Chaplain for the State Dept of Corrections

[Jesse]

New client is a chaplain for a State of WI prison. He is paid as an employee and FICA & Medicare are taken out of his pay and just like any other employee the state mathches this. $35,000 is reported in box 1 of his W-2(Box 3 and 5 amount is $37,000 w/ $2,000 in box 12 deferred comp).

With his W-2 he received a letter that says:

To Whom it May Concern:
Mr. C is employed as a chaplain with the Dept of Corrections at the XXX Correctional institution. Chaplain C is not furnished a residence by the state and therefore pursuant to WI Statute he is eligible for $1,800 or 20% of his chaplain's salary, whichever is greater, to be designated as the housing allownace.

Chaplain C's 2007 earnings were $35,000 and therefore $7,000 should be designated as the housing allowance. If you have any questions, please contact So and So at ####.

I called the number and they could not tell me anything except this is what they had been instructed to do by the State.

Has anyone else run across this or have any ideas as to what to do?

Do I make an adjustment for the $7,000 on his Federal and state income subject to income tax because normally the housing allowance is not subject to income tax but is subject to SE tax?

Do I "pretend" he received this $7,000 and subject it to SE tax? That makes no sense at all but I'm dealing with taxes.

Do I just say "oh that's nice" and do nothing?

Any opinions welcomed!!

[Y2KEA]

I would put a negative $7000 on line 21 with the notation "WI Statute chaplain housing allowance". Attach a statement to the return with the wording from the letter. If you get a CP2000 letter, send a hard copy of the letter.

[Jesse]

I would put a negative $7000 on line 21 with the notation "WI Statute chaplain housing allowance". Attach a statement to the return with the wording from the letter. If you get a CP2000 letter, send a hard copy of the letter.

That sounds like a good way to handle it and be able to efile. I thought about adjusting the wages and sending an explanation but would like to avoid having to paper file.

Even more important though is whether I can deduct this from wages? It just seems odd that it is included in his W-2 already subject to the FICA and Medicare.

[thomtax]

Housing allowance

I may have misread your question, and if so I apologize for this reply.

For the Federal:
According to the Gear Up course on clergy, one of the requirements for housing allowance is that "Must be employed by a church or an integral agency of a church." Since he is employed by the state, he would not appear to be employed by either a qualified religious organization or an integral agency. This would explain why Fica was withheld.

There are two exceptions to this rule.
1) If the minister is assigned or appointed to the position by their church or denomination.
2) If the services being performed are those of conducting religiuous worship services or ministering sacerdotal functions.

If I read and understood your post correctly, it appears that this is a state statue and would only pertain to the state taxes.

LT

[Jesse]

I may have misread your question, and if so I apologize for this reply.

For the Federal:
According to the Gear Up course on clergy, one of the requirements for housing allowance is that "Must be employed by a church or an integral agency of a church." Since he is employed by the state, he would not appear to be employed by either a qualified religious organization or an integral agency. This would explain why Fica was withheld.

There are two exceptions to this rule.
1) If the minister is assigned or appointed to the position by their church or denomination.
2) If the services being performed are those of conducting religiuous worship services or ministering sacerdotal functions.

If I read and understood your post correctly, it appears that this is a state statue and would only pertain to the state taxes.

LT

No you did not misread my question and you could very well be correct.

Pertaining to the two exceptions is it one or the other or do both need to apply. As this Chaplain was NOT assigned or appointed by a church or denomination he does meet #2 in that he does perform religious worship services for the correctional institution.

[thomtax]

Jesse,
I'm at home right now and do not have reference books here, so will look tomorrow. However, if memory serves me correctly, I had a chaplin at an assisted living facility. He did not qualify for Federal housing allowance rules because he had other duties to perform also, which are not part of being a minister.

After I look I will post again.

LT

[Jesse]

Jesse,
I'm at home right now and do not have reference books here, so will look tomorrow. However, if memory serves me correctly, I had a chaplin at an assisted living facility. He did not qualify for Federal housing allowance rules because he had other duties to perform also, which are not part of being a minister.

After I look I will post again.

LT

Thanks - I appreciate the help.

[MAMalody]

I have a question. You did not state if the FIT/SS/Med were computed on the gross income or they only assessed it on the 28K and not the 7K for housing.

