Tax Time Q&A
Last week I invited you to submit your Income
Tax questions and I promised I’d take a swipe at them. You did—38 questions
in all, so here are my answers.
Q #1: SEMINARY SUPPORT THRU
UMC Rev2B said... So... Hypothetically... I'm a member of a congregation that hasn't
sent anyone to seminary for a very long time. I'm headed there this fall. The
likelihood of anyone following anytime soon is... well, that's God's
call.
If the congregation were to establish a seminarian support fund and I and some
friends and family members (and hopefully some members of the congregation, but
likely in relatively small amounts) were to make generous contributions to that
fund prior to and during my enrollment in seminary, can we take the tax
deduction if I'm the only one benefitting from the
money in the fund?
A #1: It’s doubtful, IRS has closed
these loopholes where you can give to yourself tax-deductible gifts and they
make it hard for your dad to do it too. Such a fund could be legal if it
was an on-going fund, contributed to by others, and the money wasn’t YOUR
support fund but ANY seminary student’s fund from your church. And I
think the church would need to designate the target amount so that it wasn’t
just a pass-through gift that was “laundered” through the church. Of
course you probably already know that your name can’t be on the church, and if
you don’t go to seminary nobody gets their money back.
Q #2: OPTING OUT OF SOCIAL SECURITY
lukemiddleton said...
Your thoughts
on a minister's choice to opt out of social security?
A #2: Almost impossible to do with
integrity and honestly. It is like being a CO on military service—you
have to actually have a religious reason for not joining—it can’t be political
or financial. And you have to do it by the end of the second year
you earn ministerial income over $400.If you have not filed by then—your chance
is gone forever. You can’t
opt out of Social Security
because you think it is a bad investment. Under penalty of perjury you must
make statements on IRS Form 4361 and it is very hard to get out honestly. You must
say that on the basis of your faith you are opposed to any kind of public
insurance whatsoever including payments for death, disability, retirement, or
medical care and that you’ve told your district about it. There are people
(especially those living in communes or who might be a member of a collective sect
or religious order who can do this honestly, but few ministers I know can. For
a real live story se Jeff’s post next here:
Jeff said...
Just a quick word to Lukemiddleton
- I opted out back in 1983. I was young and following the advice of another
minister. I regret having done it. Couple of reasons.
One, it was immoral. I lied. I didn't opt out on religious grounds,
I opted out for financial gain. Second, now as I'm approaching 50 this year,
the question of what I'm going to do for retirement is huge. See, I didn't save
all that money that was supposed to have gone in investments. Now I'm wondering
what to do. At this point I don't have enough quarter earnings to qualify even
for medicare. I'm going to have to get a second job
outside of ministry to earn that. SO - that leads to my question Keith, what do
you suggest for us guys approaching our last couple of decades with no real
retirement plan in effect?
Monday,
March 27, 2006 4:48:41 PM A: Jeff you have done others a great service here
with your “testimony.” Most of my students never imagine being 50 years
old in their life. My advice for you is to get that second job to qualify for
Medicare at least, and pray they your health is strong so you can keep pasturing
a church until 70 when you should have saved about $250,000 so you will be able
to survive in retirement without Social Security.
Q #3: CHURCH WITHHOLDS MY TITHE FROM MY CHECK
Anonymous said... For years, I received a weekly
pay check for 90% of my cash salary. The church retained 10% as a “payroll
withholding” for my tithe and reported only the 90% as income on my W-2 form.
However, my new treasurer now insists that the entire 100% must be reported as
income on the W-2 form as there is no statue in the tax code for such “payroll
withholding”. Originally, this method was recommended by a CPA who
specializes in clergy taxes. His logic was that most pastors can’t deduct their
tithe. Because many pastors don’t own a house, they don’t have enough
deductions itemize on a 1040 long form. He also argued that a pastor’s tithe is
a required condition of employment as he must report his tithing on his annual
service report. I also know another pastor who refuses every 10th paycheck and
similarly reports only the 90% because he never received the 10th check.
Do you discourage such methods of a 10% “payroll withholding”? Is it legitimate
for the church to report only the 90% on the W-2 form?
