

The Incredible Value of an Accountable Plan for Ministers

I ran this notice in the last newsletter but want to reemphasize the importance of an Accountable plan for ministers. After learning of the current IRS focus at this year’s National Forum, and observing a 5-fold increase in “IRS Notices” to our clients this year, I must stress the all too real vulnerability that you and other ministers have for audit potential.

There are two areas that cause the most problems for pastors on their tax returns:

1. Charitable contributions because they’re typically disproportionately large. (This is easily defended if you keep good records, and most of you do). However, here’s my real concern;

2. Ministry expenses are frequently not adequately accounted for and thus can cause incredible hassles not to mention a huge loss financially. We’re seeing this too often. Those expenses include car mileage, travel, meals and entertainment among other things. Wrongfully accounting for ministry expenses can cost a lot in missed savings every year and be one of the biggest areas of contention on your tax return. This can put you at greater risk of audit if you do NOT have an Accountable Plan that is properly set up and implemented.

It grieves me to see ministers spending money for us to represent them in an unnecessary audit. So, for these reasons, we’ve declared October the month of the “National Accountable Plan for Ministry Expenses” (actually it’s now extended to the end of the year) and made the workshop available AT NO COST.

I hope you will use this tool to increase tax savings, reduce audit potential and make it easier for your board to see what you’re actually making. (Which in our experience often results in a pay raise!)

If done right, an Accountable Plan will almost always increase your pay while it removes a HUGE area of AUDIT potential at no additional cost to you or the church! Hence, there’s no downside, so no reason to put it off any longer.

Click “Upcoming Events” to register to view the video or find the link on our home page. Call for more information or a personal consultation 970-667-5819.

This entry was posted on Saturday, September 17th, 2011 at 12:08 pm and is filed under Blog, Blog Home Link, Client Resources, Tax Tips for Ministers, Tips, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed.

Fear is a Poor Strategy

Fear is NOT a good Strategy

Last week we all listened and watched the “deficit debates” and the ensuing media commentary that seems to be designed to alarm even the most stalwart observer.

As the S&P slid into another “unprecedented downgrade” subsequent to the media hype, many investors began “selling first and questioning later.” It’s understandable that many jumped to the conclusion that this is a repeat of 2008. But wait:

It’s easy to forget that the market dropped 15% last summer due to the same media fear mongering about Europe debt woes, our own country’s legitimate deficit concerns, concerns about a double dip recession….remember? Pundits warned then (as now) that, “if you think August was bad, wait til September! September is historically the worst month of the stock market.”

The reality is that banks are much better capitalized and money is moving much more freely than in the 2008 credit crisis.
Furthermore, last September wound up being the best performing month in 71 years.

Unprecented? I’ll say. Ironically, many investors are buying Treasury Bonds by the boatload in record numbers, even though yields are down 10 basis points as of the morning of this writing. These are the very bonds that are the real culprit of this whole ‘crisis.’ The talk is that the government might default on treasury bonds. Obviously, it makes no sense to sell the part of our economy that is showing strength (corporate earnings or stocks) to buy what is weak and fragile (bonds).

So why, you ask, are people doing this? One word: “fear.” It is always a challenge to filter through the media noise and make sound decisions when so much is seemingly at stake. This is especially true when waves are pounding your accounts in the wake of a tsunami. What is really so unsettling about all of this is that there’s nothing “unprecedented” at all. It’s the same old script.

We’re not downplaying the significance of this summer’s market uncertainty and the very real urge to bail out for safer terrain when the waves keep rolling in. We just don’t want fear to be part of your long term portfolio or strategy. It has never worked well for anyone in the past and we don’t expect that to change anytime soon. History tells us that this type of environment offers the best investment opportunities. Investor patience and a quality portfolio have always yielded the highest rewards.

We hope these thoughts will help you make more informed decisions about your financial strategy. We welcome your call if you have questions or concerns about your current investment strategies.

