The new year is starting out with a positive change regarding retirement contributions. The limit for salary deferred contributions to your 403(b) is now up to $17,000 for those under age 50 and is at $22,500 for those over 50. The total limit including employer contributions can be as much as $50,000 in some cases. Call to learn more or to develop a clergy specific plan using your unique tax benefits in your retirement plan.
IR 2011-116; Notice 2012-1, 2012-1 IRB.
The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving. (Rev Proc 2010-51, 2010-51 IRB 883, see Federal Taxes Weekly Alert 06/30/2011).
Employers that require employees to supply their own autos may reimburse them at a rate that doesn’t exceed the business mileage allowance for employment-connected business mileage, whether the autos are owned or leased. (Rev Proc 2010-51, Sec. 9.01) The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee’s personal use of lower-priced company autos may be valued at the optional mileage allowance if the conditions specified in Reg. § 1.61-21(e)(1) are met.
A separate rate applies for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction. (Rev Proc 2010-51) The mileage rate for driving an auto for charitable use (14¢ per mile) is a statutory rate that’s not adjusted for inflation. (Code Sec. 170(i))
IRS generally adjusts the standard mileage rate annually, based on a yearly study of the fixed and variable costs of operating an auto. However, IRS announced a mid-year adjustment to the 2011 standard mileage rate for travel from July 1, 2011 to Dec. 31, 2011 to better reflect the real cost of operating an auto in the current period of rapidly rising gas prices. For the last half of 2011, the rate was raised to 55.5¢ per mile for business travel and to 23.5¢ per mile for using a car to get medical care or in connection with a move that qualifies for the moving expense (see Federal Taxes Weekly Alert 12/09/2011).
RIA observation: The advantages to using the standard mileage rate include:
· Mileage rate users need not keep a record of actual expenses, or retain receipts where required. A record of the time, place, business purpose and number of miles traveled suffices.
· If an auto’s business expenses are deducted via the mileage rate, it is not subject to the Code Sec. 280F dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.
· The mileage rate method may yield bigger deductions than the actual expense method for a thrifty, high-mileage model.
RIA observation: One of the disadvantages to using the standard mileage rate is that the mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years.
Standard mileage rates for 2012. Notice 2012-1 provides that the standard mileage rate for transportation or travel expenses is 55.5¢ per mile for all miles of business use (business standard mileage rate). The standard mileage rate is 23¢ per mile for use of an auto (1) for medical care described in Code Sec. 213; or (2) as part of a move for which the expenses are deductible under Code Sec. 217. The standard mileage rate is 14¢ per mile for use of an auto in rendering gratuitous services to a charitable organization under Code Sec. 170. (Notice 2012-1, Sec. 2)
As Notice 2012-1 notes, taxpayers using the standard mileage rates must comply with Rev Proc 2010-51. Accordingly, the standard mileage rate may not be used for a purchased auto if:
· it was previously depreciated using a method other than straight-line for its estimated useful life;
· a Code Sec. 179 expensing deduction was claimed for the auto;
· the taxpayer has claimed the additional first-year depreciation allowance;
· the taxpayer depreciated it using MACRS under Code Sec. 168; or
· the taxpayer is a rural mail carriers who receive qualified reimbursements. (Rev Proc 2010-51)
A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business-connected portion of actual expenses, so long as he depreciates it from that point on using straight-line depreciation over the auto’s remaining life. The depreciation deductions would still be subject to the Code Sec. 280F dollar caps. (Rev Proc 2010-51, Sec. 4.05(3))
Depreciation. For 2012, Notice 2012-1, Sec. 3, provides that the depreciation component of the mileage rate for autos used by the taxpayer for business purposes is 23¢ per mile for 2012. (It was 22¢ per mile fore 2011; 23¢ per mile for 2010; 21¢ for 2009 and 2008; and 19¢ per mile for 2007). The depreciation component reduces the basis of the auto for gain or loss purposes. (Rev Proc 2010-51, Sec. 4.04)
FAVR plans. A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period. (Rev Proc 2010-51, Sec. 4.05(2)) Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2012, the standard auto cost used to compute the FAVR allowance cannot exceed $28,000 (up from $26,900 for 2011). For trucks or vans, the 2012 standard auto cost used to compute the FAVR allowance cannot exceed $29,300 (up from $28,200 for 2011). (Notice 2012-1, Sec. 4)
Applications of mileage allowance to a fleet. Under current rules, the standard mileage rate can’t be used to compute the deductible expenses of more than four autos owned or leased by a taxpayer and used simultaneously (such as in fleet operations). (Rev Proc 2010-51, Sec. 4.05(1)) In Notice 2010-88, 2010-51 IRB 882, IRS asked for public comments on whether the-five-or-more car limitation for the standard mileage rate should be retained. In Notice 2012-1, after considering the single comment received and because of the limited response, IRS has said that it will currently make no changes to the limitation in Rev Proc 2010-51, Sec. 4.05(1).
