2009 Tar River Tax Update For Ministers Use for filing 2008 Tax Returns Well, it’s that time of year again – time to file our annual taxes. Most likely, you have not read through the IRS Code; have not kept abreast of all the changes in the law that affect those in ministry positions; have not received all the documentation needed from the church you serve to support your filings, etc. etc. There are numerous people that have studied this. This document is a mere attempt to provide you with some information that might be able to assist you as you compile, support, and file your 2008 tax returns. Let be begin by stating that I am NOT a tax expert. I simply know that most churches are not in compliance with tax code requirements; most CPAs do not have a clue about filing taxes for ministers; and that many of us often loose out on deductions as a result of these and other problems. To that end, I want to be of assistance. Listed below are ways that we at Tar River Association are attempting to assist you: 1. Turbo Tax: 2 computers in the office are set up for you to come in and use to file your taxes using Turbo Tax software. For the most part, it is just as helpful to you as any CPA would be in filing your ministry taxes (this would not be true if you have other substantial assets and income). 2. Tax Books: We have several books/booklets that you can use to assist you in filing your annual taxes. 3. PowerPoint: There is a PowerPoint Presentation on our website that details much of the tax code. Go to www.tarriverba.com and click on the appropriate links. 4. Personal Assistance: I am available to be of help to you if you need me. I am willing to go and speak to your church finance committees, etc. if that would be of help as well. 5. This document: In this document, I simply want to highlight a few things that might assist you in your MINISTERIAL income from the church. As stated previously, you will need additional advice related to your specifics and if you have other incomes. This is dealing with income and expenses in church performance of duties and is not all inclusive. Every year there are tax law changes that affect ministers. We need to keep abreast of those changes and strive to be both good stewards of what God has entrusted to us and good witnesses by adhering to the law. As stated, most churches are not in compliance with IRS tax code. Some estimates run as high as 85% of our churches are not in compliance. I am certain our churches do not intend to operate “outside the law.” Rather, the changes come about so often and are so complicated that most churches do not keep up with them adequately. I hope this document will help both the minister and the church. I will divide this document into several parts. Hopefully all of it will be helpful to you. If you have additional questions, please feel free to contact me and I will assist as I can. My email address is email@example.com and my cell number is 252-883-7896. Section One: A quick checklist or guide to ministerial deductions so that you will not overlook anything. Section Two: I will deal with the W-2 that ALL ministers should receive from their church. Section Three: I will deal with housing allowances. Section Four: What to do if you receive a 1099 and not a W-2. SECTION ONE: MINISTERIAL DEDUCTIONS Professional expenses you incur which have not been reimbursed to you by the church are ministry expenses that you may deduct. In some cases, the church treasurer may have included your reimbursements in your W-2. In that event, you can deduct those expenses on your return. Please note: You should be using an accountable reimbursement plan to protect yourself and to document these expenses as ministry expenses. If you need assistance in this area, I can assist. If the church has adopted an accountable reimbursement plan, then the treasurer should NOT put the reimbursements to you on your W-2. Listed below are items you may be able to deduct from your return: Accounting fees/software for filing taxes/tax preparation fees Auto expense (Need to determine which methods would be best – actual expense/mileage reimbursement) Books, periodicals, subscriptions Business telephone/cell phone (Need to review IRS guidelines to insure that the way you are handling these expenses are acceptable to the IRS) Educational expenses/conferences Interest on charge cards used for business Interest on auto loans for vehicles used for 100% business Office equipment and supplies Materials used in the performance of your responsibilities/duties as a minister Post office box/postage/freight and shipping Seminars and related fees not paid by the church Tapes/CDs/DVDs related to ministry Professional Travel (You can deduct items NOT paid by the church. I recommend that you keep a “trip diary” and keep it is documentation for tax purposes.) These expenses may include the following: - Auto rental - Airfare/train fare/bus/taxi expense - Hotel - Laundry and cleaning (note this is related to TRAVEL) - Meals - Parking and toll expenses - Telephone expenses while on the trip - Tips incurred You need to keep the date and purpose for each expense. Several books I looked for suggested that you keep a file entitled 2008 Professional Travel and place all those receipts/records/explanations in them. If the IRS audits you, be assured this is an area you will be audited! Miscellaneous Expenses: Believe it or not, they MOUNT UP! Write down every expense you think is related to your ministry at the church; your performing of wedding and funerals where you received honorariums; any sideline business that you/your spouse have, etc. Again, if audited, these areas will be scrutinized by the IRS, but if they are legitimate and documented items, they will stand! Some of these expenses (not already listed) may include: - Advertising and promotion - Auto/truck expense (I keep my mileage log for all I do in the same monthly record sheet) - Business related gifts - Cleaning and care of business areas - Consulting fees and contract labor charges - Equipment rental - Legal and professional fees - Meals and entertainment (50% rule) - Moving costs - Office expenses - Safety deposit box - Storage fees - Supplies and materials - If you actually have a side-line business, there are many other aspects you need to look at as well. I am not going to get into all of the suggestions related to a “home office” or a side-line business. For those issues, I can direct you to places to review but as it does not apply to most ministers in the Association, I will not address those issues). SECTION TWO: THE W-2 FORM ALL ministers should receive a W-2 from their church. That is not always the case, but it