This entry was posted on Tuesday, August 9th, 2011 at 7:54 pm and is filed under Blog, Client Resources, Tax Tips for Ministers, Tips, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed.

Mixing Business with Pleasure can be good for you and your pocket book.

Tax breaks are available for travelers who mix a bit of pleasure with their business travel

Although video conferencing and electronic communication have made inroads in the ranks of business travelers, there still are many situations where it’s necessary to travel for face-to-face meetings. Businesspeople or ministers who must travel for work reasons should keep in mind that they may be able to qualify for a travel bargain by piggybacking a vacation onto an out-of-town business trip.

In effect, the business traveler gets free vacation airfare if the trip is set up the right way. And if the travel is undertaken for an employer, a properly set up reimbursement arrangement for the business portion of the trip will be income- and payroll-tax-free.

Let’s take a closer look at how this combination works for domestic travel, along with a review of other business travel strategies that may yield personal savings. It doesn’t cover some of the more specialized rules, such as those that apply to travelers in the transportation industry, or the per diem reimbursement rules.

Deductions for trips undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler but the personal portion of the trip yields no tax benefit. This is another great example of why an Accountable plan is so beneficial for ministers. It must be set up and managed properly, but there isn’t a better way for most ministers to save on ministry expenses. It can put considerable savings back in your pocket, each and every year of ministry. For more details about the six major advantages and how to do this right, check out our webinar, “Don’t let Ministry Expenses Eat Your Lunch.”)

In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.

Illustration 1: Jane, a minister, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.

Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.

Illustration 2: The facts are the same as in illustration (1), except that Jane is employed by a church that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).

Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane. That’s true even though she took a mini-vacation after her business trip ended.

Illustration 3: The facts are the same as in illustration (2), except that the church or employer reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation. Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion’s value (hotel, meals, etc.), which must be treated as compensation income.

When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regulations do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.”

Illustration 4: Fred pastors in Atlanta and travels to New Orleans for a ministry related conference. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.

Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status.

Another note, the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).

Caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.

Saturday night stay-overs. Although an employee’s out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stay-over, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn’t pay tax on the reimbursement for his Saturday meal and lodging expenses. In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”

When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) and can be excluded if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, the IRS treats such standby days as business days.

Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location.

Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren’t deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bonafide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion.

Nevertheless, even if the spouse’s or other companion’s travel expenses aren’t deductible, a tax benefit may still be salvaged from traveling together. That’s because the business traveler’s deduction isn’t based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $100 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two.

Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for non-business purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip.

Publication 463 referenced in this article can be viewed on the IRS website at http://www.irs.gov/pub/irs-pdf/p463.pdf .

This entry was posted on Friday, June 24th, 2011 at 2:01 pm and is filed under Blog, Client Resources, Tax Tips for Ministers, Tips. You can follow any responses to this entry through the RSS 2.0 feed.

IRS Increases Mileage Rate to 55.5

The Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

“This year’s increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices,” said IRS Commissioner Doug Shulman. “We are taking this step so the reimbursement rate will be fair to taxpayers.”

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes

Purpose	Rates 1/1 through 6/30/11	Rates 7/1 through 12/31/11
Business	51	55.5
Medical/Moving	19	23.5
Charitable	14	14

This entry was posted on Friday, June 24th, 2011 at 1:27 pm and is filed under Blog, Client Resources, Tax Tips for Ministers, Tips, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed.

The Clergy Tax Puzzle

Not utilizing all of your tax benefits could be costing you thousands of dollars in unnecessary taxes every year. Don’t be a tax casualty and keep your housing allowance benefits for life. Transform the way you use your tax benefits. Attend our free, “Tax Free Money for Ministers” and “Don’t Let Ministry Expenses Eat Your Lunch.”