A #3: I’d discourage it on theological reasons
alone—giving a tithe is a part of worship (I feel that way about direct-deposit
tithe too). I’ve heard of this system and it is smelly even though it
might be legal. I suppose that EVERY pastor could use it by saying “I’m
definitely worth 10% more than they agreed to pay me so they already ‘took it
out’ so I don’t pay my tithe—I gave at the office.” (But what kind of pastor
could do that with a clear conscience?—not one worth listening to when she
preaches…) I suppose it may be “legal” but it smells. And you get
ripped off too—you save nothing on income taxes (your giving is deductible
anyway) and it only reduces what you pay on Social Security and thus what
you’ll get back when you retire. But FOR THE CHURCH it saves them a little—they
don’t have to pay any SS reimbursement to you on that money, and when you
retire you’ll get a lower SS payment every month—but by then they will have
forgotten you. It may be legal but it is bad theology and a bad deal for
ministers. It isn’t nice for churches to skim off anything from their
ministers—we do enough “giving beyond” as it is -- saving them a few dollars in
SS reimbursement isn’t enough reason to do this I don’t think.
Q #4: WHAT IF I SAVED ALL MY SS MONEY MYSELF:
lukemiddleton said...
Jeff,
thanks for your input.I suppose my question to Dr.
Drury is: if someone does in fact save / invest the money that would have gone
to social security, it is a wise financial move?
A #4: No way! That’s why Social Security is
in the hole so bad—you get back far more than you put in. You’d have to be
really smart to beat any system as generous as Social Security. BUT you
can’t do it anyway—it is dishonest for almost every minister. If you are
willing to lie to make money there are lots of better ways to get rich
dishonestly than opting out of SS dishonestly. (But what kind of man or women
of God would do either?)
Q #5 PARSONAGE OR HOUSING ALLOWANCE?:
Anonymous said... After 26 years of ministry,
my wife and I have no personal equity as we live in “the parsonage”. We have a
somewhat illusive dream of buying our own house. Ideally, this would enable us
to build up equity and benefit from special clergy housing tax benefits. At age
52, we still have the energy to repair an older “handyman special” before we
get too old to do so. Our goal is to start a 30 year mortgage now, in order to
own a debt free home by age 82. I fear that once I retire, I will no longer
have the income to qualify for a bank mortgage approval.
PLEASE COMMENT ON THE CLERGY HOUSING & TAX ISSUES. Is a rent free parsonage
preferred over a private home mortgage? Is a tax free parsonage preferred over
property taxes on a private home? Do clergy tax benefits offset the debt and
property tax on a private home? Isn’t it cheaper to pay the 15.3% social
security on the rental value of the parsonage, than the property taxes on a
private home? PLEASE COMMENT ON SOME BROADER ISSUES. Is it unspiritual to be
concerned about home ownership? Should a pastor just focus on ministry and
forget home ownership until retirement? Whereas many local churches insist that
the pastor lives in the parsonage, is it reasonable to buy an investment property
on the side? Is it dishonorable to leave ministry for a season in order to
provide for future housing needs? Does the “parsonage system” unfairly deprive
a pastor of building up personal equity?
A #6: OK here is my take:
a.)
A “parsonage” is a GREAT idea for the church—it saves them TONS of money over
the decades at the expense of the minister’s equity. It might be better
for ministers who move every 2 years (which is where “the parsonage” came from)
but it stinks for ministers who ever plan to retire. IF the denomination will
guarantee you a church-with-a-personage until you die it might work (assuming
you don’t get sick) but it is an all-around rip-off for most ministers who
would like to retire and will have to buy housing at prices then.
b.)
Having a mortgage in retirement is OK—in fact if you are in your denominational
pension plan it will be good. You don’t need to “own” the house free and
clear until you are 80—or ever for that matter.
c.)
It is almost always a better deal for a minister to own their own home—the only
case where it may be better to live in “the parsonage” is if you leave in 2-3
years or less, or you are willing to give up the gains for a no-hassle
no-repairs life. In that case buy lots of stocks (Google last year!).
d.)
As to being unspiritual. I do know pastors who “trusted God” and happily
went through life letting the church “live off their income.” And for
many God came through in retirement. It is an option. My
grandfather never bought health insurance for the same purpose—he gave the
money to the church and trusted God. That’s admirable. However, be
ready for your kids to get bitter if you get sick at 64 and get voted out and
you have to live with them or in a run-down trailer somewhere. YOU might feel
spiritual, but your kids might turn out feeling “the church” (or worse, God)
ripped you off.
