post Posted March 25, 2009 Report Share Posted March 25, 2009 This involves clergy taxes, which are rather weird to start with. On Publication 517, worksheet 1, line g is fair rental value of of the home including furnishings plus the cost of utilities. So in some cases line g may be more than actual (line f), since the pastor doesn't rent his furniture. Also, during the year this pastor relocated and stayed with relatives for less-than--frv rent for some months while looking for suitable housing to purchase. In this case, since actual expenses (line 4f) were lower than either the allowance (line 4c) or the frv+utilities (line 4g), the amount from line f is entered on line 4h and is subtracted from line 4c, resulting in excess allowance (line 4i) which then ends up added into Form 1040, line 7. So my question is regarding line 4g: In this case, does it affect anything other than this choice of amount to enter on line 4h? It looks to me as if the difference between actual expenses and frv(furnished)+utilities is handled in these calculations, so the difference is not some form of taxable income to be entered anywhere else. Is that correct? Am I missing something here? Does the amount on line g ever affect any other calculation besides what appears on worksheet 1? Quote Link to comment Share on other sites More sharing options...
Virtual Managed Solutions Posted March 25, 2009 Report Share Posted March 25, 2009 Over my head, but I'll bump it back up to the top for you. Hopefully someone has the answer for you. Quote Link to comment Share on other sites More sharing options...
MN2V Posted March 25, 2009 Report Share Posted March 25, 2009 Line g is just an arbitrary number and doesn't appear anywhere else. I usually juste enter same amount as line f. Clergy housing allowance is never excessive. Quote Link to comment Share on other sites More sharing options...
MAMalody Posted March 25, 2009 Report Share Posted March 25, 2009 Let's go back to basic premis. The pastor is allowed the lower of FRV (+ utilites, etc), actual expenses, or the designated amount as the amount to be exempt from income tax. That is what h does. It makes that comparison. From that the determination will be made whether there is any excess housing that would be taxable for income tax purposes, which is reflected in "i". Do NOT just make f and g equal, that is a difficult position to support to the IRS. In audit, the IRS will look for you to be able to provide documentation on how you arrived at f, and to say that I just made it equal, does not cut it (at least it didn't when I was an auditor and has not in any audit I have been it). I find that about 30% of my clients (all I do is pastors and religious workers) have excess housing allowance. It is usually generated by an overdesignation in relation to the actual expenses, which is how I counsel the churches. The FRV figures usually turns out to be the limitation on the maximum that can be exempt because, once properly set up, it will be the lower of the three figures. Technically, there is one more limiting factor, and that is resaonable compensation. I have never seen that an issue in a real life situation. The court case that came form had the "pastor" performing no services at all. Just thought I would throw that in to keep things exciting. I hope this helps. I specialize in clergy taxes and if I can ever help with any question, feel free to contact me at [email protected]. You should be advised that if you do this, you will not receive the benefit of peer review that this board makes possible. Have a great day! Quote Link to comment Share on other sites More sharing options...
RitaB Posted March 25, 2009 Report Share Posted March 25, 2009 Clergy housing allowance is never excessive. Not to be disagreeable, but I have some pastors whose HA exceeds their expenses. And, I believe there was a big bruhaha a few years ago because Pastor Rick Warren had something like $80,000 HA and only $20,000 in box 1 of W-2. (I really wish I didn't know that, because his book The Purpose Driven Life is just incredible... Also, the interviews he did with McCain and Obama during the campaign were way better than any of the debates, as far as I am concerned.) Edit: I really am the slowest typist in the history of the world. Mike already made my point. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 25, 2009 Report Share Posted March 25, 2009 That is OK, Rita. You can type as slow as you want, we won't mind. And yes, good planning says that the church should always set the HA a little high, so that even if there is an unusually high expense one year, the pastor gets the tax break. After all, there is no harm if it is too high, the excess just becomes taxable. Which if it were not designated as HA it would have been anyway. It's not like they are paying more or less, just that they are designating part of what they pay as HA. And that is why Mike is right. You should not just plug Line g. It does effect what is taxable for income tax vs what is only taxable for SE tax. Quote Link to comment Share on other sites More sharing options...