I'm not sure it makes a difference. To be considered dual status, therefore, being eligible for the predesignated housing allowance, you are an employee for income tax purposes (therefore you need a W-2) and you are considered self-employed for social security purposes (therefore no deductions can be made from your income for FIT, SS, Med).

Having said that, a chaplain that conducts religious services or administers sacerdotal functions could qualify for the dual status and have a presdesignated housing allowance. If he actually qualifies you would need to prepare the normal clergy attachment showing the qualified housing expenses equal or exceeded the 7K that is supposed to be housing. You would enter it as a negative figure on line 21 of From 1040. Don't forget to ensure that this amount is also less than the FRV of his housing. You can e-file the return, however, you will also need to file Form 8453 with the clergy worksheet.

If, they actually withheld against the housing allowance, per the tax attorney I asked this question of a few years ago, he does not qualify for dual status treatment regardless of what WI says (unless they are speaking for state purposes only).

[Jesse]

I have a question. You did not state if the FIT/SS/Med were computed on the gross income or they only assessed it on the 28K and not the 7K for housing.

I'm not sure it makes a difference. To be considered dual status, therefore, being eligible for the predesignated housing allowance, you are an employee for income tax purposes (therefore you need a W-2) and you are considered self-employed for social security purposes (therefore no deductions can be made from your income for FIT, SS, Med).

Having said that, a chaplain that conducts religious services or administers sacerdotal functions could qualify for the dual status and have a presdesignated housing allowance. If he actually qualifies you would need to prepare the normal clergy attachment showing the qualified housing expenses equal or exceeded the 7K that is supposed to be housing. You would enter it as a negative figure on line 21 of From 1040. Don't forget to ensure that this amount is also less than the FRV of his housing. You can e-file the return, however, you will also need to file Form 8453 with the clergy worksheet.

If, they actually withheld against the housing allowance, per the tax attorney I asked this question of a few years ago, he does not qualify for dual status treatment regardless of what WI says (unless they are speaking for state purposes only).

FIT/SS/Med were computed on the gross income, the entire $35,000. If does not qualify for the dual status why would they even have a designated housing allowance? For State of WI purposes only?

[MAMalody]

FIT/SS/Med were computed on the gross income, the entire $35,000. If does not qualify for the dual status why would they even have a designated housing allowance? For State of WI purposes only?

Why he may have the allowance whether he would deserve it or not is a issuer issue. You and I both have seen many times where employers, private or public, have indicated or done things that are not correct.

Now, I must however, admit, this had my curosity up. I did some additional research and found out that your situation is different than the one that I had. Yours is a state employee and mine was not. Richard Hammer has written that his research indicates that in the state arena there would be full deductions like a regular employee yet they still could have the housing allowance. He mentions no other exception to this rule. Looks like you are in as long as you only take the lower of, the amount spent, the designated amount or the fair rental value. Go for it.

mike

[thomtax]

Jesse, I'm glad to see that you got your answers. I got swamped and did not get back to you as I had planned.

LT

[Jesse]

Jesse, I'm glad to see that you got your answers. I got swamped and did not get back to you as I had planned.

LT

I figured so much - it's that time of year.

I have been emailing the state of WII since mid January looking for guidance and I finally received their response:

"The amount of designated housing allowance is generally not included in box 1 on the W-2 as wages. However, it is subject to SE tax on the federal return.

If you need more information on the taxation of members of the clergy, you may want to get federal Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, which is available from the IRS website at: www.irs.ustreas.gov/pub/irs-pdf/p517.pdf"


What great guidance!

[Jesse]

Frustration!

I emailed again asking for more guidance and this is the 2nd response:

"You will have to contact the IRS to see how they want this reported. The amount that is taxable on the federal return will also be carried over to the Wisconsin return and no separate adjustment is allowed for Wisconsin. For example, if the IRS says to reduce wages on line 7, this reduction will carry over for Wisconsin as line 1 of Form 1 begins with federal adjusted gross income. If the IRS would say that the housing allowance would be claimed as a miscellaneous itemized deduction, no portion of the amount would be allowed for the Wisconsin itemized deduction credit.

The IRS has a toll free number -- 1-800-829-1040. "

[thomtax]

Typical - You have my sympathies. I had a question about a W2. Contacted the state and got a reply with the last sentence "Have you contacted the IRS?"