October 23, 2013

MinistryCPA Special Topic: Social Security Benefit Calculation (Part 2 of 2)

Question:

Having just turned 60, I am in the process of planning my retirement, so I would like to get an idea of how much I can expect for Social Security benefits each month. Can I simply apply a percentage to my average monthly wages over my working life to get an estimate? If not, how does the Social Security Administration (SSA) calculate my monthly benefit?

Answer:

In our last post on Social Security, we discussed calculation of the average indexed monthly earnings (AIME), which is the basis for monthly benefit calculation.The SSA uses the term "primary insurance amount" (PIA) to denote the monthly benefit available to an individual at full retirement age (FRA). PIA is calculated based on two different "bend points" determined by the SSA. Each year, the bend points are adjusted based on the same national average wage index used to index for AIME purposes. Up to the first bend point, retirees receive 90% of their AIME. This provides a first level of significant retirement benefit. The amount of AIME beyond the first bend point which is translated into retirement benefits is significantly less.

For 2013, the first bend point is $791, and the second is $4,768. The PIA is equal to the sum of:
  • 90% of AIME up to the first bend point ($791)
  • 32% of AIME up to the second bend point ($4,768)
  • 15% of AIME beyond $4,768
up to a maximum of $2,533* per month for 2013. The maximum PIA is also adjusted each year by the SSA.

Let's consider an example: assume an individual has a calculated AIME of $6,000. To determine the PIA, multiply the first $791 by 90% to get $712. Then, multiply $3,977 (the difference between the first and second bend points) by 32% to get $1,273. Finally, multiply $1,232 (the difference between the second bend point and $6,000) by 15% to get $185. Add $712, $1,273, and $185 to arrive at the PIA of $2,170. Keep in mind that the SSA will apply cost-of-living adjustments (COLAs) to adjust the PIA for inflation and other economic factors. he amounts projected here are for individuals planning to begin collecting benefits at FRA.

For more, visit the Primary Insurance Amount page on the SSA website. Also, see previous posts on Social Security by clicking "Social Security" in the "Categories" section on the blog's sidebar.

*2013 PIA cap information from Forbes.com.

October 19, 2013

MinistryCPA Special Topic: Social Security Benefit Calculation (Part 1 of 2)

Question:

Having just turned 60, I am in the process of planning my retirement, so I would like to get an idea of how much I can expect for Social Security benefits each month. Can I simply apply a percentage to my average monthly wages over my working life to get an estimate? If not, how does the Social Security Administration calculate my monthly benefit?

Answer:

Unfortunately, the process is more complicated than that; you can access a monthly benefit projection by creating an account on the SSA website. Benefits are based on Social Security earnings; that is, only earnings that have been subject to Social Security tax are used in the calculation of benefits. Additionally, the SSA uses a number called averaged indexed monthly earnings (AIME). This number is important in that it forms the basis for calculation of monthly benefits. 

AIME is calculated based on the 35 highest years of Social Security earnings for an individual. For example, an individual born in 1948 whose earnings grow steadily each year from 1966-2015 will not have an AIME based on the full 50 years, but on the highest 35. At first glance, it seems obvious that the most recent years will be the highest; however, the SSA introduces one more variable. Each year's earnings (for example, 1976) are indexed (multiplied by a factor based on average wages for 1976 compared with the year the individual turns 60-in this case, 2008). This essentially converts 1976 wages to 2008 dollars. Any wages this individual earns after 2008 will not be indexed. 

Once each eligible year has been indexed, the top 35 wage years are added together and divided by 420 (the number of months in 35 years). The resulting number is the individual's AIME, which will then be used to calculate benefits. In our next post on Social Security, we will discuss calculation of benefits using AIME.

As is the case with our other posts on this topic, individuals who are disabled or eligible for survivor's benefits may be subject to different guidelines.

For more on this topic, visit the AIME page on the SSA website.

October 16, 2013

Gifts Paid as Part of Expense Reimbursement Plan

Question:

Are reimbursements for gifts of a non-religious or benevolent nature allowed under an accountable reimbursement plan for a church? For example, could a pastor who purchases flashlights for the members of a Sunday School class be reimbursed?

Answer:

Gifts are a normal business expense, and are clearly addressed by IRS Publication 463: "If you give gifts in the course of your trade or business, you can deduct all or part of the cost." As such, they are allowable as expenses to be reimbursed if they satisfy the requirements of that publication. However, according to the publication, "You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year."

For more details, see  IRS Publication 463.

October 11, 2013

Church Payment for Summer Camp Expenses

Question:

What are the implications of a church using monies from the general fund to sponsor the children of its members to attend a Christian summer camp? Could the church also pay for staff members' children to attend?

Answer:

Many churches use monies from either the general fund or a designated "Camp Scholarship" fund to help families who do not have the financial resources to send their children to a Christian camp. This benevolence is deductible to the donors and non-taxable to the recipients. Churches must be careful to avoid becoming a "conduit" for re-characterizing a donor's payment of a personal obligation as a contribution to the benevolent fund. For example, while the church may offer scholarships to send children to a Christian camp, it should not accept a family member's contribution with the designation that it be forwarded to one of his or her own family members.

Gifts to staff members are taxable. However, if the church as a whole initiates benevolence for the purpose of sending children to camp, the fact that one of the children has a parent who is a staff member does not automatically make the gift taxable to the staff member. Churches must be extremely cautious, as this can be viewed as disguised compensation, especially if it is a regular occurrence and gives preference to staff members' children.

In some cases, churches may believe that Christian summer camp is an essential experience for the children of members. If a program is instituted with the genuine objective of educating children in Christian teachings through summer camp, it is our belief that a church could sponsor the children of members with no tax consequences.

Stadium Parking Income for a Church

Question:

A church located next to a football stadium opens its parking lot to fans on Saturdays when the team has a home game. This happens about half a dozen times each year, and the parking lot is manned by volunteer church members. Parking is free, but the volunteers do solicit donations. Does this arrangement affect the church's tax-exempt status? How much control can these volunteers have over the church's use of the donations?

Answer:

First, this situation will not affect the tax exempt status of the church. Non-ministry related sources of income, although they do not affect the tax exempt status of the church, may be subject to unrelated business income tax (UBIT). According to IRS Pub. 598, churches may be subject to UBIT on "income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity." This activity clearly meets all the criteria of the IRS definition, which subjects unrelated business income to tax, except possibly in the area of being "regularly conducted." IRS Code Section 513-1(c)(2)(i) addresses this issue:
Where income producing activities are of a kind normally undertaken by nonexempt commercial organizations only on a seasonal basis, the conduct of such activities by an exempt organization during a significant portion of the season ordinarily constitutes the regular conduct of trade or business. For example, the operation of a track for horse racing for several weeks of a year would be considered the regular conduct of trade or business because it is usual to carry on such trade or business only during a particular season.
Because the church opens its parking lot each time the stadium lots are open, the church is likely viewed as conducting its business regularly during the season in which comparable nonexempt commercial entities are engaging in the same business. Although the activity is not conducted year round, the church takes advantage of the opportunity whenever it is available. Based on these considerations, the church will most likely be subject to UBIT on this income. Expenses directly incurred in the production of this income may be deducted in the computation of UBIT.

The church should also carefully consider the amount of control allowed to the volunteers over the funds. Excess control by the volunteers could be viewed as disguised compensation if their influence produces personal benefit.  Rather than giving them direct influence on the use of the funds, the church should allow them input into the decisions of the committees that "control" the designation of funds.