MAMalody - More on Clergy

[dexterman]

5. If they are not exempted from Social Security, the income they have that is subject to the SE tax is: cash salary, designated (and paid) housing allowance, social security offset, honorariums, royalties, recapture of auto depreciation; less any unreimbursed professional expenses, business portion of tax prep fee, and business % of auto interest and personal property tax. The worksheet that the IRS uses and ATX uses has an error in it. It mistakenly does not allow the IRC 265 limitation as a reduction for the SE computation while the code and regs do.

7. It is a good idea when the pastor makes the request to the church that he adds about 20% to the amount that they think they will use. Since this is a use it or lose it proposition, the pastor and church lose nothing by making the figure larger that actually used. However, it cost them money, if the designated amount is not more than what they expect to use.

8. The housing amount that is not subject to income tax is the lower of (1) designated amount, (2) amount actually spent or (3) the fair rental value. So if the amount designated and fair rental value is less than what is spent, the pastor is paying income tax on income that could have been exempted. If the amount spent is less than the amount designated or the fair rental value, then the difference between the designated amount and what was spent becomes subject to income tax and is added to line 7 of Form 1040. As you can see it does not hurt to overdesignate but hurts when you underdesignate.

11. The housing amount is NOT required to be listed on the W-2, however, the pastor will always need to know what it is so their tax return can be properly prepared.

Mike

Is 100% of the housing allowance always subject to SE tax (if not exempted) or is it also the lesser of (1) designated amount, (2) amount actually spent or (3) the fair rental value? If it is not the lesser of, why would it more be advantageous for an increased $ amount, because what you save in income taxes you pay in SE tax, or am I missing something? Former CPA told (according to minister anyways) minister the less the designated allowance the better because he wouldn't have to pay SE tax on this amount.

I have a new minister and in previous years the CPA took a deduction for part of the housing allowance on line 21? Under what circustances would this be done? Could it be that part of the housing allowance was erroneously included in box 7 of the W-2? CPA has sinced died and new treasurer at the church and the Minister has not a clue???

[Redneck]

Is 100% of the housing allowance always subject to SE tax (if not exempted) or is it also the lesser of (1) designated amount, (2) amount actually spent or (3) the fair rental value? If it is not the lesser of, why would it more be advantageous for an increased $ amount, because what you save in income taxes you pay in SE tax, or am I missing something? Former CPA told (according to minister anyways) minister the less the designated allowance the better because he wouldn't have to pay SE tax on this amount.

I have a new minister and in previous years the CPA took a deduction for part of the housing allowance on line 21? Under what circustances would this be done? Could it be that part of the housing allowance was erroneously included in box 7 of the W-2? CPA has sinced died and new treasurer at the church and the Minister has not a clue???

I'm not Mike but I can answer your question. Yes, normally 100% of the housing allowance is subject to SE tax. The "lesser of" computation is done only to determine how much, if any, of the housing allowance will be subject to income tax.

There is a thread a little farther down the board called "ministry of the gospel" where Mike has given an excellent explanation of this.

[Redneck]

I'm not Mike but I can answer your question. Yes, normally 100% of the housing allowance is subject to SE tax. The "lesser of" computation is done only to determine how much, if any, of the housing allowance will be subject to income tax.

There is a thread a little farther down the board called "ministry of the gospel" where Mike has given an excellent explanation of this.

The thread is actually called "minister of the gospel"

[dexterman]

Anyone have any thoughts on this portion of my question?

I have a new minister and in previous years the CPA took a deduction for part of the housing allowance on line 21? Under what circustances would this be done? Could it be that part of the housing allowance was erroneously included in box 7 of the W-2? CPA has sinced died and new treasurer at the church and the Minister has not a clue???

[Redneck]

Anyone have any thoughts on this portion of my question?

I have a new minister and in previous years the CPA took a deduction for part of the housing allowance on line 21? Under what circustances would this be done? Could it be that part of the housing allowance was erroneously included in box 7 of the W-2? CPA has sinced died and new treasurer at the church and the Minister has not a clue???

If there is no one left to tell you why they did it that way, you'll probably never know. I would let sleeping dogs lay and do the return correctly this time. If the minister won't let you do it the right way then you have to decide if you want to have him for a client.

[JohnH]

dexterman:

Line 21 is an addition to income, not a deduction.

Are you saying that the previous CPA entered a negative number on line 21?

On the other hand, if f the line 21 entry is a positive number, then that is not unusual because Line 21 is exactly where the UNSPENT portion of the H&U allowance would normally be entered in order to bring it back into taxable income. For example, if the H&U allowance is $15,000 and the minister only spent $12,000 for all H&U related expenses, then it would be proper to enter $3,000 on line 21. (This assumes that the H&U allowance was not included on line 1 of a properly prepared W-2 form.)

