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. (click here to register) 

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.

2.  Taxpayers over age 70½ must take their 2010 Required Minimum Distributions (RMD), unlike 2009.

3.  Homebuyer Credits of up to $8,000 are available if you did not own your principal residence for the previous 36 months and buy a principal residence between 04/09/08 and 04/30/10.  Also eligible: those who have owned one principal residence for at least 5 years and who buy and move to another between 11/7/2009 and 4/30/2010.  Additional requirements must be met.  Deadlines may be extended to 6/30/2010 if you have a binding contract by 4/30/2010.

4.  Conversions to Roth IRA are allowed for everyone in 2010; income limits have been eliminated.   High income taxpayers previously ineligible for Roth contributions and Roth conversions now can contribute to nondeductible IRAs and then convert those sums to Roth IRA, sometimes without any tax liability.  However, there are potential pitfalls!  You can also convert in 2010 and wait to pay the tax in 2011 & 2012 – but this may not be advisable if the tax rates are higher then.

5.  College education credits are better in ’09 & ’10 for students in their first 4 years of college.  Tuition credits are larger and now partially refundable even if you have no tax.  Books, computers, and other required materials are now allowable.  For schools in Midwest Disaster areas (parts of AR, IL, IN, IA, MO, NE, WI), room & board costs are allowable and the credit is larger than elsewhere.  The AOTC phases out if modified AGI is $160,000 – $180,000 ($80,000 – $90,000 if single).

6.  Home energy improvement (certain insulation, storm windows, heaters, etc.) credits are restored and increased (30% of the first $5,000 of costs) for 2009 and 2010.  An unlimited 30% credit is allowed through 2016 for certain solar panels, solar water heating equipment, geothermal systems, and other alternative energy improvements.

7.  For 2009, sales and excise taxes on a brand new vehicle purchased after 2/16/09 is deductible even for those who do not itemize.  Real estate tax is also deductible in 2009, up to certain limits, even for those who do not itemize.

8.  Standard mileage rates, set annually by the IRS, may be used instead of actual operating and ownership:

9.  Charitable gifts. For all monetary contributions you need a cancelled check, bank record, or detailed receipt.  Gifts of $250 or more require a receipt and a cancelled check.  Haiti relief donations through 2/28/10 can be claimed for ’09 or ’10.

10.  403(b) Retirement Plans allow salary reductions of $16,500 in ’09 and ’10; $22,000 if age 50 or over.  Employer and employee combined contributions cannot exceed $49,000 in ’09 and ’10.  For ministers wanting to receive tax-free clergy housing allowance benefits throughout retirement, we offer the Clergy Advantage 403(b) Retirement Plan. Call us for details.

11.  IRA & Roth IRA contribution limits per person in ’09 and ’10 are $5,000; $6,000 if age 50 or over.  IRA deductions phase out if you participate in an employer retirement plan and have modified AGI of: $89,000 – $109,000 joint; $55,000 – $65,000 single.  The phaseout for Roth IRA contributions is $166,000 – $176,000 on a joint return ($105,000 – $120,000 if single), as is the phaseout for traditional IRA deductions of a person not covered by a qualified plan but whose spouse is.

12.  A 10%-50% “Retirement Savings Tax Credit” on the first $2,000 per spouse contributed to IRA, Roth IRA, 403(b), or certain other retirement plans.  Available only if modified AGI is less than: $55,500 filing joint; $27,750 filing single.

13.  The Child Tax Credit is $1,000 for each dependent child under 17.  It can be refundable, even if you have no income tax. Phases out when AGI is over $110,000 if filing jointly and $75,000 if single.  A separate Dependent Care Credit lets you claim $3,000 per child ($6,000 per family) of costs incurred to allow the parent(s) to work or attend school full time.

14.  Health Savings Account contribution limits: $3,000/yr ($3,050/yr for 2010) for individual coverage or $5,950/yr ($6,150/yr for 2010) for family coverage, plus $1,000 if the policyholder is at least age 55.

15.  2009 taxable income for married (singles) is taxed at:  10% up to $16,700 ($8,350), 15% up to $67,900 ($33,950), and 25% up to $137,050 ($82,250); thereafter at 28% to 35%.

16.  The ceiling on which Social Security tax is assessed is $106,800 in ’09 and ’10.  In ’09, $1,090 of “FICA” wages or $1,185 of net self-employment income results in one quarter Social Security credit.

