August 24, 2013

MinstryCPA Special Topic: Who is Qualified for Social Security Benefits?

Question:

I am nearing retirement age, and hoping to collect Social Security once I reach full retirement age (FRA). I have worked for a few years recently, but never had a full-time job before that. I have never been disabled. How will I know whether I have earned enough income subject to Social Security tax to collect benefits when I retire?

Answer:

In order to be eligible to receive Social Security benefits, you need to accumulate 40 work credits. According to the Social Security Administration, "In 2013, you receive one credit for each $1,160 of earnings, up to the maximum of four credits per year." Each year, the amount of earnings required for a credit is adjusted based on nationwide average earnings. An individual with 10 years of work, earning at least 4 quarters worth of the minimum income required per year, will earn 40 credits and be eligible for benefits.

While an individual cannot earn more credits above $4,640 in a year, the amount of benefits is based on full earnings for the year. Essentially, while higher income cannot lead to more than 4 credits, it will lead to higher benefits once an individual becomes eligible and begins to collect. As is the case with our other posts on the topic of Social Security, individuals who are disabled, survivors, dependent children, and others in special circumstances may fall under other guidelines. 

Source: Social Security: Retirement Benefits

August 22, 2013

Church as a Conduit for Non-deductible Gifts: Illustration

Question:

A member of a church has recognized the need of a family in the congregation for a new vehicle. If the member purchases a car and gives it to the church, which immediately passes it along to the needy family, can the donor claim a tax deduction?

Answer:

Car purchases and gifts of this type are common topics on the MinistryCPA blog, so readers should first consider the following blog posts.

Donating a Vehicle

Church as a Conduit for Non-deductible Gifts

Deductibility of Designated Gifts

Since it is apparent that the car is a gift from one individual to another individual, using the church as a conduit, it is highly unlikely that a charitable deduction is warranted. As readers may have observed by reading the above blog posts, congregational initiation is necessary to avoid the appearance or reality of a gift between individuals. In order for a gift to be deductible, it must be a charitable act of the church body rather than the good intentions of an individual.

Private Inurement: Review and Application

Question:

The secretary of a small church, who handles the checkbook, often purchases supplies for the pastor's personal use and pays his expenses along with those for the church. He enjoys the convenience, and the deacons approve of this arrangement. Does this need to be reported as compensation? Are there any other tax consequences to be aware of?

Answer:

In regard to the first question, yes, this would be reportable compensation. Payments in cash or in kind (instead of cash) on behalf of an employee are taxable. However, this situation presents issues for a tax-exempt organization in the area of "private inurement." According to IRS Code Section 501(c)(3), "No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual." Essentially, private inurement describes a situation in which a tax-exempt organization deviates from its exempt purpose through the enrichment of an individual or group. This condition may give the IRS cause to revoke the organizations's tax-exempt status. 

Private inurement involves at least two ares of concern for a tax-exempt organization that appears to be benefiting one individual to the detriment of the fulfillment of its charitable purpose. 1) Excessive compensation, violating the guideline that "none of an exempt organization's income or assets may disproportionately benefit a person or company that is closely related to the organization" (Ron Blue and Co., Tax Exemption is a Privilegeand 2) private benefit, a more subjective situation in which the ministry gives the appearance that it is benefiting one individual to the detriment of its charitable purpose. According to Ron Blue and Co., "personal expenses paid by the entity" are viewed by the IRS as private inurement. 

Though the IRS may never investigate or uncover this issue, the church, and any other organization, should be very careful to maintain its testimony by obeying all applicable laws. Romans 13 speaks to this issue, as does I Thessalonians 5:22: "Abstain from all appearance of evil." 

August 17, 2013

Housing Allowance for Minister Leading NPO

Question:

An ordained minister recently started a Non-Profit Organization to spread the gospel through providing free food to needy members of the community. Is he eligible for a housing allowance?

Answer:

The Minister Audit Technique Guide provides the answer to the question, "Who qualifies for a housing allowance?" Follow the link below to choose the second item in the Table of Contents-"Who Qualifies for Special Tax Treatment as a Minister?"

Minister Audit Technique Guide


Generally, the following two treasury regulation sections list the services defined by the IRS which a minister must be performing "in the exercise of his ministry" to qualify for a housing allowance:

"Treas. Reg. § 1.1402(c)-5(b)(2) provides that service performed by a minister in the exercise of the ministry includes:
·      Ministration of sacerdotal functions;
·      Conduct of religious worship;
·      Control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or denomination.
Treas. Reg. § 1.107-1(a) also provides examples of specific services considered duties of a minister, including:
·      Performance of sacerdotal functions;
·      Conduct of religious worship;
·      Administration and maintenance of religious organizations and their integral agencies;
·      Performance of teaching and administrative duties at theological seminaries."

As noted in the question above, it is not likely that the minister is performing sacerdotal functions or conducting religious worship. Our experience has demonstrated that non-profit organizations other than churches and religious colleges and seminaries most often must wrestle with their inclusion under the category "religious organizations and their integral agencies." The Minister Audit Technique Guide lists several examples that may assist with understanding of this issue.

August 16, 2013

Housing Allowance Designations by Multiple Employers

Question:

If a new missionary on deputation is also working part-time in his church, can he receive a housing allowance from both organizations?

Answer:

Yes, this is legal under IRS guidelines and, in most circumstances, wise tax planning. There is no danger in excessive avoidance of tax because of the three-part test defined by the IRS for computing taxation of housing allowance, defined in a previous blog post.

IRS Filing by Church if no Taxable Compensation is Paid

If the combined housing allowance designations are higher than actual housing expenses or the fair rental value plus utilities, the excess will be taxed as regular compensation. Based on this, excess housing allowance designation is generally preferable to too little.
 