When the new rates are effective. The revised standard mileage rates in Notice 2012-1 (55.5¢ for business; 23¢ for medical or moving) apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after Jan. 1, 2012, and to mileage allowances or reimbursements that are paid both (1) to an employee on or after Jan. 1, 2012, and (2) for transportation expenses paid or incurred by the employee (or charitable volunteer) on or after Jan. 1, 2012.
RIA Research References: For the optional mileage allowance, see FTC 2d/FIN ¶ L-1903; United States Tax Reporter ¶ 1624.157; TaxDesk ¶ 293,005.
Source: Federal Tax Updates on Checkpoint News tab 12/12/2011
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.
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.”
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.
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 |
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.
Ministers often work beyond the “normal” retirement age. Here’s how extending your work life can affect your taxes and retirement benefits.
“Normal” retirement age is not a fixed number. For Social Security purposes, the “full” retirement age threshold ranges from 65 to 67, depending on your birth date. However, you can elect to start receiving lower payments as early as age 62, or you can maximize your benefits by forgoing them until you’re 70. Once you reach age 70, there’s no incentive to postpone your benefits further, since you’ll already have reached your maximum.
Earnings limit. If you’re working, you probably should forgo the early payment option. Benefits received before full retirement age will be reduced by $1 for every $2 earned over an annual limit (currently $14,160). However, you will receive a compensating increase when you do reach full retirement age and your payments will not be reduced thereafter no matter how much you earn.
Taxable benefits. Even if you are receiving Social Security retirement benefits, you’ll continue to pay Social Security tax on any income you earn from wages or self-employment. Up to 85% of your Social Security retirement benefits may become subject to income tax, depending on the amount of your other income. An important tax planning strategy that most ministers overlook is to maximize your clergy housing allowance exclusion from ministry pension plans to avoid extra taxation on your Social Security retirement income. Retired ministers can save thousands of dollars in taxes by using this and other tax saving strategies.
Working beyond retirement age can require several complex decisions. Call us to schedule a complimentary consultation to see what’s best for you. Call 970-667-5819 or tune into our webinar, “Social Security in a Winning Retirement Strategy,” for great information.
The “HIRE Act,” passed in March, provides tax incentives for churches and nonprofit organizations to hire unemployed workers. One of these incentives is an exemption from Social Security payroll taxes for every qualified worker hired after February 3, 2010, and before January 1, 2011. This new incentive only applies to “lay” employees and does not apply to “minister status” employees.
A new IRS form is available for employers to document this payroll tax exemption for hiring unemployed workers. Form W-11 (Hiring Incentives to Restore Employment Act Employee Affidavit) is to be filled out by the new hire, certifying under penalty of perjury that he or she was either unemployed or worked fewer than a total of 40 hours during the 60 days prior to taking the current job. The W-11 forms are not filed with the IRS. The employer must keep them along with other payroll records.
Health Care Tax Credits were included in the recent health care reform legislation for certain small businesses that provide health insurance to their employees. The IRS is in the process of mailing postcards to more than four million small businesses and tax-exempt organizations to make them aware of this new credit for 2010.
The credit is generally available to small companies and tax-exempt organizations that pay at least 50% of the cost of single coverage for their employees. For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible employers (25% for tax-exempts).
Under the right circumstances, these tax incentives can save churches and nonprofits thousands of dollars. Call us to schedule a consultation to discuss how these tax incentives may benefit your organization.
IRS has announced the 2010 MILEAGE RATES:
STANDARD BUSINESS RATE 50¢ per mile
MOVING & MEDICAL RATE 16.5¢ per mile
The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees and tolls connected to business driving, (rev Proc 2009-54, Sec. 5.04)
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