17.  Retirees age 62 – 66 who receive Social Security retirement benefits lose some or all of those benefits if earned income exceeds the earnings ceilings.  We can help with your pay package to avoid this problem!  Caution:  The number of hours that you work can also create issues with Social Security.  In the year workers turn 66, a special limit applies to earnings up through the month before they turn 66.

18.  Estate Tax Exclusion: $3.5 million in ’09.  Annual Gift Exclusion:  $13,000 in ’09 and ‘10.

19.   Consider conversions to a Roth IRA. We’ll help determine if this is appropriate in your situation.

20.  Clergy housing allowance is not subject to income tax to the extent spent on the minister’s principal residence and to the extent that it does not exceed the fair rental value of that residence furnished, plus the cost of utilities.  No IRS guidance has been given yet on how to determine the fair rental value of a furnished home.

21.  An Accountable Plan to pay or reimburse all job-related expenses is vital for maximum tax savings and to reduce audit risk.  Business miles include driving on the job, between jobs, to business events, and to manage rental property.  It does not include commuting between home and any regular place of employment.

22.  Per Diem rates for business travel away from home (lodging, meals & incidental expenses):  Employers may pay or reimburse travel expenses on an actual cost or per diem basis.  Employees may use the meal allowance for reimbursement or for a deduction on their tax return.  They may use the lodging and combined allowance only when being reimbursed by their employer.  Self-employed persons may use the meal allowance if being reimbursed or if deducting expenses on their tax return, but may not use the lodging per diem.  High cost locations are listed in IRS Pub. 463. The ’09 rates:

23. IRS:  1-800-829-1040.  Status of your IRS refund:  www.irs.gov or 1-800-829-4477, with your tax return in hand.

 1.  Contribute to the limit.  You may save $5,000 – $9,000 of tax if you contribute to your Clergy Advantage 403(b) or Denominational Retirement Plan the maximum allowable amount:  $22,000 if over age 50; $16,500 if younger.  There are amazingly effective strategies to help you afford to contribute the maximum, especially if you are over 59 1/2! 

2.   Most often the best retrirement plan for a minister, by far, is either a Denominational Plan or the Clergy Advantage 403(b).  The next best option usually is to contribute to a Roth IRA.  Have you considered the dramatic benefits of these two opportunities?  We can show you how these would work best in your situation.

3. If you have zero taxable income in 2010, we can show you how to convert money from an existing retirement account to a Roth IRA, typically with no tax!

4.  If you own mutual funds, stock, land, houses, rentals, or other ivestments, the expiring capital gains rates make 2010 a huge opportunity to harvest gains at a  discounted rate. The deadline is December of 2010, but don’t put this off until then.  Talk about it now with your tax advisor and plan ahead.

Check this Blog next Monday or watch your inbox for our annual publication, “Tax Updates and Reminders” with more important information about your current tax savings opportunities for 2010 — to be emailed in our next E-newsletter.   Contact us or Sign up for our free newsletters at clergy@clergysupport.com.

Under current law, employees receive a fringe benefit when they receive a cell phone from an employer and the employer acquires and pays the costs of using the cell phone.

 To the extent that the employee uses the employer’s cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit that is excludable from the employee’s gross income. However, to the extent the employee uses the employer’s cell phone for personal purposes, the fair market value of such usage is includable in the employee’s gross income.

[Shulman comments on the Jan. 8, 2010 C-SPAN Newsmakers program] The IRS Commissioner and Treasury Secretary recently urged strong recommendations to Congress that there be no tax consequences to employers or employees for personal use of cell phones:

A report from the IRS Commissioner Douglas Shulman, claims he is optimistic that Congress will enact legislation this year to make it clear that personal use of employer-provided cell phones will not be subject to taxation. 

In June 2009, the IRS proposed simplification of the cell phone substantiation requirements. Shortly thereafter, Shulman and Treasury Secretary Timothy Geithner urged Congress “to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete.”

Shulman now says that the IRS will not be moving forward with any of its cell phone initiatives.

Cell phone contributions made through text messages can be deducted if the cell phone bills are provided as proof of donation.

Typically, charitable donations count toward the year they are made.  This legislation means taxpayers don’t have to wait until next year to claim the benefit.  The Haiti relief contribution will count as an itemized deduction. Itemized deductions are typically taken when an individual exceeds the standard deduction.

If your adjusted gross income for 2009 tops $166,800 or $83,400 if married and filing separately, your charitable contribution is subject to the reduction of itemized contributions, usually 1%.