Q #7
MINISTERS AS EMPLOYEE VS. SELF-EMPLOYED:
: Zach said... How do taxes work for a full
time Interim Pastor? Is it ok if the Interim is paid like you would pay a
janitor at the church?
A #7: It is possible but
hard—ministers are almost always “self-employed.” BUT if you are a
“worker” like the church secretary or janitor it can be done. The sorts
of questions they need to address are these: Are you required to work set
hours; they give you instructions for what you do; You get on-the-job training;
the church determines the sequence in your work; the church furnishes your
tools and materials; you can be fired by the church; you can quit at any time or
be fired; you do not offer your service to the general public; and other sorts
of questions. Some churches do indeed treat their ministers like Taco
Q #8: LAY PASTOR STATUS IN FILLING?
Anonymous said... How should a Ministerial
Student unlicensed lay-pastor be classified or an Assistant TO the Pastor be
classified? Do they have to file as self employed even though they can't take advantage
of all the clergy tax credits (housing.) Is it to our advantage to file as
clergy or should we file as an employee of the church and have taxes withheld?
A #8: Most likely you are an “employee” and
you won’t get the benefits of ministers and you are not self-employed so you’ll
do the FICA thing for social security. At this stage you are just like a
church secretary, daycare worker or janitor. Sorry.
Q #9: HOW TO
: Sniper said...
How
do I convince a church to reimburse a bit of the Social Security (15%) that I
have to pay on housing. After all,
if I was working in any other job (non self employed), the company would have
to pay half. Many churches already do this, but let's say "my
church" is stubborn and doesn't even understand my request. How would you
go about it?
A #9: This is what DSs
are for—ring him up. It isn’t “required” that they reimburse your
self-employment (SS) tax but it is the honorable thing for them to do—at least
half of it…good churches reimburse all of it.
Q #10: WEDDINGS, FUNERALS HONORARIA
rev.mick said... Do I have to pay income tax on money I get
from weddings and funerals or can I consider that money a
"gift?"
A #1O: You gotta’ pay
taxes on them. Honoraria are income and you pay both income taxes and SS
taxes on them. A check for performing a wedding is “pay for services rendered”
thus it is just like income a members of your church gets for putting on a new
roof. He puts the roof on and people give him money for putting on the
roof—that is i-n-c-o-m-e and must be treated as such
and listed. A gift has no quid-pro-quo… it comes to you for providing no
services in return. However I have heard of one pastor who got no check
for a wedding but every year for more than 20 years he gets a $25 gift on the
couple’s anniversary. That might pass muster as a gift with the IRS.
The easiest way is to write down the honorarium amount each time you get one or
toss a slip of paper with that amount in your for-taxes box until you do your
taxes. Some ministers consider these “too small to worry about” and
conveniently forget them, but that’s like shop-lifting a small item and
forgetting to pay for it on the way out. We may not like our government
or Wal-Mart either—but we ministers ought to be “above reproach” on
stealing/cheating issues. (General rule: “Don’t mess with the IRS”—they have
the power to review all your bank
records—including every single deposit and even every check you cased. We
now live a “documented life” and every check you’ve cashed or deposited is in
the record. If they call in all your records you will have to justify every
single check and deposit or pay taxes on what you can’t document. These guys
can make your life miserable. I suppose a cash payment could be hidden from
their eyes—but do your really want to be a minister who cheats only when you
might get away with it? What kind of authority would such a minister have
in the pulpit?
Q #11 TWO JOBS: ONE AS MINISTER, ONE “SECULAR”
: Josh Hilty
said... How
do I file taxes if I "work" full-time at a church and also work a
part-time job on the side? Especially from a Social Security standpoint, where
my church pays all of my Social Security and my employer matches the part I
pay. Is there a separate section for both?
A
#11: The income from the church is treated as ministerial
income and self-employed and the income from the other job is treated as
an employee. Your tax software will guide you through this.
Q #12 PARSONAGE AGAIN
lukemiddleton said...
I agree
about wanting to hear about housing issues. I know a pastor who's been at a
church for 20+ years and in the parsonage the whole time. He recently had a
medical scare and was left realizing his kids would be out on the street
(theoretically). A lot of people have been mentioning this topic lately and we
need to examine whether parsonages help or hurt the pastor. And if they hurt,
why do churches go that route?
