January 28, 2014

2014 Social Security Updates

Question:

I understand that some of the numbers used to compute my Social Security benefit may have been updated for 2014. Is this the case, and, if so, what are the new amounts?

Answer:

Yes, the Social Security Administration (SSA) updates some of its numbers each year based on the Consumer Price Index. Below is a list of the major changes from a recent Social Security press release:
  • PIA increased by a 1.5% Cost-of-living adjustment (COLA)
  • Maximum PIA increased from $2,533 to $2,642
  • The first "bend point" in PIA calculations has increased from $791 to $816; the second has increased from $4,768 to $4,917
  • Earnings exempt from the earnings test for those under full retirement age (FRA) increased from $15,120 to $15,480
  • Maximum taxable earnings for Social Security increased from $113,700 to $117,000
  • Earnings for one quarter of coverage increased from $1,160 to $1,200
The press release also describes other 2014 changes. Each of the topics mentioned in this update have been covered in previous MinistryCPA posts; click on the "Social Security" topic on the blog's sidebar for more detailed coverage.

Form 1099-MISC Failure to File Penalties

Question:

Are there any consequences for a church forgetting to file a required Form 1099-MISC? If so, what are they?

Answer:

An organization or individual who fails to file a Form 1099-MISC as required by the IRS and cannot show reasonable cause may be subject to severe financial penalties, as outlined in the IRS instructions for the form:
  • $30 per information return if you correctly file within 30 days; maximum penalty $250,000 per year ($75,000 for small businesses)
  • $60 per information return if you file correctly more than 30 days after the due date but by August 1; maximum penalty $500,000 per year ($200,000 for small businesses)
  • $100 per information return if you file after August 1 or you do not file required information returns; maximum penalty $1,500,000 per year ($500,000 for small businesses)
Based on these penalties, churches should be mindful of the filing requirements. For more on this, please see a preceding post regarding who must file Form 1099-MISC.

January 24, 2014

Form 1099-MISC Rental Payment Reminders

Question:

During the course of 2013, a church made rental payments in excess of $600 to its landlord. Is the church required to report these payments to the IRS? If so, what form should be used?

Answer:

Form 1099-MISC is used for reporting rental payments to the IRS. According to the instructions, you must "File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year...at least $600 in rents." Other criteria also apply; for example, "Report on Form 1099-MISC only when payments are made in the course of your trade or business. Personal payments are not reportable...However, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements.

There are exceptions to this requirement, including payments made to a corporation. A full list is available on the IRS website within the 1099-MISC instructions. To assist in the compliance with these requirements, Form W-9 should be requested from payees. For more posts on this topic, please type "1099-MISC" in the blog's search window.

Sale of a Parsonage to a Pastor

Question:

To show appreciation to its pastor, a church would like to sell him its parsonage for a nominal value. Will this sale at well below fair market value cause any unintended tax consequences?

Answer:

Yes, this sale will essentially increase the pastor's income by the difference between the bargain sale price and fair market value of the property, reportable on his W-2 as taxable compensation. A "gift" of this sort made with the best intentions may cause an extremely high tax burden to the pastor, including both income and self-employment taxes. The church could provide the pastor with a cash bonus along with the parsonage sale to help him pay some of the taxes. However, the cash bonus will also be taxable compensation.

There are ways to minimize the tax effects of a transaction of this nature, but those require careful thought and consideration of the situation of the church and pastor.

January 23, 2014

Wisconsin Identity Verification Quiz

Question:

I received a letter from the Wisconsin Department of Revenue requiring me to take an identity verification quiz. I have never received correspondence like this before. Is this legitimate, and, if so, how does the quiz process work?

Answer:

Yes, the letter is legitimate. Identity theft for the purpose of filing false income tax returns to receive refunds has become a major issue that the Wisconsin DOR hopes to resolve through the Identity Verification quiz. Feel free to visit the Wisconsin DOR website to view the ID Verification information page or call at (608) 266-2772.