[dexterman]

It was entered as a negative on line 21. I have studied past years returns and can't find a rhyme or reason to the amounts that are deducted. One year the amount equal to the housing allowance was deducted, another year the housing allowance plus utilities, and another year nothing. I do want to do the return correctly and neither over or under report the income.

Would there be a proper reason to deduct any part of the housing allowance on line 21? If so when or why? I've been trying to research but at this time of year my mind is not totally clear and I don't have a lot of extra time, most likely we'll do an extension, but he's pushing for not.

Hmmmmmmmmmm I wonder why? Can we say REBATE!

[JohnH]

I'd want to get a list of all checks written to him duiring the year and reconcile them back to the W-2 to be sure the housing & utilities allowance is being reported correctly. That may answer all your questions, including why the prior CPA handled it the way he did (although it was incorrect).

As for the extension, I've been telling people since Mar 12 that we would be filing an extension. Only those that are in pristine condition or need slight clarifications are getting filed by Apr 15. Anything else has to wait. I think it's important that the tax preparer take charge of the situation and insist that the client wait for the best result. They chose to wait until now to get their info together. If they are suddenly in such a hurry, let them go rush somebody else.

One thing I have noticed is that many people are under the impression that if they don't file by Apr 15 they don't get the rebate at all. Once that misconception is dealt with, they are much more understanding about the extension. After all, if they waited this long to get their regular refund claim under way (assuming they have a refund), then why should it matter that they will need to wait another month or two for the rebate? It just isn't that big a deal.

[MAMalody]

dexterman:

Line 21 is an addition to income, not a deduction.

Are you saying that the previous CPA entered a negative number on line 21?

On the other hand, if f the line 21 entry is a positive number, then that is not unusual because Line 21 is exactly where the UNSPENT portion of the H&U allowance would normally be entered in order to bring it back into taxable income. For example, if the H&U allowance is $15,000 and the minister only spent $12,000 for all H&U related expenses, then it would be proper to enter $3,000 on line 21. (This assumes that the H&U allowance was not included on line 1 of a properly prepared W-2 form.)

I would differ here a little. I think the most appropriate place for unused housing allowance would be an addon to line 7 of the 1040. That is where we would but the excess reimbursements for F3903, taxable tips off F4137, etc. There is not a lot of difference here. Also from a pragmatic sense, in a live audit, you are waving a flag in front of the auditor (who can open this issue), when they probably will never even know that line 7 exceeds the total of box 1 on the W-2s. I would have to go back and look it up, however, I believe this is actually what the IRS recommends also.

If the housing allowance is listed in box 1 of the W-2, my request is always to have the pastor go back to the church and get a corrected W-2. I have about a 85% success rate here. Failing that, I would back out any qualified housing, per the limitations, on line 21 of 1040.

In answer to the question about overdesignating the housing allowance, my reasons (I hope it is correct) is as follows:

1. All the pastors compensation is subject to SE tax, whether it be housing allowance or cash salary (assuming no F4361 on file). So where it is in the pie at this point makes no difference.

2. By overdesignating, the pastor is assured of getting the maximum amount of nontaxable (for income purposes) possible. It will not change his SE tax whether he has 10K salary and 20K housing, or if he has 6K salary and 24K housing. The SE base (30K) would be the same. It will make a little difference, possibly, in the IRC 265 limitation (remember 85% of pastors are unable to itemize).

3. With a 100% housing allowance, then, of course, it won't make any difference because all that is coming in is already designated as housing.

If I misinterpreted the questions, please repost and I will try again.

Mike

[dexterman]

I didn't realized there is so much involved and so many errors with clergy and reporting until this year, touched on the subject slightly at past seminars, but mind wonders because I have not actually dealt w/ the issue. I thought the designated housing allowance was just some number that was grabbed out of the air, never realized how important it is.

So if a minister normally receives a salary of $34,000 they could negogiate to set the housing allowance at say $6,000. Then when the W-2 is completed box 1, 3 and 5 should have $28,000 and box 14 could have the amount of $6,000 reported for informational purposes only. Then for SE purposes I would add the lesser of (1) designated amount, (2) amount actually spent or (3) the fair rental value?

My minister has a salary of $31,000 and said the housing allowance is $1,800 plus utilities but in box 1, 3 and 5 the total $31,000 is reported. So if indeed the $1800 is the designated housing allowance this amount only should be deducted from box 1, 3, and 5(the corrected amount of $29,200)?