A #12: yep, see above. Good story. I love my
church and my denomination. But if you have a heart attack or broken back
a local church will only “take care of our pastor” so long before they’ll “move
on for the good of the work.” I wish they’d care for you the next 20
years, but they won’t in almost all cases. So ministers have to be careful they
do not become co-dependants in the church’s “using” them too much. I
don’t think it is wrong to insist on the church being just and fair to its
oxen—it is helping them do what the Scriptures command them to do.
: Josh Weesner
said... Can
you explain the "double-dipping" benefit that ministers receive on
their taxes. How many items are
there that receive the "double-dipping" bonus?
A #13: “Double dipping” sounds crooked but
actually it is the nickname for the part of the tax code that grants ministers
a HUGE benefit when they own their own house instead of living in a
parsonage. Here’s the double part: A “housing allowance” the church
designates for a minister to get his or her own house is (income) tax exempt—it
does not even show up as income. So, say you get a housing allowance of
$10,000 a year and you used it all paying your mortgage and on your
utilities. That $10,000 is [income] tax free—it is as if you never earned
it at all [as far as income taxes go]. That’s your first break.
The double break is that (if you are buying a house and have a mortgage) you
can ALSO deduct the interest you paid on that house as a
deduction—even though you already eliminated it “off the top” of your income.
YIKES! (Nobody ever said the income tax laws were “fair”—this is how they write
them for rich people too!) So, say that you paid $5000 interest of your
$10,000 housing allowance—this means that $15,000 is [income] tax exempt.
(of course remember that your housing allowance is NOT
exempt from self-employment/SS taxes—we are talking income taxes here) This is
one more big fat reason why most ministers are better off owning their own
home.
Martin A. Furrow Jr. said...
If I
was to fill in on Sundays during the summer preaching at different churches
that need a Preacher to preach and they gave me what they call “Gas Money” to
come out should I claim it on my taxes and how would I claim it?
A #14: If you give the church
documentation showing that you “spent it all” then no—it does not need
reported. If you don’t give them documentation then it is income and
you’ll need to show it as income then list the expenses “against” the
income. If you only show the church that you spend half of it -- the
other half is income.
Q #15 UTILITIES PAID
BY CHURCH ON HOME OWNED BY PASTOR
Anonymous said... If a pastor receives a
parsonage allowance for a home he owns he pays S.S. tax on it. What if the
church also pays for utilities. The money isn't given
to the pastor but paid as a church expense. Should S.S. be paid on that money
as well?
A #15: Yes. Pay SS taxes on it but not
income taxes (because it is “housing.”)
Q #16: SPOUSE NOT A MINISTER—FILE JOINTLY?
Christin Wright said... I am getting married and my
future husband will be employed full time by the government. If i am working full time at a church and i
have been given a housing allowance (from which only SS tax is taken out) can
we file our taxes together?
A #16: Sure, your tax software
will help you do it. This means that your government-employed husband
will get to live in a [income] tax-free house—a bonus for marrying a minister!
Q #17 WHEN A CHURCH DOES
HANKY-PANKY
: Aaron Thompson said... Is there a way that one can
challenge an employer's (the local church's) tax filing? That is, is there some
part of the IRS that hears appeals - if my church gave me a clearly
under-realistic housing allowance one year, or if they file a staff
(non-pastor, licensed or ordained) as a private contractor rather than an
employee (thus moving SS tax burden on to he/she entirely). Can you do anything
about these kinds of discrepancies other than argue with the church
board/treasurer?
A #1: Yes there is an 800 number you
can call to report fraud to the IRS, but before you go that far remember that
this is what DSs are for—ring him up. A DS in a
denomination wants to be sure churches are legal. If they break the law
the entrie district can be at risk—so “tell on
them. But if there is fraud and the DS ignores it you’d do just what
you’d do with churcd abuse—you’d have to report it as an honest man. The IRS criminal hotline is
800-829-0433. The web page is http://www.unclefed.com/TaxHelpArchives/2000/irs-tt/faq1-13.html
But I say start with the DS—this is his/her job.
As
to your housing allowance, there is nothing you can do on a too-low housing
allowance—hey can set your allowance at $10 a month if they want to.
However, a too-low allowance is a “signal” that they do not value you.