Note: In limited situations, ministers are ill-advised to claim a substantial housing allowance. Readers should consult their tax adviser to ensure that they avoid these consequences.

MinistryCPA Special Topic: When Can I Start Receiving Social Security Benefits?

Question:

When can I start to receive Social Security benefits?

Answer:

The average individual is eligible to begin receiving partial Social Security benefits as early as age 62. However, the Social Security Administration (SSA) has defined full retirement age (FRA), the age at which an individual is eligible to receive his or her full benefit, according to the table below:

Source: www.ssa.gov/pubs/10035.html

An individual may also elect to delay collecting benefits to age 70 in order to receive increased benefits. (For the purposes of this blog post, we will consider only an "average" individual; widows, widowers, disabled individuals, and others are subject to different guidelines).

An individual who elects to start receiving benefits between age 62 and FRA may be subject to two separate penalties. First, monthly benefits may be reduced by as much as 30 percent for those who claim at 62. Second, earnings may be subject to an earnings test, and benefits will be reduced by $1 for every $2 earned past the cap set by the SSA ($15,120 in 2013). Once FRA has been reached, the benefit will be increased to make up for reductions  in SS benefits due to excess earnings above the threshold. However, the reduction for collecting earlier than FRA will continue for as long as benefits are collected.

An individual who begins to receive benefits at or after FRA will not be subject to the earnings test, and will receive his or her full monthly benefit with no penalties. Additionally, individuals who delay the start of benefits past FRA can earn delayed retirement credits (DRC) of 8% per year up to age 70. Depending on the length of the delay, this strategy can result in a monthly benefit approximately 30% above FRA benefits.

Based on life expectancy and savings other than Social Security, each option will provide advantages for different individuals. Those who start collecting benefits early will receive a reduced monthly benefit, but will enjoy the income much earlier than those who wait until FRA or after. Additionally, the reduction in benefits will continue for the life of the recipient. Those who delay past FRA will receive a higher monthly benefit, despite waiting longer for the income. 

One easy method of comparison involves break-even points. Those who begin collecting benefits at FRA provide the "baseline" for comparison of the total benefit amount. An individual who begins collecting benefits at age 62 will break even with that total amount at age 77. Essentially, this means that someone who lives beyond age 77 will receive greater total lifetime benefits if they wait to start collecting benefits until FRA. One who begins collecting at age 70, earning a higher monthly benefit, will break even with the baseline total amount at age 81. (The Adviser's Guide to Social Security, 2nd Edition, by Theodore J. Sarenski, CPA, PFS, CFP, and Elaine Floyd, CFP. AICPA, 2013. Page 21)

These general guidelines provide a framework for decisions about when to begin collecting benefits, but each individual's situation is different. Other factors, such as life expectancy, other sources of income, and tax consequences should be taken into account when deciding on the timing of benefits.

August 04, 2013

MinistryCPA Special Topic: Family Finances Resource

Russ Crosson’s book, Eight Important Money Decisions for Every Couple (Harvest House Publishers, 2012), gets our strong recommendation as an extremely practical aid to couples wanting to better communicate about their family finances. We especially appreciate his thorough consideration of Biblical truths about marriage, husband and wife roles, and God-honoring communication.

We have referenced other family financial resources in this blog, including those by Crosson’s colleague, Ron Blue (Books for Financially Troubled Christians). Crosson’s book is not quite as “in-your-face” as Dave Ramsey’s, Total Money Makeover (not without its merits), but Eight Important Money Decisions for Every Couple offers comprehensive instruction into the root cause of financial disharmony—a lack of discerning communication.

Before Crosson initiates development of his eight money decisions in chapter five, he explores the purpose of money, the purpose of marriage, reasons for marriage conflict, and the value of work. Some readers may become impatient with this rather long introductory section, but will see its value as the eight decisions are addressed. 

Woven throughout the entire book is a conversation between a hypothetical couple, Rob and Sarah, which paints a tangible picture of the different perspectives that husbands and wives bring to the table when discussing finances. Wives (and husbands) will find Julie Crosson’s (Russ’s wife) final chapter a balanced and thought-provoking examination of a wife’s role in family finances.

Eight Important Money Decisions for Every Couple is ideal for targeted audiences of pastors seeking pre-marital counseling materials, newlyweds hit with the realities of coming to “one mind” after their independent singleness, and married couples of all ages wanting to improve their stewardship of money.

The Eight Decisions (and our brief comments):
1.   How much should we work? (Don’t complain about never seeing one another if you cannot learn to live on the income of a normal work week.)
2.   Should mom work outside the home? (This chapter has produced great discussions among and between couples in Bible studies we’ve led.)
3.   Who pays the bills? (Examine the extremes of controlling versus apathetic husbands; then find your own balanced approach.)
4.   How do we set budget amounts? (Practical guidelines for creating a workable budget. Crosson: "You're only on a budget system if, at any point in time, you can answer this question: How much do you have left to spend on [name a specific expense]." (p. 123"))
5.   How much debt should we allow? (Communications that most married couples will wish they had had before their wedding day.)
6.   How do we decide which investments to make? (Good perspective: “A person doesn’t become wealthy from investments. He gets wealthy by spending less than he makes from his vocation over a long period of time and preserving that surplus through investments” (p. 157).)
7.   How much should we give? (Crosson: “Julie and I have found that it’s critical to communicate in this area just as we do about investments” (p. 169).)
8.   What is our strategy for discussing money? (The thoroughly biblical counsel of this chapter works for a lot more than just talks about money.)