[JohnH]

Mike:

Seems like every time you post I learn something new. I've been adding the unused H&U allowance on line 21 for years, and now I learn it should go on Line 7. Same net result, but I haven't been doing it according to IRS instructions.

[chadlonetree]

Thought I would throw in my 2 cents (or cent and a half). About 80% of my business is ministers tax returns (about 300 a year).

This year you should be filing the 1040 clergy worksheet. You enter designated housing allowance, then the actual amount used. ATX will automatically report the unused portion on line 7. If your minister is a w-2 employee and has expenses (auto, mandatory giving (not contributions if mandatory by the denomination or church bylaws) and any other expenses on 2106, it will reduce the SE tax liability by taking the percentage of taxable income divided by total compensation. If your minister is a Sch C, it will do the same thing for Sch C expenses (using worksheet 4). Let me know if you have any questions and I can help any way I can.

[MAMalody]

I didn't realized there is so much involved and so many errors with clergy and reporting until this year, touched on the subject slightly at past seminars, but mind wonders because I have not actually dealt w/ the issue. I thought the designated housing allowance was just some number that was grabbed out of the air, never realized how important it is.

So if a minister normally receives a salary of $34,000 they could negogiate to set the housing allowance at say $6,000. Then when the W-2 is completed box 1, 3 and 5 should have $28,000 and box 14 could have the amount of $6,000 reported for informational purposes only. Then for SE purposes I would add the lesser of (1) designated amount, (2) amount actually spent or (3) the fair rental value?

My minister has a salary of $31,000 and said the housing allowance is $1,800 plus utilities but in box 1, 3 and 5 the total $31,000 is reported. So if indeed the $1800 is the designated housing allowance this amount only should be deducted from box 1, 3, and 5(the corrected amount of $29,200)?

You have a problem here. If boxes 3-6 are filled in on the W-2 the pastor does not qualify for dual status and therefore cannot have a housing allowance. While you can list the housing in box 14, I don't actually do it. It is not required, but it is okay.

For SE purposes you would add the cash salary, the lower of designated housing, actual amount spent or the fair rental value less business protion of tax preparation cost, business % of auto interest and taxes less any unreimbursed professional expenses, irrespective of the IRC 265 limitation.

If you pastor had 31K income and 1800 housing allowance, his W-2 should have 31K in box 1 and the rest should be blank. You could put 1800 in box 14 and of course you would have any appropriate state boxes filled out.

If his housing (1800) is part of the 31K I would try to have the W-2 corrected. Failing that, I would enter the qualified housing expense in line 21 of the 1040 as a negative number.

[MAMalody]

Thought I would throw in my 2 cents (or cent and a half). About 80% of my business is ministers tax returns (about 300 a year).

This year you should be filing the 1040 clergy worksheet. You enter designated housing allowance, then the actual amount used. ATX will automatically report the unused portion on line 7. If your minister is a w-2 employee and has expenses (auto, mandatory giving (not contributions if mandatory by the denomination or church bylaws) and any other expenses on 2106, it will reduce the SE tax liability by taking the percentage of taxable income divided by total compensation. If your minister is a Sch C, it will do the same thing for Sch C expenses (using worksheet 4). Let me know if you have any questions and I can help any way I can.

Be careful of the 1040 Clergy Worksheets, there are errors on them. For example, they are not designed to accomodate a pastor with an approved Form 4361. This has been communicated to ATX, however, to date they have not adjusted the worksheet to handle this situation. Also, they do not properly accomodate the IRC 265 limitation, or lack thereof, on Worksheet #4. I guess the real problem here is that ATX simply took them from Publication 517 without reviewing them for their program applications.

I hope this helps.

Mike

[dexterman]

You have a problem here. If boxes 3-6 are filled in on the W-2 the pastor does not qualify for dual status and therefore cannot have a housing allowance. While you can list the housing in box 14, I don't actually do it. It is not required, but it is okay.

For SE purposes you would add the cash salary, the lower of designated housing, actual amount spent or the fair rental value less business protion of tax preparation cost, business % of auto interest and taxes less any unreimbursed professional expenses, irrespective of the IRC 265 limitation.

If you pastor had 31K income and 1800 housing allowance, his W-2 should have 31K in box 1 and the rest should be blank. You could put 1800 in box 14 and of course you would have any appropriate state boxes filled out.

If his housing (1800) is part of the 31K I would try to have the W-2 corrected. Failing that, I would enter the qualified housing expense in line 21 of the 1040 as a negative number.

Mike,

The amounts are in box 1, 3, 5 and 16(State Wages). Box 2, 4, 6 and 17(State w/held) are Zero?

