The Zondervan Minister's Tax & Financial Guide 2002

by Busby, Dan

• ISBN13: 9780310237556
• ISBN10: 0310237556
• Format: Paperback
• Copyright: 2001-11-01
• Publisher: Zondervan

Table of Contents

Recent Developments	1	(8)
Form 1040 Line by Line	9	(6)
Taxes for Ministers	15	(14)
Ministers serving local churches	16	(2)
Evangelists and missionaries	18	(1)
Members of religious orders	18	(2)
Ministers in denominational service, administrative, and teaching positions	20	(2)
Individuals not qualifying for ministerial tax treatment	22	(1)
Social security status of ministers	23	(1)
Income tax status of ministers	23	(3)
Forms and schedules for the minister	26	(1)
Importance of the employee vs. self-employed decision	27	(1)
Recommended filing status	28	(1)
Compensation Planning	29	(8)
How much should a minister be paid?	30	(1)
Plan your compensation	30	(3)
Avoid recharacterization of income	33	(1)
Use fringe benefits wisely	34	(2)
Use accountable expense reimbursements	36	(1)
The Pay Package	37	(22)
Should you delay paying tax on a portion of your salary?	37	(1)
Can churches discriminate when providing fringe benefits?	38	(1)
Tax treatment of compensation, fringe benefits, and reimbursements	39	(17)
Table of compensation, fringe benefits, and reimbursements	56	(3)
Retirement Planning for Ministers	59	(8)
Preparing for retirement	60	(3)
The keys to social security	63	(1)
Taking out your retirement money	64	(3)
Home Sweet Home	67	(18)
Types of housing arrangements	69	(2)
Structuring the housing allowance	71	(6)
Reporting the housing allowance to the minister	77	(1)
Accounting for the housing allowance	77	(2)
Other housing allowance issues	79	(3)
Housing allowance worksheets	82	(3)
Business Expenses	85	(22)
Accountable and nonaccountable expense reimbursement plans	85	(3)
Documenting and reporting business expenses	88	(1)
Travel and transportation expenses	89	(4)
Auto expense deductions	93	(6)
Home-office rules	99	(2)
Other business and professional expenses	101	(4)
Allocation of business expenses	105	(2)
Social Security Tax	107	(12)
Computing the self-employment tax	108	(1)
Both spouses are ministers	109	(2)
Self-employment tax deductions	111	(1)
Use of voluntary withholding agreement to pay social security taxes	111	(1)
Opting out of social security	111	(4)
Opting back into social security	115	(2)
Working after you retire	117	(1)
Canada Pension Plan	118	(1)
Paying Your Taxes	119	(12)
Tax withholding	119	(1)
Estimated tax	120	(3)
Excess social security with held (FICA)	123	(1)
Earned income tax credit	123	(1)
Extension of time to file	123	(3)
Extension of time to pay	126	(1)
Offers in compromise	126	(1)
Filing an amended tax return	127	(4)
Sample Returns	131	(27)
Example No. 1 Minister-employee for income tax purposes (accountable plan)	133	(10)
Example No. 2 Minister-employee for income tax purposes (nonaccountable plan)	143	(15)
Citations	158	(8)
Index	166	(4)
10 Biggest Tax Mistakes Made by Ministers	170

Excerpts

 