post Posted March 25, 2009 Author Report Share Posted March 25, 2009 I've even left it blank and not had a problem. I think it's pretty much a kind of cap to protect against an excess of exclusion, really a reaction to the Warren vs IRS case. And, yes, this parson has excess allowance. Just about everything I see published by the IRS referring to this is in situations where the actual expenses are equal to or greater than the frv (furnished)+utilities. The only time I've seen the actual lower is in one example in the auditor's training publication for ministerial returns. There it reminds that the lower of the three values (actual, housing allowance and frv[furnished]+utilities) is the maximum exclusion. A line on the manual says that the publication should not be used to form or maintain a technical stance, so that's not encouraging to those of us looking for some substantiation! Quote Link to comment Share on other sites More sharing options...
KEYWEST_RICKS Posted March 26, 2009 Report Share Posted March 26, 2009 to go to the next step though. is the FRV of the parsonage considered taxable for SE tax if not taxable for income tax? jeff Quote Link to comment Share on other sites More sharing options...
post Posted March 26, 2009 Author Report Share Posted March 26, 2009 to go to the next step though. is the FRV of the parsonage considered taxable for SE tax if not taxable for income tax? jeff Either the entire housing allowance or the frv(furnished) get listed on worksheet 4, which calculates SE income. Unlike worksheet 1, line 4g, however, line 3a is just the frv with furniture but no utilities. The use of 3a or 4a in calculating SE income on worksheet 4 depends on whether the housing is provided or the parson rents or buys a place of his own. Quote Link to comment Share on other sites More sharing options...
MAMalody Posted March 26, 2009 Report Share Posted March 26, 2009 Let's not confuse the issue. The FRV has nothing to do with SE tax. It is only a consideration when considering how much of the housing allowance is exempt from income tax. When you get to SE tax, the cash salary and the entire housing designation minus a few minor items is subject to SE tax. Well, it is12:30AM but that is the way I remember it. Quote Link to comment Share on other sites More sharing options...
Lynn EA USTCP in Louisiana Posted March 26, 2009 Report Share Posted March 26, 2009 MAMalody - my issue re clergy (I have 2 clergy clients - both cantors) is that the congregations will NOT issue the proper tax reporting documents. One congregation issues a 1099-MISC with the full amount shown in box 7, no reduction thereof for the allocated housing allowance. Here, the payroll is done by a volunteer treasurer. The other congregation issues a W2 will all (Fed WH, SS and Medicare) withholdings. And NOTHING notated in box 14 for the allocated housing allowance. This congregation uses a national payroll service, which in my experience does a poor job of reporting variances in W2 reporting (clergy, S corp SH health ins, or personal use of company vehicles). For the second, when I do the SE calculation I 'back out' the W2 wages for which SS and Medicare have already been deducted - is there a better way to do this? No amount of 'education' on my part will get them to change the way they report the income. Not really asking for advice or suggestions, though any and all are greatly accepted. Just venting. Lynn Jacobs, EA Kenner, LA Quote Link to comment Share on other sites More sharing options...
MAMalody Posted March 26, 2009 Report Share Posted March 26, 2009 From my experience as a prior IRS auditor, reading the Code, REgs and pubs, and three discussions with tax attorneyss is that when a W-2 is filled out for a pastor with boxes 1, 2, 3, 4, 5, 6 filled out, they are NOT considered dual status and do NOT receive the housing allowance exemption. The only exception I have found is for some chaplains. I had a case exactly like yours, except was a Greek Orthodox Priest, I referred him back to his church for a corrected W-2. The church administrator asked why, I explained the above. He didn't like it so I suggested he contact a tax attorney. He did so and a couple of weeks later a corrected W-2 showed up. The national prep firms that I have dealt with that did it wrong, when I pushed them admited that their operation manuels directed them to do it the correct way. The problem was they thought they knew it all and did not consult them and now they don't want to admit to their client that they blew it. Quote Link to comment Share on other sites More sharing options...
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