Question:
If a minister is "tax exempt" by being approved on the IRS tax form 4361, does that mean he doesn't pay Federal, State or Social Security?
Answer:
No, Form 4361 only exempts a minister's self-employment income from SE tax normally reported and calculated on Schedule SE, Form 1040.
Saturday, January 7
Wednesday, December 28
403(b) Plan Rollovers to IRAs
Question:
From my 403(b) retirement plan can I rollover an amount to a Traditional IRA, then roll that over to a Roth IRA to avoid paying self employment taxes?
Answer:
First, timely rollovers from an Internal Revenue Code section 403(b) plan to a Traditional IRA are non-taxable both for income and self-employment (SE) tax purposes. In fact, distributions from qualified retirement plans are not subject to SE tax. Income tax can be postponed by rolling over 403(b) distributions to a Traditional IRA. But subsequent distributions from a Traditional IRA rolled over to a Roth are not tax-free.
However, there may be reason to avoid rolling over a lump-sum distribution from a 403(b) plan into a Traditinal IRA. Please reference the following posting and others within this blog related to housing allowance designations.
http://ministrycpa.blogspot.com/2008/02/ministers-retirement-distributions.html
From my 403(b) retirement plan can I rollover an amount to a Traditional IRA, then roll that over to a Roth IRA to avoid paying self employment taxes?
Answer:
First, timely rollovers from an Internal Revenue Code section 403(b) plan to a Traditional IRA are non-taxable both for income and self-employment (SE) tax purposes. In fact, distributions from qualified retirement plans are not subject to SE tax. Income tax can be postponed by rolling over 403(b) distributions to a Traditional IRA. But subsequent distributions from a Traditional IRA rolled over to a Roth are not tax-free.
However, there may be reason to avoid rolling over a lump-sum distribution from a 403(b) plan into a Traditinal IRA. Please reference the following posting and others within this blog related to housing allowance designations.
http://ministrycpa.blogspot.com/2008/02/ministers-retirement-distributions.html
Friday, December 2
Housing Allowance for Extra Mortgage Principal Payments
Question:
Can a pastor pay extra on his mortgage principal and use it to count toward his housing allowance?
Answer:
Yes, but.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. The IRS lists only food and servants as prohibitions to allowance housing expenses. If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or c) the fair rental value of the home (IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation Section 1.107-1).
Because of the third limitation listed here, many ministers gain little or no benefit by accelerating their mortgage payments. For example, an additional $5,000 principal payment adds to the amount actually used to provide a home. But it does not increase a minister's fair rental value of his home.
Can a pastor pay extra on his mortgage principal and use it to count toward his housing allowance?
Answer:
Yes, but.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. The IRS lists only food and servants as prohibitions to allowance housing expenses. If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or c) the fair rental value of the home (IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation Section 1.107-1).
Because of the third limitation listed here, many ministers gain little or no benefit by accelerating their mortgage payments. For example, an additional $5,000 principal payment adds to the amount actually used to provide a home. But it does not increase a minister's fair rental value of his home.
Monday, November 21
"Volunteer" Pastor Receives a Gift from His Congregation
Question:
A church led by a "volunteer" pastor wishes to give him a monetary gift for Christmas. Will the church need to issue a Form 1099-MISC? Is the answer different depending on the amount?
Answer:
The payment will be considered as compensation for services rendered--the church is acting corporately in compensating a minister who serves it. However, there are some options.
First, the amount can be designated (prior to payment) as housing allowance. This removes the federal income tax consequence to the extent of his actual housing expenses (and the fair rental value of his home).
Second, while the compensation is subject to the 15.3 percent self-employment (SE) tax, to the extent the minister has unreimbursed ministry expenses, he can reduce his SE income. If his net self-employment income is less than $400, he will owe no SE tax.
With so little income, it is unlikely that the IRS would classify him as a Form W-2 employee. Therefore, if the non-housing allowance portion of the payment is $600 or more, Form 1099-MISC should be issued. The minister is responsible to report the income correctly regardless of the church's obligation to issue a statement of earnings.
A church led by a "volunteer" pastor wishes to give him a monetary gift for Christmas. Will the church need to issue a Form 1099-MISC? Is the answer different depending on the amount?
Answer:
The payment will be considered as compensation for services rendered--the church is acting corporately in compensating a minister who serves it. However, there are some options.
First, the amount can be designated (prior to payment) as housing allowance. This removes the federal income tax consequence to the extent of his actual housing expenses (and the fair rental value of his home).
Second, while the compensation is subject to the 15.3 percent self-employment (SE) tax, to the extent the minister has unreimbursed ministry expenses, he can reduce his SE income. If his net self-employment income is less than $400, he will owe no SE tax.
With so little income, it is unlikely that the IRS would classify him as a Form W-2 employee. Therefore, if the non-housing allowance portion of the payment is $600 or more, Form 1099-MISC should be issued. The minister is responsible to report the income correctly regardless of the church's obligation to issue a statement of earnings.
Sunday, November 6
Church Donor Designations to Foreign Ministries
Question:
Some members and non-members of a church direct funds to a ministry overseas, partly because they want to get a tax deduction by giving it through the church versus giving to the overseas ministry directly. The church has elected to include the foreign ministry in its missions budget, albeit with a much smaller amount than what is being designated by other people. Does this pose any problems that the church should be aware of?
Answer:
With the church as the organization overseeing the support of the overseas' work (it obviously endorses it by virtue of its own giving), it's almost certainly better to contribute in this manner than by individual donors trying to make wire transfers (I suppose) to a foreign ministry.
In my experience, the typical concern the church must have is that it does not become a conduit for the otherwise non-charitable obligations of individuals who are not really donors.
Let me illustrate. Imagine that a parent is obligated to pay on the college loans of a child who because of his or her mission activity has little income to pay the loans. By "donating" to the church the parent gets a tax deduction. Yes, the income is taxable to the child, but if he or she is a low-income (or, more likely, a high deduction) taxpayer then the "gift" may produce little or no tax to the child. The church has unwittingly become a conduit for the parent's otherwise personal obligation. That's why I believe it is important that churches carefully monitor excessive contributions to funds that benefit their family members.
Some members and non-members of a church direct funds to a ministry overseas, partly because they want to get a tax deduction by giving it through the church versus giving to the overseas ministry directly. The church has elected to include the foreign ministry in its missions budget, albeit with a much smaller amount than what is being designated by other people. Does this pose any problems that the church should be aware of?
Answer:
With the church as the organization overseeing the support of the overseas' work (it obviously endorses it by virtue of its own giving), it's almost certainly better to contribute in this manner than by individual donors trying to make wire transfers (I suppose) to a foreign ministry.
In my experience, the typical concern the church must have is that it does not become a conduit for the otherwise non-charitable obligations of individuals who are not really donors.
Let me illustrate. Imagine that a parent is obligated to pay on the college loans of a child who because of his or her mission activity has little income to pay the loans. By "donating" to the church the parent gets a tax deduction. Yes, the income is taxable to the child, but if he or she is a low-income (or, more likely, a high deduction) taxpayer then the "gift" may produce little or no tax to the child. The church has unwittingly become a conduit for the parent's otherwise personal obligation. That's why I believe it is important that churches carefully monitor excessive contributions to funds that benefit their family members.
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