2001 Recent Developments The Economic Growth and Tax Relief Reconciliation Act of 2001, the largest tax cut in almost 20 years, brought a number of changes that impact ministers. As we go to press, Congress is considering another tax bill in the wake of the economic impact of the September 11, 2001, terrorist attacks. Housing allowance liberalized by Tax Court Since issuing Revenue Ruling 71-280 in 1971, the IRS has taken the position that the housing allowance exclusion is limited to the lesser of (1) the amount prospectively and formally designated, (2) the amount actually spent on housing or (3) the fair rental value of the housing furnished plus utilities. The IRS takes the position that Congress intended to impose the fair rental value limitation to equalize the tax treatment of ministers receiving cash housing allowances and those receiving housing in-kind. The fair rental value limitation has been difficult to apply because the IRS provides little guidance on determining this amount. It is also difficult to determine the fair rental value of the minister's home if there is not a comparable furnished home in a nearby area. Plus, the fair rental value limitation was particularly difficult for ministers living in relatively expensive housing, making a purchase down payment, or paying off a mortgage early. In 2000, the U.S. Tax Court ruled that the fair rental value is not a limitation and that a housing allowance was excludable from income simply because it was approved by the church board in advance and it was all spent on housing. An amicus brief was filed by the National Association of Church Business Administration, Presbytery of New Covenant of The Presbyterian Church (USA), and Eagle Mountain International Church. The decision is a major setback for a long-held IRS position. It is the first court challenge to the IRS requirement that the housing allowance not exceed the fair rental value of the minister's housing. Warren v. Commissioner, 114 T.C. No. 23. The Warren case was appealed by the IRS to a federal appeals court for the ninth circuit. As we go to press, no decision on the appeal has been rendered. If the IRS loses the appeal, it could appeal to the U.S. Supreme Court. Even if it loses at the appeals court level, the IRS could continue to challenge the Tax Court decision in circuits other than the ninth federal circuit. The ninth circuit covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. Opting back into social security Congress created a "window" during which a minister or religious order member who has opted out of social security may revoke the election in 2000 or 2001. The revocation will be effective for all succeeding taxable years. A minister must pay all self-employment taxes that would have been imposed for the years for which the revocation is effective. However, back taxes are not required. You must file the revocation by April 15, 2002, unless the filing date is extended for your 2001 return. The IRS had developed Form 2031 to use for the revocation. (See pages 115-117 for a thorough discussion of this important change.) Student loan interest Student loan interest will be deductible up to $2,500 per year for 2001 (up from $2,000 for 2000), effective for payments of interest due after December 31, 2000, subject to adjusted gross income limits. This deduction is available even for those who do not itemize their deductions. For 2001 and prior years, the deduction is allowed only for interest paid during the first 60 months in which interest payments are allowed. For 2002 and later years, the interest deduction is available for the entire life of a student loan. The deduction cannot be claimed by someone who is claimed as a dependent on another person's tax return. Increase in unified estate and gift tax credit The exemption from federal estate taxes is increased from $675,000 to $1 million, phased in gradually through 2006 as follows: Applicable Exemption Year Amount 2001 $675,000 2002 and 2003 1,000,000 2004 and 2005 1,500,000 2006 through 2008 2,000,000 2009 3,500,000 If your estate is less than $675,000, federal estate tax is not a problem. The simplest way to dispose of assets may be to place them in joint ownership with the person whom you wish to receive them, such as a spouse. If your estate is more than $675,000, estate tax planning is a must. If married, use both exempt amounts to pass up to $1.35 million tax-free. There is no estate tax for those dying in 2010. Without further legislative action, the estate tax law in effect on May 26, 2001 would again become effective on January 1,2011. Annual gift tax exclusion The annual exclusion for gifts for 2001 is $10,000 per year, per donee and $11,000 for 2002. The annual gift tax exclusion is indexed to the Consumer Price Index for periodic adjustment, rounded to the next lowest multiple of $1,000. Foreign earned income exclusion increased The foreign earned income credit is increased for qualified individual U.S. citizens or residents who reside in foreign countries as follows: For calendar year The exclusion amount is 2001 $78,000 2002 and thereafter 80,000 For any tax year after 2007, the $80,000 amount is increased by multiplying the dollar amount of the limitation by the cost-of-living adjustment for the calendar year in which the tax year begins. The increase will then be rounded to the next lowest multiple of $100. 2001 tax rate and other changes Here are a few of the key tax rate bracket, standard deduction, personal exemption, and other changes in the tax law for 2001:

  For 2001, "low income" generally means families with taxable and nontaxable earned income of less than $10,710 if there is no qualifying child, less than $28,281 if there is one qualifying child, and those who earned less than $32,121 and have two or more children.

  The amount of investment income children under age 14 can receive before it is taxed at their parents' maximum tax rate is $1,500 for 2001.

  The standard deduction and personal exemption amounts are adjusted as follows: 2000 2001 Standard deduction: Married couples $7,350 $7,600 Head of household 6,450 6,650 Single 4,400 4,550 Dependent children 700 750 (1) Personal exemption 2,800 2,900 (1) The greater of $750 or $250 plus the individual's earned income up to the single standard deduction amount, whichever is greater.

  Tax rates are changed for 2001 because of the 2001 tax bill. For example, the married income tax brackets are as follows: If taxable income is The tax is Not over $45,200 15 % of taxable income Over $45,200 but not over $109,250 $6,780.00 + 27.5% of excess over $45,200 Over $109,250 but not over $166,500 $24,393.75 + 30.5% of excess over $109,250 Over $166,500 but not over $297,350 $41,855.00 + 35.5% of excess over $166,500 Over $297,350 $88,306.75 + 39.1% of excess over $297,350

  New 10% rate bracket. A 10% regular income tax bracket is created for a portion of taxable income that is currently taxed at 15% retroactive to January 1, 2001. The 10% rate bracket applies to the first $6,000 of taxable income for single individuals and $12,000 of taxable income for married couples filing joint returns.

  Rate reduction credit for 2001. The IRS is using a credit to deliver the benefit of the new 10% income tax rate bracket during 2001. If you qualified for this credit, you have probably already received up to $300 for singles and $600 for a married couple filing jointly. Not all ministers received a full-fledged rebate. The checks couldn't exceed the income tax you owed on your 2000 return-that is, your income tax bill for the year, not what you owed with your return. So if you just owed social security taxes for 2000, you would receive no check.

