Minister Tax Planning

[Snaggletooth]

Retired part-time minister is considering taking a preaching job with a small church. Church pays $400/wk. In the rural south, there are many such small churches with no denominational affiliation.

The $400/wk is for EVERYTHING. Salary, expense account, housing allowance, etc. Undecided how to split this up, but in the area, a decent fair rental value for a home is $500 to $550/month, not including utilities.

His wife makes $45,000/yr as a bank loan officer, a much better-than-average salary for the area. Their income around $80K, all total.

BIG PROBLEM. Client is in the age bracket over 62, draws social security, and if he shows $20,800 in earned income, he will have to give $3000 back to SSA.

Two questions:
1) Does housing allowance count toward earned income for purposes of the social security "excess" earnings?
2) How can we plan strategy in such a way as to avoid or minimize the "excess" earnings SSA penalty?

Thanks. Mike Malody, where are you? Anyone else?

[PIGLEE]

I have 2 ministers in the same situation. Yes you add back the housing allowance to calculate the SE tax. But you get to deduct the 2106 before calculating the SE tax. Hope this helps. My one minister does also get 400 a week, but his mileage and other expenses bring his SE below the figure. We are in a rural spread out area, and also has trips to the hospitals in Flagstaff and Phoenix, 300 to 400 mile round trip. Hope this helps. Take a look at the Clergy worksheets, this should help.

[OtisMozzetti]

here's only the Social Security answer:

BIG PROBLEM. Client is in the age bracket over 62, draws social security, and if he shows $20,800 in earned income, he will have to give $3000 back to SSA.

Mr. Snaggletooth, please allow me to explain only the Social Security portion of the answer, not the clergy housing allowance portion of the answer.

If the earnings of $20,800 are $6640 more than the annual earnings limit of $14,160 (which is inflation-adjusted each year), then half of $6640, i.e. $3320, must be deducted from the Social Security benefits. This assumes that it isn't his first calendar year of receiving Social Security benefits. It is taken out by not paying enough entire months of benefits to cover the full $3320 and more. Then the partial month difference is paid to him approximately January of the following year.

In the year that he will reach "full retirement age", there is a different formula, which is so much more liberal that chances are he won't lose anything at all due to earnings. In years after he reaches full retirement age, there is no restriction at all on his earnings. For many people right now, the full retirement age is age 66 and zero months.

Social Security likes to remind retirees that the deduction of benefits for earnings aren't "really lost". That is because upon reaching full retirement age, the reduction in benefit amount caused by early retirement is recalculated to take into account all months or even partial months during which benefits were taken away on account of earnings.

A different procedure is used during the first calendar year that Social Security benefits are received upon early retirement before full retirement age.

[Corduroy Frog]

Thanks, but

I have 2 ministers in the same situation. Yes you add back the housing allowance to calculate the SE tax. But you get to deduct the 2106 before calculating the SE tax. Hope this helps.

Piglet, yes all of this does help, but the question of the housing allowance is not whether it is counted toward SE tax, but whether it is counted as earnings for purposes of the social security "excess" penalty.

Here's an example: If housing allowance is $6300, then his W-2 will read $14,500 in wages and $6300 in non-taxable housing allowance. The $6300 is added to the $14,500 to calculated SE tax. However, if the $6300 is NOT added back for penalty purposes, then my client virtually bails out of the penalty with next year's earnings limit of $14,180 + COLA.

Thanks for posting and being "on the wavelength" for this subject.

