April 30, 2012

IRC 403(b) Plan Distributions

Question:

Are Internal Revenue Code section 403(b) plan distributions taken in retirement after age 55 subject to Federal Income, State Income, Social Security, or Medicare taxation?
Answer:

Distributions from a 403(b) account are taxable as ordinary income to the employee; however, if the distribution occurs when the employee is under age 59½ , the amount may be subject to an additional 10% early-distribution penalty, unless the employee qualifies for an exception.

The distributions are not subject to social security or Medicare tax. Readers of this blog will want to read other postings regarding potential housing allowance benefits to ministers who receive retirement distributions from church plans.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. James Jorgensen of Owatonna, Minnesota gets credit for this one.

U.S. Missionary Taxed on World-Wide Income

Question:

My 22 year-old son is a missionary in north Africa. He received a W-2 for his 2011 compensation. Is it taxable in the U.S.?

Answer:

Yes, world-wide income must be reported both for federal and state income taxes. However, he may be able to file Form 2555 to receive the Foreign Earned Income Exclusion.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. James Jorgensen of Owatonna, Minnesota gets credit for this one.

Benevolence NOT Reportable on Form 1099-MISC

Question:

If an individual is given money (more than $600) by a church as benevolence is he or she required to file Form 1099?

Answer:

Form 1099-MISC is used to report Miscellaneous Income for each person to whom a business or charitable organization paid during the year at least $600 in rents, services, prizes and awards, and other income payments. A recipient does not file Form 1099.

Form 1099-MISC should only be prepared when payments are made in the course of a trade or business. Businessdictionary.com defines “course of business” as the daily or regular routine peculiar to a firm or trade, involving purchase, production, and sale of usual goods and/or services, and payment and receipt of money. Benevolence is defined as an act of kindness or generosity. When benevolence is given to meet the needs of individuals, it is considered a charitable program of the church, is not taxable, and does not need to be reported on a Form 1099-MISC.

If the benevolence is in return for services, it is taxable and needs to be reported on a Form 1099-MISC. Benevolence paid to employees is not taxable as long as it is not being used to disguise compensation. One-time gifts used to meet emergency financial needs of employees would generally qualify as benevolence and not be taxable (just as they would for members of the church or community who demonstrated emergency need).

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. James Jorgensen of Owatonna, Minnesota gets credit for this one.

Short-term Missions Trip Income

Question:

My wife and I recently returned from a six-month mission trip. We were sent and supported by our church congregation. Our flight, living expenses, and mortgage back home were all covered by the church. We were supported directly by our home church as missionaries (no missions’ agency was employed). We received a Form 1099-MISC from the church listing all of our support as “Non-employee compensation.” How will I report this to make our trip expenses balance out?

Answer:

Non-employee compensation reported on Form 1099-MISC is included on Schedule C of IRS Form 1040. This Schedule allows business expenses to be deducted directly from income. In your case, business expenses will include your deductible trip expenses assuming you have adequate substantiation of the expenses as required by the IRS. Payments on your home mortgage are not deductible business expenses.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer posted questions. Dan Chodan of Lancaster, Pennsylvania gets credit for this one.

Unincorporated Churches--A "Loophole"?

Question:

I am a member of a local church that has opted to not incorporate with our State nor to file for the 501(c)(3) tax exemption with the federal government. I have heard of churches giving occasional "gifts" to individuals within the church from money that was given to the church by donors who write these contributions off as tax-deductible and the recipients of these gifts were never given Form 1099s from the church, nor do they claim them as income on their personal tax returns.  How do donations to individual missionaries qualify for tax deduction? What is the responsibility of the church to account for such distributions to individuals?  

Answer:
“A church is a cohesive group of individuals who join together to accomplish the religious purposes of mutually held beliefs. In other words, a church's principal means of accomplishing its religious purpose must be to assemble regularly a group of individuals related by common worship and faith” (Tax Court Memorandum 1990-41). Whether the church has either formally incorporated or filed for IRS recognition as a 501(c)(3) organization is irrelevant to its classification as a church and to its responsibility to comply with tax law.

According to IRS Publication 526 charitable contributions made to individuals are not tax deductible nor are they reported as income.
Donations must be given to a qualified organization (e.g. a church) in order to be tax deductible by the donor. The church can use such donations to support missionaries without affecting the tax deductibility of the gift for the donor. 

In the case of a church giving a “gift” to an individual within a church, it depends on the relationship between the church and the individual. Because a missionary is providing services on behalf of the church, money received from the church is considered taxable income . If the gift is dispensed by the church for non-compensatory, benevolent purposes, then it is not taxable to the recipient.
If the a church is simply a supporting church and the missionary is sent funds through a missions’ agency, the “gift” is treated as a transfer to funds between two tax-exempt organizations—a church and a missions’ agency. The missions’ agency is responsible to correctly report the disbursement of taxable compensation to the missionary.

If the church is acting as the missions’ agency then tax treatment must be determined by the church—typically Form W-2 or Form 1099-MISC depending on the missionary’s employment status (i.e., employee or independent contractor). I recommend that readers of this blog explore other postings for a review of rules to determine this status.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer the posted question. Andrew Domsic of Mattawan, Michigan gets credit for this one.

Unsolicited, Unilateral Gifts Directed to Individuals

Question: 

Financial gifts are given by several persons to our former pastor who is now retired. The question is: since they give through the church, are their gifts deductible and do we need to give him a Form W-2 at the end of the year or are these gifts not taxable? 

Answer: 

The way the question is worded leads me to believe that the actions of the donors were unsolicited (i.e., the church did not take corporate action to initiate the collection of funds in order to compensate its former pastor). The church is simply acting as a conduit to forward the gifts  to the pastor.

To be deductible, charitable contributions must be made to a qualified organization, donors releasing control of the funds to it in order that it might accomplish its charitable purposes. On occasion, a church will encourage contributions to enable it to compensate its employees, including its pastor(s). These contributions are deductible by the donors. The recipients are generally subject to income and self-employment tax (see other postings within this blog for exceptions or strategies to avoid or limit these taxes).

Payments to individuals are not considered qualified organizations per IRS Publication 526, even if the organization is used as a conduit to accomplish the donor’s unilateral show of generosity. Individuals who make contributions to another individual are not able to take a tax deduction, nor is the gift taxable to the recipient.

The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer the posted question. Aaron Oberholtzer of Marinette, Wisconsin gets credit for this one.

Social Security: Opt Back "In"?

Question:

I am a minister who decided to opt out of the Social Security system. Am I able to opt back into Social Security if I so choose?
Answer:

Unfortunately, no. Once a minister requests exemption from social security, that exemption is irrevocable (Reg. §1.1402(e)-4A(b)). The Ticket to Work and Work Incentives Improvement Act of 1999 did allow for a reversal of the exemption between January 1, 2000 and April 15, 2002. I am aware of no Congressional consideration to repeat the allowance of the 1999 Act.
The members of my Federal Taxation I class at Maranatha Baptist Bible College in Watertown, Wisconsin have taken on the challenge of study and research to answer the posted question. Aaron Oberholtzer of Marinette, Wisconsin gets credit for this one.