The instructions for the quiz are detailed on the letter you received from DOR. Only those who receive the letter need to complete the quiz. The ID quiz is, in reality, simply a verification of your identity. Once you receive the letter, you will have 20 days to take the four-question quiz either online or over the phone, and you will know the quiz results upon completion. If passed, processing of the return continues. If failed, you will have another opportunity to take the quiz with four different questions. Failure of the second quiz means that you must mail the following documentation to DOR to prove your identity: a copy of the letter, a copy of a document that has your full name and photograph (e.g. driver’s license), and a copy of a document that has your full name and complete address used on the tax return (e.g. bank statement). Once your identity is confirmed, your income tax return will be processed.

Coverdell Educational Savings Accounts

Question:

I recently learned of Coverdell education savings accounts (ESA), and I am considering setting one up for my child. What are the parameters and benefits?

Answer:

This account is designed to help parents save money for the education of their children. The beneficiary for the account may be anyone less than 18 years of age, and the contributions must be designated for qualifying educational institutions that range from the elementary level through higher education. There is a $2,000 contribution limit per beneficiary per year.

The main benefit of a Coverdell ESA is the tax-free growth on contributions. Contributions are not deductible; however, the balance in the account grows tax-free and will not be taxed upon distribution if it does not exceed the beneficiary’s qualified educational expenses. Upon distribution, the amount in excess of educational expenses of the beneficiary is subject to taxation and will usually incur an additional 10% tax. An exception applies when the beneficiary has received a scholarship that reduces qualified educational expenses. Another benefit of a Coverdell ESA is that the money may be rolled over from one Coverdell account into another family member’s Coverdell account free of tax.

If your state offers a 529 plan deduction, you may want to consider this before a Coverdell ESA. For more on Coverdell ESAs, please read IRS Publication 970.

January 15, 2014

Private Inurement: Excessive Compensation Issues

Question:

An American businessman runs a company as a ministry abroad, and also collects a salary from a U.S. mission agency for which he works 20-40 hours per week. Is there any risk of private inurement in this situation? (For a review of the concept of private inurement, follow this link: Private Inurement: Review and Application)

Answer:

The risk in this situation relates to potential excessive compensation by the mission agency: that the businessman is being paid more than is reasonable for the services he is performing. The IRS has laid out criteria for whether an organization has procedures set up to avoid private inurement. Form 1023, Sec. V, line 4 relates to reasonable compensation. The instructions for line 4g state, "'Reasonable compensation' is an amount that would ordinarily be paid by like organizations under like circumstances as of the date the compensation arrangement is made." Essentially, then, if his compensation has been set based on these guidelines, no private inurement has occurred.

January 14, 2014

Housing Allowance and Social Security Earnings Test

Question:

A pastor who receives a housing allowance has recently begun collecting Social Security benefits. Does his housing allowance count against the 2014 earnings limit of $15,480 for individuals who work while collecting Social Security?

Answer:

The Social Security Administration (ssa.gov)  does not specifically address this issue in its handbook. However, Sec. 1811 of the handbook includes both "all work for pay" and "all net earnings from self-employment" as items that count against the earnings limit. Since housing allowance is clearly included in net earnings from self-employment, it is considered income for purposes of the earnings test.

A second issue arises for ministers who have "opted out" of Social Security but are collecting based on non-ministerial earnings. If they have not opted out, housing allowance will certainly affect the earnings limit, so it seems inappropriate for those who have opted out to exclude housing allowance in reporting to the SSA without clear exceptions to cite. However, the SSA website provides little guidance as to the method of reporting a housing allowance by those who have opted out. Those ministers are not required to report SE earnings on their tax returns, which is the basis for the SSA to conduct its earnings test, as indicated by Sec. 1819 of the Social Security handbook.

January 10, 2014

Effect of Mortgage Prepayment on Housing Allowance

Question:

Can a minister pay off his mortgage early and prorate the prepayment each year over the life of the original loan, essentially treating what he would have paid each year as a housing allowance designation?

Answer:

Individual taxpayers are on a strict cash basis of accounting, so tax deductions are only allowed for cash payments made during a given year. Additionally, the housing allowance deduction is limited to the least of three amounts:

(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.
(Sources: IRS Publication 1828; Clergy Housing Allowance Clarification Act of 2002; IRS Regulation Section 1.107-1)

Based on this list, a minister who owns his home and makes no housing payment in a given year will be eligible for a housing allowance deduction only to the extent of current-year cash expenditures. Further, in the year of significant prepayment, it is likely that the fair rental limitation will apply since his total actual expenditures will exceed fair rental value.