EIC & Clergy

[Burke]

For a minister who has opted out of SS via Form 4361, what is considered earned income for EIC? Is the housing allowance treated as earned income for this purpose? Pls provide a cite. Pub 517 only includes example of someone who has NOT opted out. TTB page 16-14 (Worksheet B) is for clergy who file Sche SE.

[appelman]

Look at p. 11 of Pub. 517

In the middle of the page you'll find "Earned income for a minister with an approved Form 4361."

[Burke]

Yes, I saw that. It says ".....amounts you received for performing ministerial duties as an employeee are earned income. This includes wages, salaries, tips, and other taxable employee compensation." So, does this include a housing allowance, which is not taxed and does not go on Line 7 as wages? (Unless there is an excess H/A.) In my client's case, if you exclude H/A from earned income they qualify for EIC, if you include it, they don't. And even if 4361 does not apply, why would that make any difference in EIC calculation? These are two different things under the tax code. In a book I have on ministers and churches, H/A is described as a "fringe benefit," not compensation. However, the fact that the IRS subjects it to SE tax seems to suggest they consider it earned income, even though Pub 517 does not say so. I betcha there is a court case, Rev Ruling or CCA on this somewhere.

[appelman]

From Pub. 596:

Minister's housing. The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. For that reason, it is included in earned income for the EIC (except in the cases described in Approved Form 4361 or Form 4029, below). See Example 4 in chapter 7.
...

Approved Form 4361 or Form 4029

This section is for persons who have an approved:

Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or

Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits.

Each approved form exempts certain income from social security taxes. Each form is discussed in this section in terms of what is or is not earned income for purposes of the EIC.

Form 4361. Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and other taxable employee compensation. A nontaxable housing allowance or the nontaxable rental value of a home is not earned income. Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees for performing marriages and honoraria for delivering speeches.

[Burke]

Thank you very much. I guess I did not read far enough. To summarize, if TP has opted out of SSA via 4361, you do not include H/A as earned income for EIC. If he has not opted out (or has not been approved), you do include it as earned income for EIC calculation. I have a client who has been trying to opt out for a year and a half but can't seem to get approved. Until he can furnish me with such approval, I will have to process the return as if he has not done it. How long can this go on? He filed within the proper time limit.

[appelman]

Have you tried the practitioner priority line?

You might want to get a POA in place and give them a call.

[MAMalody]

Thank you very much. I guess I did not read far enough. To summarize, if TP has opted out of SSA via 4361, you do not include H/A as earned income for EIC. If he has not opted out (or has not been approved), you do include it as earned income for EIC calculation. I have a client who has been trying to opt out for a year and a half but can't seem to get approved. Until he can furnish me with such approval, I will have to process the return as if he has not done it. How long can this go on? He filed within the proper time limit.

Don't forget that If he has an excess housing allowance, that becomes taxable income on line 7 of Form 1040 and therefore would be used in the EIC computation.

In reference to the F4361 exemption approval, it usually only takes about 4-6 months. Since we are working with a two year window and it sounds like we are reaching the end of that window, make sure all information is sent registered, return receipt requested. It may protect you against the statute.