Setting a fair housing allowance costs them nothing and saves you
bundles. If they are setting it too low they might be signaling you to
move on. If they set it too high—more than you spend you have to report
the “unused housing allowance” anyway and pay income taxes on it—so they lose
nothing by setting it high. (Remember however that you must be able to PROVE
the following on housing allowance:
a)
They set your allowance every single year in advance of you using it—preferably
in December for the next year. Board minutes will do.
b)
You spent it all—or reported the unused allowance as income (you tax software
will ask you if you have any unused housing allowance)
c)
You did not exceed the “fair rental value” of your house plus utilities.
Q #18: CHURCH REPORTING HOUSING ALLOWANCE TO IRS
: Branden Mestach
said... This is and i have a question:
How does the church report the minister's housing allowance/parsonage to the
IRS?
A #18: They don’t (yet). What good treasurer’s
do is issue a letter on church letterhead to YOU saying something like this:
This is to certify that yourname,
SS ###--##-####, earned $$,$$$$ of nontaxable
Ministerial Housing Allowance during the calendar year of #### at nameofyourchurch addressofyour
church, and this amount is not included in
You
keep the letter and you’ll need it when you are audited some day. If you
spent it all and you meet the criterion above (question #17) it is [income]
tax-free. If you spent LESS then your tax software will ask you to list
the difference as “unused housing allowance.” If you spent MORE you are out of
luck—suggest they raise it next year (assuming you meet the criteria in #17)
SIDE
NOTE: As some of your more creative folk are thinking the easiest way to cheat
on your taxes is to get the church to set a really high housing allowance, not
spend it all, then lie to your tax software and not report the unused allowance
for taxes. But what kind of a minister would cheat and lie? Perhaps the
same kind who would cheat on his wife then lies about it? Might aw well be
honest and report any unused allowance.
Q #19: SWITCHING FROM
MINISTRY TO COUNSELING
: Anonymous said... Say I graduate from IWU with
a
A
#19: Maybe, maybe not. It will depend on your work at that time. If
you are a “minister of counseling” appointed to that work by your district, and
you do more than have counseling office hours—that is you also perform duties
in worship, leading the congregation, presiding at Communion, and the sorts of
duties usually “reserved for the clergy” then probably yes, you’ll be able to
continue filing as a minister. But if you change
professions and cease to serve as a minister then probably no. For
instance, I am a minister not at a local church—I am appointed by amy district to IWU—to teach
future ministers in college. Part of my work is “sacerdotal”—I preach,
lead worship, serve the Lord’s Supper and do various other duties generally
reserved for the clergy. So I can file my taxes as a minister.
HOWEVER I also love backpacking. If Mike Fratzke
offered me a position as professor of backpacking where I no longer was
training ministers I’d lose my ministerial status with the IRS (and my
district). So for you, it will depend on the nature of the work you take
on.
Q #20: BI-VOCATIONAL REPORTING
Luke said... I am planning on being
bi-vocational after graduation. One job in a church and
another outside of the church. How will this effect
the way I do my taxes? Will I have to file two separate ways?
A
#20: (see question #11 above)
Q #21 OUT OF STATE HONORARIUM
The Legend said...
How to I claim taxes if I am doing preaching events outside of the
state that I am living in?
A #21: The same way you’d report them in-state.
State boundaries aren’t relevant for federal income taxes.
Q #22: HIGHER HOUSING
ALLOWANCE TO COVER SS
brian episcopo said...
Is it
ethical to include in your housing allowance your four social security payments
in order that you can use your allowance to pay them all in one lump sum at the
conclusion of the year?
A
#22: They are unrelated—you can’t include anything in your housing
allowance except… housing allowance…
Q #23: Tom Chamberlin
said... If
one chooses to receive lifetime monthly annuity income after retirement, is
this income taxable?
A #23: It depends on how the money went into the
fund. If it was pre-tax going in you can generally count on it being taxed
coming out. SOME funds are after-tax when you put them in (and they even
build up tax-free) and these funds are non-taxed when they come out—because you
“already paid the taxes on them.”
Q #24:HOW
TO AVOID ERRORS AND PENALTIES
Jonathan Bell asks... How can a
pastor know full well that he or she is abiding by the lawful system for taxes?
The reason I ask is that I know of several pastors who have had to pay extra
fines because of not knowing about a specific area that they needed to be taxed
or abide by the certain regulations. What would your advice be to avoid such
extra fines and payments?
A #24: I’d say use TurboTax (or #2 Tax
Cut) and answer every question honestly doing it early enough so that when you
are in doubt call “some old guy who knows his way around this stuff.”
Once you get the hang of it YOU will be that old guy!
