August 26, 2015

Health Coverage and IRS Forms

Question:

I expect to have health insurance coverage for some or all of this year. What form(s) should I expect to receive in January?

Answer:

More than likely you will receive one or more Forms 1095-A, 1095-B, or 1095-C. You will use the Forms 1095 to report your Minimum Essential Coverage on your tax return. What forms you receive will depend on where you received health insurance coverage and on your size of employer.

  • You will receive Form 1095-A if you have coverage through the Federal or a State Marketplace.*
  • You will receive Form 1095-B if you receive coverage from your employer who has fewer than 50 full-time employees or if you self-purchased coverage through the individual insurance market (not the Marketplace).*
  • You will receive Form 1095-C if you receive coverage from your employer who has 50 or more full-time employees.*

You should receive your form(s) each year by January 31. But certain employers could request a 30-day extension.

Something to keep in mind… you could receive an alternative form(s) in lieu of the actual IRS Forms 1095. If you receive an alternative form, they will still meet IRS information requirements, but they may not look like a 1095.

*There are exceptions to what forms may be issued. If you are not sure, consult your tax professional or health insurance coverage provider.

June 25, 2015

1099-MISC Ministers and 403(b) Plans

Question:

I am treated as a 1099-MISC self-employed contractor by my U.S. mission agency. Should I consider establishing and contributing to a 403(b) retirement plan? Am I eligible? 

Answer:

This blog post will deal with the issue concerning a self-employed minister’s eligibility to establish a 403(b). Please bear with the very technical nature of this post.

Starting with IRS Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans), we see two conflicting statements when taken at face value.

First Statement: “The following ministers are eligible employees for whom a 403(b) account can be established… Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.”

Second Statement: “Who Can Set Up a 403(b) Account? … A self-employed minister cannot set up a 403(b) account for his or her benefit. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit.”

How are these statements reconciled? According to Internal Revenue Code (IRC) Section 1.403(b)(8)(D), an eligible employer is a “minister described in section 414(e)(5)(A), but only with respect to a retirement income account established for the minister.” 

Per IRC Section 414(e)(5)(A)(i)(I), certain ministers may participate [in a church retirement plan]. These ministers include a “self-employed individual (within the meaning of section 401(c)(1)(B)).” A self-employed individual means an individual who has “earned income,” which is net earnings from employment.

Section 414(e)(5)(A)(ii) further reads that a self-employed minister as described in (i)(I) [as stated above] “shall be treated as employed by the minister’s own employer which is an organization described in section 501(c)(3) and exempt from tax under section 501(a).”

In layman’s terms, it appears that a self-employed minister is considered both the employee and employer for 403(b) plan purposes and should be eligible to establish the retirement plan.

April 24, 2015

Can I Deduct Travel Costs for a Mission Trip/Vacation?

Question:

How do I determine "significant personal time" when I am on a mission trip? Example: I travel overseas for a mission trip and work one week full-time for the mission. The next week, I explore and vacation in the area. As a charitable contribution, can I deduct any part of my airfare, lodging,  and food during the week I worked? Or have I lost the whole amount because I vacationed?

Answer:

Although the terms "significant personal time" in the question are not given specifically in IRS Publication 526, Charitable Contributions, the publication does describe when traveling costs are deductible for charitable purposes. Here is a quote from page 5 of the publication:
Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel.
However, the publication went on to say this:
The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense through the trip. However, if you have only nominal duties, or if for significant parts of the trip you do not have any duties (my emphasis), you cannot deduct your travel expenses.
So how does one determine if he or she had "significant parts of the trip" that were spent on personal pleasure? Well, Publication 526 does not give a black and white calculation. However, there are four example situations included in the publication that may help individuals work through the framework of the guideline. We encourage you to click on the link above and read each example.
 
In a quick search of tax resources, we found twenty four different court cases, IRS Revenue Rulings, and private letter rulings pertaining to this matter. Each situation portrayed a different answer depending on the facts and circumstances of each case. Individuals should contact their tax professional for guidance on this matter.

April 23, 2015

Midyear Housing Allowance Increase

Question:

A pastor has requested that the church increase his housing allowance for the rest of the year. Is it permissible for the church to change the pastor's housing allowance midyear?

Answer:

The minister's church or other qualified organization must designate the housing allowance pursuant to official action taken in advance of the payment. The new designation must be made prospectively, not retrospectively. In other words, the pastor can claim the new housing allowance designation only on the remaining pay periods of the year. 

There is often a prorated calculation that must take place when midyear housing allowance changes occur. Here is an example:

For 2015, Pastor Smith's salary is $48,000 ($4,000 per month). Of the $48,000, the church has designated a housing allowance of $12,000 ($1,000 per month). 

In June of 2015, Pastor Smith realizes that his actual housing expenses and the fair rental value of his home will far exceed $12,000 during the calendar year 2015, so he requests that the church increase his housing allowance to $18,000 for the entire year, with prorated calculations to take place on his July-December paychecks. 

Pastor Smith has already received six paychecks (January-June) totaling $24,000, of which $6,000 was designated as housing allowance. However, since the new housing allowance designation is $18,000 for the year, the church needs to prorate the difference of $12,000 ($18,000-$6,000) on the remaining portion of Pastor Smith's monthly paychecks. Since there are six months remaining, the new monthly housing allowance designation would be $2,000 ($12,000 / 6 months). Here is how the July-December paychecks would look for Pastor Smith:

Pastor's Cash Salary                = $ 2,000
Pastor's Housing Allowance      = $ 2,000
Total Monthly Take Home Pay   = $ 4,000  

Things would get less complicated in 2016. If the pastor requests that his housing allowance remain at $18,000, then the church can simply designate $1,500 of housing allowance per month ($18,000 / 12 months). 
  

April 16, 2015

Church Pays for Camp Fee - Is it Taxable?

Question:

Our church pays 100% of registration fees for our pastor staff's children to attend youth camp in the summer. The children of the staff do not have to complete an application to get the full registration scholarship. Staff children are responsible for paying their transportation fee. Would the cost of the camp registration be considered a taxable fringe benefit to the pastor? 

Answer:

Tax-free fringe benefits are so classified based on statutory authority. To our knowledge, there is no statutory authority on this benefit based to be nontaxable.

While the benefit is certainly generous and most likely appreciated by the staff families, the policy's current state leads to taxable income.

If staff members are receiving this benefit similar to other families of the church, however, it may be possible for them to enjoy tax-free assistance. For example, the church could establish a scholarship fund to sponsor children and teens of the church or local community to attend summer camp. Donations could be solicited from the membership and a proper policy could be applied.