For cash contributions, the deducted ceiling is typically 50% of adjusted gross income, although in 2005, Congress passed legislation allowing 100% of income.

For 2010 that amount is $14,160 for workers age 62 to 66. If you’re over age 66, you may earn as much as you want without losing any Social Security benefits. However, you may pay income tax on Social Security benefits as your income increases.  In the year that you turn 66 you’ll enjoy a higher earnings ceiling (of $37,680 in the year 2010).

Income counted toward the Earnings Ceiling would include:

Ministry Salary, Honoraria, Housing Allowance, Parsonage Rental Value, Social Security allowance paid by the church, other secular work income or any other income from work.

Income not counted toward that ceiling includes:

Interest and dividends, Pensions, IRA’s, TSA’s or Annuities, any rental income and capital gains.

Also, church payments that do not count towards the ceiling include medical insurance for the worker and family. (Medical expenses reimbursed under a properly established Medical Reimbursement Plan will typically cover out-of-pocket expenses, such as deductibles, co-insurance amounts, dental care and eyeglasses).  Payment of other ministry expenses such as automobile mileage, meals, entertainment, books, seminars, etc. also do not count.  Money set aside by the church for a “Rabbi Trust” or  church payments to a 403(b) Retirement Plan is also excludable from the Earnings Ceiling.

Any time we mention a 403 (b) retirement plan to pastors, we feel that  we must emphasize this:  If your 403(b) is a regular secular plan and not a denominational plan or the Clergy Advantage 403(b) Retirement Plan, we strongly recommend that you call us or attend our next  ”Tax Free Money for Ministers” webinar to see why this is so important. Click a date on the Home page under “Upcoming Events” to Register and see details.  There is no charge for ministers, pastors and/or their spouses.

Also note this potential pitfall:  If your church sets aside funds in a deferred compensation account in the church name to pay out in a later year, this must generally be treated as income in 2010, even if it’s not paid to you until 2011. We’ll elaborate on this if you need more information. There are two exceptions, already mentioned above: the 403(b) retirement plan and a Rabbi Trust, if done correctly.

For a great, detailed explanation of  Social Security benefits and strategies, you’re welcome to attend our “Transforming Social Security in a Winning Retirement Strategy” webinar on January 19. See “Upcoming Events” on the Home Page for details.  These webinars are free to all pastors and their spouses.

How much housing allowance can I claim on my tax return in a given year?  

The clergy tax code imposes three limitations here. Ministers may only claim the lower of these three:

(1) the amount of the housing allowance designated by the church.

(2) the fair rental value of the minister’s furnished home, plus utilities.

(3) the amount spent that year to buy, rent, furnish, improve and maintain the primary residence.

A real estate agent can be helpful in figuring out the fair rental value of an unfurnished home.  But, one problem with these calculations has always been in determining the fair rental value of a furnished home. We discuss this at length in our “Tax Free Money for Minister’s” webinar. Certainly the fair rental value of a furnished home is significantly more than an unfurnished home, there’s no argument there. 

However, the IRS has not  provided official guidance on how to determine the fair rental value of a furnished home, even though it’s been directed to do so. With this in mind, we’ve notified the IRS as to how we’re treating this situation on our minister’s tax returns and thus far have experienced no difficulties. 

When can I change my housing allowance limits?

The Housing Allowance designation can be changed or amended anytime throughout the year but, never retro-actively. This means that the new designation applies only to the money remaining to be paid for that year. If you anticipate extra costs in the months ahead for a home purchase, repair, addition, etc. you may adjust your housing allowance designation before you incur the expense.  You may even designate the entire amount of your salary as housing allowance, if necessary, and is often very appropriate to do so.

How much can my employer designate for housing allowance?  My church board believes that $40,000 is the limit. 

We can’t be more emphatic about this; there are no official limits, except those numbered and mentioned above in the first question. The Tax Code Regulations and Rulings impose NO LIMITS on housing allowance designations.  In some cases, including part-time ministry, semi-retired ministers, particularly high housing costs,and the situations already mentioned above,  it may be acceptable and even advisable for 100% of a ministers salary to be designated as housing allowance.

For more detailed strategies visit our “Tax- Free Money for Ministers” webinar.  The link to register is located on the home page under “Upcoming Events.”  There’s no investment other than an hour of time from the convenience of your home or office computer. We’re sure you’ll go away with very valuable tax saving tips that you can start implementing immediately.