Q #25: DONATIONS RULES
cujo said...
What are
the processes for the donation of an item that is greater then 10K such as a
vehicle to you or your family? Is there a way to process that gift so that you
do not have to pay taxes on it?
A #25: I think the gift would have to be to
THE CHURCH not to the pastor. (and the amount the
giver gets to deduct would be what the church SOLD it for in the next 2
years—they closed the “blue-book-loophole now). But if the vehicle is
then “given” to YOU by the church YOU would have to pay taxes on the value as
if it were income—after all it is. HOWEVER, I
suppose the church could own it and let you “use” it as a business vehicle for
the next 50 years and the giver could accomplish the same thing—they’d get a
write-off, and you’d get the [use of] the car?
Q #26: HONORARIA AS MISC. INCOME OR SCHEDULE C
Kathy Drury said...
Should
you put funerals/ weddings/honorariums under misc. or other income or create a
business name for it and do Schedule C and is there a tax advantage of doing
one over the other?
A #26: I like listing all miscellaneous
income on a schedule C “business” as a minister for all the “extra stuff” I get
money for. That way I can charge expenses to that income—including travel,
advertising, resources, and even wedding gifts of people I’ve married—any
expenses it took to “make” the honorarium.
Q#27 ESTIMATE OR ACTUAL MILEAGE?
Kathy Drury said...
Can
you claim mileage (for an out of state speaking event for example) by estimates
only or do you have to have an exact log of miles/odometer readings?
A #27: It is supposed to be a “contemporaneous
record” –as in writing down the odometer reading when I leave and when I
return. But, perhaps (given the accuracy of Mapquest)
a backup might be a printout from Mapquest with the
date marked on it, and the income amount you received. It would depend on
how sweet or mean the IRS agent was in this case I suppose.
Q#28: TURBOTAX QUESTION ON “INCOME ALONE”
Jason Denniston
said... Is
there any way to reduce Self Employment taxes?? Between the standard deduction,
and personal exemption I ended up with like 400.00 taxable income, so federal
tax is like nothing, but I'm getting killed on SECA. Along with
that in my Turbo tax, it asks me do I want to figure SECA on income, income and
housing al, housing al only, exempt. I clicked to figure it on both. Is that
right?
A #28: Jason, you were always one of the most
insightful student years ago, and now you have a most insightful
question! You did right—even though it is “killing you.” You MUST
pay taxes on both income and housing. TurboTax info at this point is not clear
enough—it can come across as optional—“Oh gee, well, I think I’ll only pay SECA
it on my income and not housing” It isn’t optional and they need to clarify
that (I’ve written to them). It is hard to opt out of Social
Security honestly (and not a good idea anyway) so you’re stuck paying lots of SECA.
Welcome to the club. Very few (smart) minister
pay ANY income taxes at all (wssuming they are smart
in how the save, set-aside money for retirement, and own their own hosue) but we ALL pay SECA. That’s the only tax most
of us pay (don’t tell the laity). Get used to it. ;-)
Q #29: DO I QUALIFY AS A
MINISTER—I MINISTER
Anonymous said... Do I qualify as a minister?
I have been a staff pastor in a Wesleyan church since last summer.
However, I am not ordained and not yet licensed. I am a staff pastor, but
functionally I believe I would meet all of the IRS’s qualifications. I was told
by someone in my church that I needed to be licensed to get a housing allowance
and qualify for tax purposes. Is that true? Does a denomination or a local
church have the ability to raise the standard and require you to be licensed or
ordained?
A #29: Not yet. Assuming you meet the
other qualifications get licensed as fast as you can and you will then be able
to file as a minister—until that you must file as what you are—a lay person on
staff.
Anonymous said... How many pastors do you know
of that regularly fail to file tax returns?
A #30: Every pastor I’ve ever met. Though I
suppose there are some who are “underground” somewhere and simply don’t file at
all and get away with it for now. I will see them later—when I do jail
ministry. Don’t mess with the IRS—they win.
Q #31: 403(B) BY EMPLOYER
VS. PASTOR
Jason Denniston
said... This past church year my church decided to reconfigure my salary
package with a portion going to our denominationally provided 403(b). Prior to
that I was making voluntary pre-tax deductions. When I was working on my
taxes this year I noticed that the second half of the year the contributions
were marked as employer benefits, and therefore I couldn't claim the tax
deductions and credits for the retirement contributions for the second part of
the year. Our treasurer talked to someone in the pension fund office, and said
that it is better to have it that way. I can't see how. From where I'm looking
at it, I'm missing out on some big deductions, and if the church would
designate it as income, and then I could get the credits for it. What am I
missing?
