Ministerial Housing Allowance

[Christian]

P. S. I now have had time to look over what the client's former taxperson did in respect to her salary and HA. In prior years returns I noted Form 2106 showing mileage expense and a few other miscellaneous expenses incidental to being a minister such as uniform maintenance, telephone calls, etc. These expenses subject to the 2% limitation normally appear on Schdule A. A recapitilation sheet I found showed the following. An addition of the salary and HA into a single figure. The total reduced by unreimbursed employee expenses which ccomprised most of the amounts reported on Form 2106. This greatly reduced the HA exposed to SE tax although the salary remained fully taxed. In reading material in the large Taxbook I received with my ATX renewal it states that the entire HA is taxed for SE purposes and allows no deductions period. In asking how long her former taxperson had been preparing her taxes I was told twenty years. Unless I am greatly mistaken this was an egegious error but would like to hear what y'all think.

 

[Margaret CPA in OH]

It seems that you are more fully grasping the correct handling of clergy tax reporting.  It appears as though the earlier returns reducing the HA are wrong. It seems that Form 2106 reduced the income that was taxable and again reduced the amount subject to SE (assuming the total exceeded the standard deduction).  As mentioned in an previous reply, the salary and HA are fully taxable for SE as would be any net Sch. C income.  When Form 2106 was discontinued, it was a bit detrimental to some clergy without Sch. C income to possibly offset that.  As Rita B pointed out, there is now a mechanism on Sch. SE to deduct unreimbursed expenses there.  The instructions state to attach an explanation.  I have not had this issue so am a bit washy about this.  Read the instructions yourself.  It could be the bottom line would still be the same but determined in an unusual way.  I believe the ATX clergy worksheets and your Taxbook reference will go a long way with you now.

[Christian]

I will photocopy the exact words from the Taxbook on the HA.What is crystal clear is the salary is fully subject to SE tax and not placed on Schedule C. Fees, baptismals, funeral services are the items placed on Schedule C and are of course allowed deductions on that. The HA not exposed to regular income tax is indicated to be fully exposed to SE tax but I will photocopy it and place it into my next submission. 

[JohnH]

Yes, it's clear that the previous tax preparer didn't understand the proper treatment of clergy taxes.  They seemed to have a rough idea of the end result, but they took an improper route to get there.  As Margaret has pointed out, they probably got fairly close to the correct final numbers.  So no harm, no foul.  

By taking the time to learn how to report clergy income and H&U allowance properly, you're doing the best job you can for your client.  You're minimizing their chances of an audit and maximizing their chances of a "no change" result in the unlikely event one occurs.  They're fortunate to have you handling their return going forward.