Also, I did the worksheet from the Quickfinder and deducted the business portion of his unreimbursed expenses for the SE income.

[chadlonetree]

Be careful of the 1040 Clergy Worksheets, there are errors on them. For example, they are not designed to accomodate a pastor with an approved Form 4361. This has been communicated to ATX, however, to date they have not adjusted the worksheet to handle this situation. Also, they do not properly accomodate the IRC 265 limitation, or lack thereof, on Worksheet #4. I guess the real problem here is that ATX simply took them from Publication 517 without reviewing them for their program applications.

I hope this helps.

Mike

If you check the 4361 box on sch SE in the program, you can enter zero on worksheet 4 on the 1040 clergy and everything is correct. It will show Exempt 4361 on pg 2 of the 1040 where required and zero out the SE tax. At the beginning of the season I tried 6 or 7 times to get ATX to update SCH SE or the 1040 clergy to get the program to zero it out once the box on Sch SE was checked, but you can imagine how that went. No response. I have just been doing it manually. You can actually read about it on this forum back in Jan.

Make sure you are sending in 8453 with 1040 clergy for efiles.

[dexterman]

Do you need to send 8453 with all efiled clergy?

[MAMalody]

Mike,

The amounts are in box 1, 3, 5 and 16(State Wages). Box 2, 4, 6 and 17(State w/held) are Zero?

That can work. It does leave the door open for questions, but the lack of boxes 2, 4, 6 should clear the way for an appropriate housing allowance.

[MAMalody]

<<<If you check the 4361 box on sch SE in the program, you can enter zero on worksheet 4 on the 1040 clergy and everything is correct. It will show Exempt 4361 on pg 2 of the 1040 where required and zero out the SE tax. At the beginning of the season I tried 6 or 7 times to get ATX to update SCH SE or the 1040 clergy to get the program to zero it out once the box on Sch SE was checked, but you can imagine how that went. No response. I have just been doing it manually. You can actually read about it on this forum back in Jan.

Make sure you are sending in 8453 with 1040 clergy for efiles. >>>

That's my point. Unless I misunderstand your posting, I am doing the same thing. However, you should not have to override the worksheets to make them work. Technically, the F4361 box on the SE form should not be checked unless there is other SE income. So if the pastor did not have any other SE income it would be left unchecked.

Also we still don't know what the IRS will do when they get the F8453 with the modified worksheets. My guess is they will be filed away and nobody will actually look at them, but, who knows. There could be some major correspondence in 8 to 16 months from now.

It there happens to be somebody that has software other than ATX, does you software handle this differently?

Mike

[chadlonetree]

<<<If you check the 4361 box on sch SE in the program, you can enter zero on worksheet 4 on the 1040 clergy and everything is correct. It will show Exempt 4361 on pg 2 of the 1040 where required and zero out the SE tax. At the beginning of the season I tried 6 or 7 times to get ATX to update SCH SE or the 1040 clergy to get the program to zero it out once the box on Sch SE was checked, but you can imagine how that went. No response. I have just been doing it manually. You can actually read about it on this forum back in Jan.

Make sure you are sending in 8453 with 1040 clergy for efiles. >>>

That's my point. Unless I misunderstand your posting, I am doing the same thing. However, you should not have to override the worksheets to make them work. Technically, the F4361 box on the SE form should not be checked unless there is other SE income. So if the pastor did not have any other SE income it would be left unchecked.

Also we still don't know what the IRS will do when they get the F8453 with the modified worksheets. My guess is they will be filed away and nobody will actually look at them, but, who knows. There could be some major correspondence in 8 to 16 months from now.

It there happens to be somebody that has software other than ATX, does you software handle this differently?

Mike

No you are not misunderstanding my post. The 1040Clergy WKSHT is flawed which is why I spent so much time trying to get Tech Support to work on it at the beginning of the season. That being said, I think it can still be a valuable tool for those who are not experienced with ministers returns if they understand its flaws.

Just out of curiosity, if you do not check the f4361 box on Sch SE, how do you have "Exempt 4361" appear on line 58 (SE tax) of 1040 as the IRS requires?

[MAMalody]

<<<Just out of curiosity, if you do not check the f4361 box on Sch SE, how do you have "Exempt 4361" appear on line 58 (SE tax) of 1040 as the IRS requires?>>>

When I have done it because there was not other SE income, I overide the form and type it in. Your way is probably better, except it is not called for. I view this as another ATX programming glitch.

BTW, I don't run across many who specialize in clergy taxes. May I add you to my list of those I ask questions of when I am stumpted? If so, please send me your e-mail, etc to [email protected]. have a great day!

Mike