should be. However, often times the W-2 is incorrect as treasurers include benefits, housing, and reimbursements in the salary line. That ought not to be. Basically, there are 12 boxes on your W-2 that you want to be concerned with. In the following paragraphs, I will address some of the general guidelines regarding a minister’s W-2 Form. Again, these are based on readings from several books/updates. Your actual situation may merit additional information. General guidelines are listed below: Box/Line 1 of your W-2 is here your salary from the church goes. If you received a 1099 (or nothing at all), this amount should include the following items: - Regular salary that you receive from your church (NOT your housing allowance) - Christmas bonuses/financial gifts of any kind from the church - Year end bonuses - Any travel allowance received from the church IF the church does not have an approved accountable reimbursement plan - Personal use of the church’s auto - Life insurance premiums paid by the church beyond the first $50,000 - Personal vacations paid for by the church - School tuition for your children if paid by the church - Social Security Offset (many churches pay this to assist the pastor in his paying his Self Employment Taxes without knowing that this is taxable income to the pastor) - Federal or state income taxes paid for you by the church - All church-related expenses reimbursed/paid to the pastor without an accountable reimbursement plan is considered taxable income to the pastor (no matter what we think---we are either to be accountable to the church or to the IRS) - Below interest loans and/or church property sold at below-market prices because of your position as pastor (the difference is considered income) - Money NOT USED as housing expense that was designated by the church as Housing allowance is to be reported as income to the pastor. - PLEASE NOTE: For 2008 if your salary recorded in Box 1 and housing allowance is less than $41,646, you may qualify for the Earned Income Tax Credit (depending on the number of children you have). PLEASE NOTE: If you receive honorariums for weddings, funerals, etc. and/or have additional income besides the salary from the church, you should place that on Form 1040 Line 21 and on Schedule SE, Line 2 unless you are exempt from Social Security. SECTION THREE: HOUSING ALLOWANCE The word use of the word “allowance” in the minister’s “salary package” (which is a term we need to get rid of as well), is when it is connected with the word housing. This is a great tax benefit for ministers, but there should be good recordkeeping. The housing allowance is limited to the LEAST of these: 1. The amount that has been designated by the church as a housing allowance 2. The amount actually spent for housing expenses 3. The fair rental value of the home fully furnished There are several “rules” that must be followed with the use of the Housing Allowance benefit for ministers: 1. Was the amount designated in the church minutes in advance (prior to being paid out)/ 2. Did your actual housing expenses equal or exceed the amount listed in the church’s minutes? 3. If there is money in excess, it is to be considered income to the pastor. The following items are considered allowable housing expenses through various rulings of the IRS, the courts, and audits. You should maintain an accounting (kept receipts) for these items in the event of an audit: - Rent or mortgage payments - Down payment - Insurance on home and contacts - Real estate taxes - Repairs - Kitchen items – including plates, silverware, dishes, etc.) - Household cleaning supplies (soap, detergent, tissues, brooms, light bulbs, trash bags, etc.) - Furniture/furnishings (purchase of new, repair of old, general upkeep) - Appliances (purchase of new, repair of old, general upkeep) - Curtains, rugs, linens, towels, pictures, frames, decorating items, wall paper, door locks, etc. - Utilities (electricity, gas, telephone, sewer, trash pick up, cable or satellite TV, firewood, etc.) - Landscaping, lawn services, gardening, fencing - Adding on rooms, remodeling - Perhaps other things but NOT food, servants, or entertainment Please remember – the entire amount paid to you as housing allowance is not taxable income to you as a minister BUT it is to be considered in the calculation of your self-employment tax. With regard to a “Parsonage Allowance,” is dealt with in the same manner as a Housing Allowance. There should be a FRV established by the church for the portion considered rent but it is also acceptable for the church to pay for or provide money for the same expenses as listed above. SECTION FOUR: RECEIVED A 1099 Unfortunately many of our churches still give 1099s as opposed to W-2s. In effect, not receiving a W-2 hurts you with the IRS but technically it also hurts you with Guidestone Benefits. The extra protection benefits afforded pastors who contribute to Guidestone’s retirement must be W- 2 employees of the church. If you are a minister that received a 1099, you should use one of the worksheets offered by several tax programs and on the IRS website. Once that figure is determined, you should do the following: 1. Total from a W-2 Income Worksheet $_______________ 2. Health-Insurance Premiums paid for you by the church $_______________ 3. Health-Expense Reimbursements paid for you by the church $_______________ TOTAL (This is the number that should be on your Line 7 $_______________ Of your 1099 if filled out correctly by the church) The above amount should then be listed on Schedule C. If you received honorariums for funerals, weddings, etc. this total amount should be added to the above amount on your Schedule C. FYI---honorariums can be designated for specific items (i.e. housing) and as long as you spend it on that they with documentation would not have to be counted as income. You should note that ONLY THOSE who get a W-2 from the church escape taxation on church- provided health plan. If that is your case, you MAY be able to claim 100% of your premiums on Form 1040, Line 29 (See IRS Publication 535 for additional information). I can not be of much help with the particular rules related to 1099s. My best advice to all churches is simply this – ALL pastors/ministers should receive a W-2 for their employment. It maximizes their benefits and makes them eligible for additional benefits Hopefully, this will serve as a help to you. Remember, I am not an “expert” but am providing this with the hope of helping you as you fill out your taxes. Your circumstances may dictate additional assistance. I am happy to assist and Turbo Tax is also available to you.
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