Clergy housing allowances: IRS loses battle, wins war.Congress adopted the longstanding IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. position on housing allowances for clergy when it passed the Clergy Housing Allowance Clarification Act of 2002 (CHACA). Tax practitioners with clergy as clients must clearly understand how to calculate a minister's housing allowance exclusion, deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). expenses and net self-employment (SE) earnings. Unfortunately, these amounts may not be properly calculated by tax preparation software packages. CHACA Two years before the CHACA, the Tax Court in Warren, 114 TC 343 (2000), rejected the IRS's position and held that the housing allowance exclusion is not limited to the fair rental value rental value n. the amount which would be paid for rental of similar property in the same condition in the same area. Evidence of rental value becomes important in lawsuits in which loss of use of real property or equipment is an issue, and the rental value is the (FRV FRV feline rhinotracheitis virus. ) of a minister's home. The court excluded the actual amounts the taxpayer paid to provide a home, even though they clearly exceeded his home's FRV. After Warren, the Warren, The Haredale’s house, “mouldering to ruin.” [Br. Lit.: Barnaby Rudge] See : Decadence Service appealed to the Ninth Circuit. Before a decision was rendered, however, Congress passed the CHACA, which effectively prevented the Ninth Circuit from ruling on Warren. As a result, the court dismissed the Warren appeal, based on stipulations filed by the taxpayer and the IRS; see Warren, 302 F3d 1012 (9th Cir. 2002). The Congressional Record A daily publication of the federal government that details the legislative proceedings of Congress. The Congressional Record began in 1873 and, in 1947, a feature called The Daily Digest was added to briefly highlight the daily legislative activities of each House, clearly indicates that Congress passed the CHACA because it Feared the Ninth Circuit was about to strike down the housing allowance exclusion for clergy on the grounds that it violated vi·o·late tr.v. vi·o·lat·ed, vi·o·lat·ing, vi·o·lates 1. To break or disregard (a law or promise, for example). 2. To assault (a person) sexually. 3. the doctrine of separation The doctrine of separation, also known as the doctrine of non-fellowship, is a belief among some religious groups that the members of a church should be separate from the world and not have association with those who are of the world. of church and state; see 148 Cong. Rec. H1299-1301 (statements of Rep. Jim Ramstad James M. "Jim" Ramstad (born May 6, 1946) is a United States politician from the state of Minnesota. Ramstad has been a Republican member of the United States House of Representatives since 1991, representing Minnesota's 3rd congressional district, one of eight congressional (R-MN) and Rep. Earl Pomeroy Earl Pomeroy (born September 2 1952) is an American lawyer and politician from the U.S. state of North Dakota. A member of the North Dakota Democratic-NPL Party, Pomeroy has served as the member representing North Dakota's at-large congressional district in the United States House (D-ND)). Although neither party to the appeal raised Constitutional issues, an amicus, appointed by the Ninth Circuit, was opposed to the exclusion. In fact, he opposed Warren's dismissal and filed a motion to intervene. The Ninth Circuit rejected the motion, because the amicus was not directly affected by the case's outcome, and dismissed the Warren appeal. By enacting the CHACA, Congress prevented the Ninth Circuit from ruling and, at the same time, conceded con·cede v. con·ced·ed, con·ced·ing, con·cedes v.tr. 1. To acknowledge, often reluctantly, as being true, just, or proper; admit. See Synonyms at acknowledge. 2. to the IRS'S position in Warren. As a result, the Service won the war to limit the housing allowance exclusion to FRV The CHACA applies to tax years beginning after 2001. Prior to the CHACA, Section 107 read as follows: Section 107. Rental value of parsonages. In the case of a minister of the gospel, gross income does not include--(1) the rental value of a home furnished fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home. The CHACA amended Section 107 by inserting the following phrase at the end of paragraph 2: "and to the extent such allowance does not exceed the fair rental value of the home, including furnishings furnishings the extra type or quantity of hair on the head, tail, ears or legs, specified for a particular breed. For example, the feathers in setters, the beard in Bearded collies, the eyebrows in Schnauzers. and appurtenances APPURTENANCES. In common parlance and legal acceptation, is used to signify something belonging to another thing as principal, and which passes as incident to the principal thing. 