[erchess]

S S A Website

http://ssa-custhelp.ssa.gov/cgi-bin/ssa.cfg/php/enduser/std_adp.php?p_faqid=236&p_created=957878244&p_sid=W6OrtwEj&p_accessibility=0&p_redirect=&p_lva=&p_sp=cF9zcmNoPTEmcF9zb3J0X2J5PSZwX2dyaWRzb3J0PSZwX3Jvd19jbnQ9NSw1JnBfcHJvZHM9JnBfY2F0cz0wJnBfcHY9JnBfY3Y9JnBfc2VhcmNoX3R5cGU9YW5zd2Vycy5zZWFyY2hfZXgmcF9wYWdlPTEmcF9zZWFyY2hfdGV4dD11bmRlciBGUkEgYW5kIHdvcms*&p_li=&p_topview=1

Down near the bottom of the page it says that net earnings means wages and net profit from self employment. If you're skittish you could PM M A Malody or call your local office of the SSA and ask for the relevant citation in the law or at least one of their pubs. But it seems clear to me from your facts that setting things up so he works for a housing allowance would fly with the IRS and would solve his Social Security related problems.

[JohnH]

Snag:
Concerning the Housing & Utilities allowance, be sure he works with the church board to set the allowance very high. Not unreasonably high, but very generous.

I contend that if the minister isn't reclaiming part of the H&U allowance as taxable income, then it needs to be increased. Fair rental value is very subjective, and keep in mind that this figure is FRV for a comparable residence, completely furnished, and with utilities, taxes, insurance, etc included. There's no down side to a high H&U allowance with part of it unspent and therefore pulled back into taxable income, but a low H&U allowance just leaves tax money on the table for no good reason.

Maybe if we keep bumping this thread to the top, Mike will stop by and fill in the gaps on your main question.

[MRTAX4EA]

SSA Looks At Schedule SE

Net earnings subject to SE tax on Schedule SE is used to determine social security "excess earnings".
Minister's housing allowance does not help with excess earnings. It does help with income tax however.
I have had experience with a further problem: SSA looking at Schedule SE and then adding W-2 income from a properly prepared minister's W-2. Even SS files with notes explaining the situation still required a trip to the local office for correction.
Many people at SSA & IRS are not familiar with taxation of ministers.
There should be a special W-2 form for ministers.

The suggestion for the church board to set the allowance high enough is excellent.

[JohnH]

It makes sense that SSA would look at Schedule SE in determining whether the individual has excess earnings. After all, that figure would roll up the minister's W-2 amount, the H&U allowance, and any reportable Schedule C income into a single figure. (Be sure to reduce the W-2 figure by the full amount of employee business expenses from the 2106 before entering on the Schedule SE).

And I'd never thought about their erroneously adding W-2 income to SE earnings & essentially doubling up on the earned income figure, but I can see how easy it would be for SSA to make that mistake. Thanks for pointing that out, MRTAX4EA.

Off the top of my head it seems there might be a tax planning opportunity of sorts here. After determining the H&U Allowance, the church could look at the remaining compensation and allocate the maximum amount allowable to be paid into a pension plan. This would effectively remove it from earned income (and SE tax), thus reducing the excess earnings used to reduce his SocSec benefit. Even if he withdraws the entire amount from the pension plan in the same year, he could potentially benefit from this extra step, provided the church is willing to do the extra paperwork.

Another point would be the expenses. You said the $400/week includes expenses, so he should work up a reasonable estimate of his expenses and the church should exclude that from his compensation. He then prepares expense reports under an accountable plan and claims reimbursement. Ideally his actual expenses should slightly exceed that amount, but even if he misses it slightly, he will benefit because the entire amount is excluded from earned income (and SE tax). And if the church is paying attention, the financial board might just decide to go ahead and pay the excess at the end of the year if he exceeds the estimate. (especially if he visits the chairman's mother in her nursing home on a regular basis)

[Snaggletooth]

Bump Up

I'd like to bump this up to the top again one last time - maybe get some more discussion.

Like MRTAX4EA I also have had the problem of Social Security Adm adding the total W-2 to the Self-Employment Income and trying to charge a penalty to my client. This is clearly wrong.

Maybe we'll get some authoritative info, and maybe SSA can clean up their act with respect to this...

[S T]

Don't have Knowledge

Snags, I don't have much knowledge on this set of circumstances, but have you gone to the SSA.gov site, ? I have found a lot of answers there,

Good Luck,

Sandy