A #31: You stumped me Jason—first one I can’t
answer out of my head. I’d say go with your denomination’s pension fund’s
advice—that’s what they do for a living. But maybe call and get them to
explain it to you—then tell me.
Q #32: CHRISTMAS GIFT IS NOT INCOME RIGHT?
PastorKarl said... My church gave me $600 as a
Christmas gift -- is it right that "Gifts" aren't taxable and I don't
have to report it?
A
#32: Sorry Karl—if it came as a check from the church it is income
and you own taxes and SECA/SS on it—even if they collected an offering and just
“ran through the books” to you. If it went through the books it is a gift “from
your employer” not the individuals and thus taxable. HOWEVER if people send you
$20 in a card it is a gift and not taxable. THIS is why churches sometimes pass
out Christmas card pre-addressed to their pastor and encourage people to “send
your appreciation gift direct.” If the church hands you a check for $500
at Christmas it costs you $75SECA for sure even if you pay no income taxes at
all. And they are required to include that check in Box #1 of your W-2 and if
they don’t YOU are required to list it as Misc
income” (or better) on a schedule C with your honoraria. OK, story
time. There are some churches in some USA cultures who pay their
pastor a pittance through the year but hold a massive “March Offering” near
Christmas where the people march by and toss CASH into a huge Christmas basket
for the pastor’s “Christmas gift.” These givers are usually low-income
Christians who could care less if they get a “tax receipt” for this gift
anyway—they’re all standard-deduction people. The treasurer never touches
the money and the pastor’s wife usually gets presented the basket when the
march is over (sometimes the deacons peer into the basket and deem it too small
and call for a second march even ;-). Though I’ve never seen it
personally I’ve heard of ministers who receive more then $20,000 in these gift
baskets—all cash! I’m not sure if this is legit—it is “smelly” to me, but
it still is a good story to tell, huh?
Q #33: HOW CAN I GET THESE TAX BREAKS AS A LAYMAN?
Tom said... I'm a lay person and I'm
very active ministering in my church and I'm wondering what it will take for me
to get the tax breaks ministers get?
A #33: Tax breaks aren’t a reason for going into
the ministry. There are some unscrupulous people who have tried to get ordained/commissioned and placed just for financial reasons
but they should be ashamed of themselves. As I’ve said above, “Don’t mess with
the IRS” but seeking ordination or commissioning for tax purposes puts you in
far greater risk than the IRS—even more than them I’d say, “Don’t mess with GOD
and holy orders. The IRS’s long arm can only get you in this life. God’s
hand extends into the next. Ordination as a tax ploy is
wrong-wrong-wrong. And then only thing more despicable than a person
seeking some kind of tax break through
ordination is a local church or denomination who would be a conspirator in this
fraud. And that’s what it is—fraud: the sort of thing you go to jail for.
If you are really called into ministry go into the ministry and get any tax
benefits, but don’t even think another second about dragging down God’s holy
orders as a tax strategy.
Q #34: IRA AS RETIREMENT
HOUSING ALLOWANCE
Headed
to brooksville. said...
When I
retire is there any way I can consider part of my IRA as "housing
allowance" and thus it would be tax free?
A #34: You can’t. HOWEVER if you are in your
denomination’s pension plan THEY (the denomination) can designate part
(sometimes all) of your pension as housing allowance. This is one big
advantage of denominational pension plans.
Q #34: WHAT RECORD SYSTEM OR
SOFTWARE IS BEST?
Anonymous said... What record system do you
use to keep reciepts etc. for tax purposes? Do you
use software?