  Reduction in individual income tax rates. The existing regular income tax rates of 28%, 31%, 36% and 39.6% are reduced to 25%, 28%, 33% and 35% over the next six years. The detail of the rate reductions that will most often apply to ministers is reflected in following box: Regular Income Tax Rate Reductions 28% rate 31% rate Year reduced to reduced to 2001-2003 27% 30% 2004-2005 26% 29% 2006 and later 25% 28%

  Child tax credit. The new law increases the child tax credit to $1,000, phased in over 10 years beginning in 2001. The following table shows the increase of the child tax credit: Credit Amount Year Per Child 2001-2004 $600 2005-2008 $700 2009 $800 2010 and later $1,000

  Dependent care tax credit. The new law increases the maximum amount of eligible employment-related expenses for 2003 and later years from $2,400 to $3,000 if there is one qualifying individual and from $4,800 to $6,000 if there are two or more qualifying individuals. The rate of the credit also increases from 30% to 35%.

  Expansion of adoption tax benefits. The new law expands the adoption tax credit and the exclusion from income for employer-provided adoption assistance beginning for 2002. The maximum adoption credit is increased to $10,000 per eligible child. Also, the exclusion from income for employer-provided adoption assistance is increased to $10,000 per eligible child.

  Education IRA's. The annual limit on contributions is increased from $500 to $2,000 effective with 2002. The definition of qualified education expenses that may be paid tax-free from an education IRA is expanded to include: ò Tuition, fees, academic tutoring, special need services, books, supplies, and other equipment incurred in connection with the enrollment or attendance of the beneficiary at a public, private or religious school providing elementary or secondary education (kindergarten through grade 12); ò Room and board, uniforms, transportation and supplementary items or services (including extended day programs) required or provided by such a school; ò The purchase of any computer technology or equipment or Internet access and related services, if the technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the year the beneficiary is in school.

  College cost deduction. A new $3,000 deduction starts in 2002 for college costs by itemizers and non-itemizers alike. For 2004, the limit on the deduction will be $4,000. This provision is repealed after 2005. Tuition paid in December 2001 for coursework that begins in January 2002 will be covered in 2002. Tuition payments postponed from 2001, but paid in 2002, will not be covered.

  Earned income credit changes. The new law simplifies the definition of earned income by excluding nontaxable employee compensation from the definition of earned income for earned income credit purposes for years beginning in 2002 and later. For 2001 (and earlier years), the minister's housing allowance that is excluded from federal income tax is included in earned income for the purposes of determining eligibility under the earned income credit rules. This change in the law will generally be beneficial to ministers with low incomes.

  Reduction of the marriage penalty. The marriage penalty means two-earner married couples have higher taxes than single filers with the same incomes. The new legislation provides relief but not until 2005 when: The standard deduction for joint filers will increase each year until 2009, when it reaches a level of twice the single standard deduction. The size of the 15% tax bracket for joint filers will increase each year until 2008, when it will double that of the 15% bracket for singles. 2001 standard mileage rates The optional standard mileage rates for employees, self-employed individuals, and other taxpayers to use in computing the deductible costs paid in 2001 in connection with the operation of a passenger automobile for business, charitable, medical, or moving expense purposes are as follows (for more information, see pages 94-95): 2001 Rate Type of Expense (per mile) Business 34.5 cents Charitable 14 cents Moving/Medical 12 cents 2001 auto depreciation deduction limits The annual limits on depreciation deductions for automobiles first placed in service in 2001 are as follows: Tax Year Amount 1st Tax Year $3,060 2nd Tax Year 4,900 3rd Tax Year 2,950 Each Succeeding Year 1,775 Lessees of "luxury" cars for business will have imputed income on automobiles that cost more than $15,400 and are first leased in 2001. Thus, leased cars have a similar deduction limit as purchased cars. Clean-fuel auto special tax deduction Both Toyota and Honda are selling hybrid cars that have a gasoline engine and an electric motor. These vehicles pollute less and get great mileage. Buyers of these clean-fuel autos can deduct up to $2,000 of the cost of the car on their tax returns. However, the proper place for the write-off is difficult to find. The deduction goes on line 32 of Form 1040. The tax-break is available even if the purchaser takes the standard deduction. Larger clean-fuel vehicles get even bigger deductions, up to $5,000 for a light truck or van. These write-offs are scheduled to be phased out after the 2001 tax year. The maximum deduction would be reduced to 25% in 2002, 50% in 2003, and so on. However, it does not appear that Congress will let this happen and it is expected that the benefits will be extended in full. 2001 retirement plan limits The maximum amount employees can contribute on a tax-deferred basis to a 401(k) plan remains at $10,500 for 2001. The maximum amount of employee voluntary salary reduction contributions to 403(b) plans (tax-sheltered annuities) is also $10,500 per year. This limit does not apply to pension plan contributions made by a church to a denominational pension plan on behalf of a minister. Under a regular deferred compensation program, up to $8,500 a year (2001 limit) or, 25%, of compensation may be deferred. Salary reductions under 403(b) and 401(k) plans reduce the contribution limit. (Continues...)

Excerpted from The Zondervan Minister's Tax & Financial Guide 2002 Edition by Dan Busby Copyright © 2001 by Dan Busby
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.