By breaking the puzzle into three main categories and fitting them into a practical and complete plan, you’re likely to see huge savings right away. Learn how to maximize the critical, “Tax Biggies” and 90% of your tax puzzle is solved:

Housing Allowance
Maintaining Housing Allowance Benefits FOR LIFE & using the right retirement plan
Understanding Ministry Expenses and the Accountable Plan

Using your housing allowance effectively requires much more than knowing what you can & can’t deduct. Understand three basic principles before setting your housing allowance for the year. Learn effective strategies for special circumstances like, buying or selling a house to create even more tax deductions.

Keep your housing allowance benefits when you retire. Even if you never plan to retire, you can have the tax free stream of income for life. The wrong kind of retirement plan can cost you your housing allowance benefits and tens of thousands of dollars over the years. There are unique tax strategies available to pastors, and there are unique financial strategies available as well.

Ministerial Expenses are a huge area of tax losses for ministers without an Accountable plan. If your Accountable Plan isn’t set up and implemented properly, you ARE LOSING significant deductions every year. Discover a host of frequently overlooked deductions AND reduce your audit risk enormously. If you’re a typical pastor, you could be adding hundreds or even thousands to your income every year. You’ll have everything you need to present to your board, implement and budget an Accountable Plan.

This entry was posted on Tuesday, January 11th, 2011 at 3:52 pm and is filed under Blog, Blog Home Link, Client Resources, Tax Tips for Ministers, Tips, Upcoming Events. You can follow any responses to this entry through the RSS 2.0 feed.

New Tax Provisions for Roth IRA Conversions in 2010

You owe it to yourself to see if a Roth IRA is a good strategy for you. We’ve used and advocated converting retirement income into a Roth IRA for many people over the years, but it has become even more appealing due to new tax provisions for 2010. Some of the restrictions on converting money to a Roth have been removed and you can actually undo any portion of the conversion as late as October of next year.

Who should look at a Roth IRA Conversion?

This is an individual discussion because of all the various concerns and factors for each situation. We’re suggesting that everyone take a look at the benefits of converting some or all of a regular IRA into a Roth, particularly if you’re a married minister or in a high or low tax bracket. Many ministers in the 0% tax bracket don’t realize it because of their housing allowance. These people definitely meet some of the criteria to consider a Roth conversion. However, you can’t automatically disqualify yourself if you fall into the middle ( 10-15% ) tax brackets either. Don’t believe you’re too young or too old for this strategy to work for you, either. For many, but not all ministers, the best time to consider this strategy is when housing espenses are highest.

Your state tax and estate plan need to be taken into account, as well as, the cost and possible tax ramifications for the year of the coversion and a myriad of other factors, so it’s not as simple a calculation as one would hope. Most people shouldn’t try to figure this one out on their own. The best way to determine and weigh all of the necessary factors is to evaluate your situation carefully with a qualified tax planner and financial advisor. We’ll go deeper into the ramifications and criteria if you’d like to call us for a personal evaluation or join us for a free webinar for more details. Learn more details of Roth IRA Conversions in a free webinar to discover more about Who should convert and Why. Click here for information or to Register.

This entry was posted on Thursday, August 12th, 2010 at 11:00 am and is filed under Blog, Blog Home Link, Client Resources, Tax Tips for Ministers, Tips, Uncategorized, Upcoming Events. You can follow any responses to this entry through the RSS 2.0 feed.

2010 HSA Limits Increased

The IRS recently provided the inflation-adjusted contribution limits for health savings accounts (HSAs) for 2010. HSAs allow taxpayers with high-deductible health insurance plans to set aside pretax dollars that can be withdrawn tax-free to pay unreimbursed medical expenses.

The 2010 contribution limit for individuals is $3,050; the limit for family coverage is $6,150. A catch-up contribution of an additional $1,000 is permitted for individuals who are 55 or older.

This entry was posted on Monday, May 24th, 2010 at 1:00 am and is filed under Blog, Blog Home Link, Client Resources, Tax Tips for Ministers, Tips. You can follow any responses to this entry through the RSS 2.0 feed.