10 Peters, R. 25; Angell, Wat. C. 43; 1 Serg. & Rawle, 169; 5 S. & R. 110; 5 S. & R. 107; Cro. Jac. such as a garage, plus the cost of utilities." Post-CHACA Housing Allowances Under the CHACA, the housing allowance exclusion is now limited to the lesser of: (1) the amount actually used to provide a home; (2) the amount officially designated by the house of worship Noun 1. house of worship - any building where congregations gather for prayer house of God, house of prayer, place of worship bethel - a house of worship (especially one for sailors) ; or (3) the FRV of the home, including furnishings, appurtenances (e.g., a garage), plus utility costs. If the amount designated (i.e., #2 above) exceeds the smaller of the amount actually paid or the home's FRV, the excess is included in gross income. Clergy can itemize To individually state each item or article. Frequently used in tax accounting, an itemized account or claim separately lists amounts that add up to the final sum of the total account on claim. home mortgage interest and real estate taxes paid, even though they are paid with funds excluded under the housing allowance. However, ministerial Done under the direction of a supervisor; not involving discretion or policymaking. Ministerial describes an act or a function that conforms to an instruction or a prescribed procedure. It connotes obedience. trade or business expenses and unreimbursed employee expenses must be allocated between taxable and tax-free (i.e., excluded) ministerial income. Notably, a common-law employee of a house of worship, who has not applied for an exemption from SE tax, is treated as self-employed. As a result, clergy must include salary and any amount excluded as a housing allowance in calculating SE earnings. In addition, ministerial business expenses are deductible in full when calculating net SE earnings. Example: P, who is single, is a cleric at U, a house of worship. During 2005, U considered him a common-law employee and did not withhold with·hold v. with·held , with·hold·ing, with·holds v.tr. 1. To keep in check; restrain. 2. To refrain from giving, granting, or permitting. See Synonyms at keep. 3. Social Security and Medicare taxes, although it paid P a 830,000 salary. P was also paid an additional $10,000, which was designated by U as his 2005 housing and utility allowance. P owns a small home, which has a FRV of $9,000 annually, including utilities. He paid the Following amounts related to his home: $7,000 mortgage payments ($6,000 was mortgage interest), $1,000 real estate taxes, $600 insurance, $900 utilities and $500 repairs. P also earned $5,000 presiding pre·side intr.v. pre·sid·ed, pre·sid·ing, pre·sides 1. To hold the position of authority; act as chairperson or president. 2. To possess or exercise authority or control. 3. over weddings and funerals. His ministerial expenses associated with these sacerdotal sac·er·do·tal adj. 1. Of or relating to priests or the priesthood; priestly. 2. Of or relating to sacerdotalism. [Middle English, from Old French, from Latin earnings consisted of $100 for premarital counseling brochures and 1,000 business miles visiting families at home. He also drove 1,500 miles visiting U members in the hospital, and paid $275 to attend a religious conference, for which U did not reimburse re·im·burse tr.v. re·im·bursed, re·im·burs·ing, re·im·burs·es 1. To repay (money spent); refund. 2. To pay back or compensate (another party) for money spent or losses incurred. iron. He made $3,000 of charitable contributions charitable contribution n. in taxation, a contribution to an organization which is officially created for charitable, religious, educational, scientific, artistic, literary, or other good works. to U during 2005. The exhibit on p. 83 shows how a tax practitioner should account For P's 2005 ministerial income and expenses. Note: $1,000 income (the excess of the $10,000 housing allowance over the home's $9,000 FRV) should be reported in gross income as part of P's wages. Home mortgage interest and real estate taxes are deductible in full on Schedule A, even though part of the designated housing allowance was used to pay these expenses. Schedule C expenses associated with P's sacerdotal function income must be allocated between the $36,000 of taxable ministerial income ($30,000 + $1,000 + $5,000) and the $9,000 of tax-free ministerial income, which is the excluded housing allowance. The same allocation must be made for unreimbursed employee business expenses reported on Form 2106, Employee Business Expenses. Finally, net SE earnings for common-law employee clergy are calculated by adding wages ($30,000), the designated housing allowance ($10,000) and sacerdotal function income ($5,000) and by reducing that amount ($45,000) by the full amount (deductible and nondeductible non·de·duct·i·ble adj. Not deductible, especially for income-tax purposes. Adj. 1. nondeductible - not allowable as a deduction deductible - acceptable as a deduction (especially as a tax deduction) ) of Schedule C and Form 2106 expenses ($1,388). Conclusion When it passed the CHACA, Congress adopted the IRS's long-standing position on clergy housing allowance exclusions. By default, the Service won the war to limit the housing allowance exclusion to FRV. Now, tax practitioners are left with the task of properly calculating ministerial income and expenses for their clergy clients.