A #1: It depends on what your personality is
like. If you LIKE record-keeping and it brings you joy to have neat and
electronic records (and you have time) get Quicken ( http://www.intuit.com
). But I hate record-keeping and I spend too much time already in front
of a computer screen. I feel like Quicken turns me into a
secretary. So what do I do? I have a box marked “Tax stuff” and all
year I toss everything into one box and let it pile up—receipts, check stubs,
copies of checks, 3X5 cards with “Got $50 cash for Smith wedding 2/13/02” and
every other sort of “backup” I need for taxes. Thus I spend zero time for
11 months of the year. Then at the end of the year I take a “tax Day #1”
and commandeer the entire living room floor and sort it all properly—sticking
into 9X12 envelops various things (all my contribution receipts into one
envelope, all my income slips into another etc.). That takes me about 6
hours and I watch a DVD the rest of the day as a reward. (I had to do
this even when I hired a C.P.A. to do my taxes.) Then I schedule “Tax day #2”
some chilly day in February and type in the numbers to TurboTax—that takes
another 5 hours. Presto—my taxes cost me $19 for TurboTax and less than
12 hours. (side note—I own 15 rental properties
and two businesses so this should take the average minister far less
time). It isn’t the neatest filing system but it is the easiest and
fastest for me. And when I’m done it actually is neat—I have a stack of
neatly organized envelopes with all my tax backup in
them and I almost delight when the IRS does an audit (almost).
Q #35: MINISTER’S BENEFITS
AS TEACHER?
Anonymous said... As a college professor do
you recieve the same benifits
at tax time as a pastor? If so, can I recieve them if
I become a full time teacher in the public schools?
A #36: I do (see question #19) but you won’t
unless you are appointed there by your denomination and you perform sacerdotal
services as a minister—not a teacher.
Q #37: CHURCH TOOK NOTHING OUT—FIRST TIME I’M PAYING
A #37: Oh boy are you in for a shock! You
probably won’t pay ANY income taxes but you’re about to get hit up beside the
head with a whopping SECA payment—which you own on both your salary and the
value of your housing. Your salary will total $10,000 ($200 wk) and probably
the parsonage is worth another $6000($500 month?) plus the utilities are
probably worth another $4000 (300 mo.?) which means you will owe SECA at about
15% on $20,000 which is a whopping $3000. PLUS, since you did not send in your
quarterly payments (and did not have the church withhold anything) you are
going to be hit with penalties and interest on your “late payments.” This means
that (since your church did not reimburse any of your SS) your $3000 tax bill
is going to blow you away! Churches often do this to young ministers.
I’ve known ministers who owed their entire year’s salary in taxes at the end of
the year—because they were paid so low and got such a nice parsonage that was
“free.” You are in a pickle. Call your DS—that’s what they get paid
for—to help young ministers keep themselves form getting snookered by their
church like you did.
Q #38: CATCH UP SAVINGS FOR
RETIREMENT
Anonymous said... I'm 57 years old and at my
highest level of income in my life. My kids are gone and our expenses are
low--what's the best way for me to save these next ten years for my
retirement--I don't have much put away yet.
A #38: I hear ‘ya—time
to play catch-up. Luckily the government knows you didn’t save (like many
other Boomers) so you can do it now tax free. You can have a chunk of
your salary now socked away for retirement and it will be “as if you never got
it” when filing income taxes. It is as if your church is saying, “instead
of paying you this money we’re going to pay it to a 403(b) for you and you can
draw out this part of your salary when you retire. They don’t keep it
(you wouldn’t be that stupid, would you?) but they deposit it into a legit fund
FOR you (you can’t touch it on the way—you might spend it). If you are
over 50 you can tuck away $15,000 a year (more for some) like this and it will
really help you “catch up.” You need advice from your denomination’s
pension fund to do this (be careful of that
insurance salesman in your church with all the breath mints). The magic
words to ask about are: “deferred compensation” “Catch-up provisions” and
403(b), 401(k) and 402(g)(7)
______________________________________
______________________________________
And Drury closes
off with…
Whew! Great questions! Most ministers know this stuff already, but thanks especially to younger ministers for posting the questions many ask in their first years of ministry. I WAS GOING TO KEEP THE FORUM BLOG OPEN ANOTHER WEEK for you to post rebuttals ask for clarifications or make other comments on taxes but I’m sifk of the subject now… so I’ll move on. I’ve given “the tithe of my time” this week to my readers—and it wasn’t taken out of my paycheck either ;-)
AND THE USUAL DECLAIMER
I am not in the business of
offering tax advice, serving as a tax lawyer, or officially operating as a tax
accountant or posing as a C.P.A. so don’t try to sue
my pant off for my views above—the only sure source of tax law is the IRS: Go
here for the official goggledegook:
NO more questions but you can… click here to say whatever you want in the next 7 days Keith Drury April
2, 2006
Responses
are open for one week after the original column is published—after that they
are posted next to the original column)