Exhibit 1: P's ministerial income and expenses
Schedule C
Schedule A income and
Income or deduction item deductions deductions
Form W-2 income
Housing allowance exclusion:
smaller of $10,000
designated; or $9,000 FRV;
or $10,000 actual expenses
Gross income: Excess
allowance over FRV
($10,000-$9,000)
Schedule C earnings from sacerdotal $5,000
functions
Expenses:
Brochures $100
Mileage:
(1,000 x $0.405) 405
$505
Exclusion allocation:
($9,000/$45,000 x $505) (101)
Inclusion allocation:
($36,000/$45,000 x $505) $404 (404)
Net Schedule C profit $4,596
SE tax:
SE earnings:
Salary $30,000
Housing allowance 10,000
Sacerdotal functions 5,000
Less expenses:
Schedule C (in full) (505)
Form 2106 (in full) (883)
Net SE earnings $43,612
SE tax deduction:
($6,162/2 = $3,081)
Adjusted gross income (AGI)
Itemized deductions:
Mortgage interest $6,000 $6,000
Real estate taxes 1,000 1,000
Contributions 3,000 3,000
Unreimbursed expenses
Mileage: (1,500 x $0.405) 608
Conference fee 275
$883
Exclusion allocation:
($9,000/$45,000 x $883) (177)
Inclusion allocation:
($36,000/$45,000 x $883): $706 706
2% AGI (650)
56
$10,056
Personal exemption
Taxable income
Income tax
SE tax
Total Federal taxes due
Schedule SE
tax Form 2106
Income or deduction item calculation deductions
Form W-2 income
Housing allowance exclusion:
smaller of $10,000
designated; or $9,000 FRV; or
$10,000 actual expenses
Gross income: Excess
allowance over FRV
($10,000-$9,000)
Schedule C earnings from sacerdotal
functions
Expenses:
Brochures $100
Mileage:
(1,000 x $0.405) 405
$505
Exclusion allocation:
($9,000/$45,000 x $505) (101)
Inclusion allocation:
($36,000/$45,000 x $505) $404
Net Schedule C profit
SE tax:
SE earnings:
Salary $30,000
Housing allowance 10,000
Sacerdotal functions 5,000
Less expenses:
Schedule C (in full) (505)
Form 2106 (in full) (883)
Net SE earnings $43,612 $43,612
x 0.9235
$40,276
x 0.153
$6,162
SE tax deduction:
($6,162/2 = $3,081)
Adjusted gross income (AGI)
Itemized deductions:
Mortgage interest $6,000
Real estate taxes 1,000
Contributions 3,000
Unreimbursed expenses
Mileage: (1,500 x $0.405) 608
Conference fee 275
$883
Exclusion allocation:
($9,000/$45,000 x $883) (177)
Inclusion allocation:
($36,000/$45,000 x $883): $706 $706
Personal exemption
Taxable income
Income tax
SE tax
Total Federal taxes due
Form 1040
Excluded income,
income deductions
Income or deduction item and expenses and tax due
Form W-2 income $30,000
Housing allowance exclusion:
smaller of $10,000
designated; or $9,000 FRV; $9,000
or $10,000 actual expenses
Gross income: Excess 1,000
allowance over FRV
($10,000-$9,000)
Schedule C earnings from sacerdotal
functions
Expenses:
Brochures $100
Mileage:
(1,000 x $0.405) 405
$505
Exclusion allocation:
($9,000/$45,000 x $505) (101) (101)
Inclusion allocation:
($36,000/$45,000 x $505) $404
Net Schedule C profit 4,596
SE tax:
SE earnings:
Salary $30,000
Housing allowance 10,000
Sacerdotal functions 5,000
Less expenses:
Schedule C (in full) (505)
Form 2106 (in full) (883)
Net SE earnings $43,612
SE tax deduction: (3,081)
($6,162/2 = $3,081)
Adjusted gross income (AGI) $32,515
Itemized deductions:
Mortgage interest $6,000
Real estate taxes 1,000
Contributions 3,000
Unreimbursed expenses
Mileage: (1,500 x $0.405) 608
Conference fee 275
$883
Exclusion allocation:
($9,000/$45,000 x $883) (177) (177)
Inclusion allocation:
($36,000/$45,000 x $883): $706
(10,056)
Personal exemption (3,200)
Taxable income $19,259
Income tax 2,524
SE tax 6,162
Total Federal taxes due $8,686
FROM MARY BADER, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , J.D., LL.M LL.M Legum Magister (Master of Laws) ., MINNESOTA STATE UNIVERSITY MOORHEAD The school's college radio station is KMSC. History The plans for what would become MSUM were laid down in 1885, when the Minnesota State Legislature passed a bill declaring the need for a new state normal school in the Red River Valley, with an eye on Moorhead. , MOORHEAD, MN (NOT AFFILIATED WITH GRANT THORNTON LLP  This article or section is written like an .Please help [ rewrite this article] from a neutral point of view. Mark blatant advertising for , using . ) |
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