Introduction to Clergy Housing and Ministry Tax Deductions
Taxes are confusing enough. Combine that with the stress of running a ministry, and things can become downright overwhelming. We put together this guide to help you avoid costly mistakes and have financial peace of mind. We have included at the bottom of this article a free tax organizer to help you track of your expenses.
Many clergy members are paid with a designated clergy or minister "housing allowance" which is used to pay their real estate related expenses (i.e. interest, utilities, property taxes). However, other clergy members may opt to live in a parsonage that is owned by their churches.
For income tax calculation purposes, the minister may EXCLUDE from income tax the lower of
1) the actual amount spent on housing
2) the amount designated by the employer or
3) the rental value of the home. However, the clergy “housing allowance” is subject self-employment (Social Security) tax on form SE. The IRS regulations require that the governing body for your church designate the amount of the clergy housing allowance before it is paid to you.
If you have made an election to opt out of Social Security or Self-Employment tax on Moral grounds you would be exempted from self-employment taxes, You should speak with your tax advisor about maximizing your refund or minimizing your taxes by managing your clergy housing.
Toll calls that are made from your home that are related to business for the church can be deducted if the expenses are not reimbursed to you. To make sure that you are assured of a deduction, record these business calls on your monthly phone bill. When a communication device, such as a mobile phone, is used for both business and personal reasons, the equipment cost must be allocated as non-deductible personal use and deductible business use. Make sure that you keep your cell phone bills and make a note of all calls that were placed for business purposes.
Your auto expense is determined by the number of qualified business miles that you drive. Expenses for travel between business locations and transportation expenses from the church and temporary work locations (i.e. from a home to a nursing home for an ill parishioner) can be deducted. Commuting miles between home and the church are generally are not deductible. If you are bi-vocational mileage from your first job to your second job are deductible. Miles from the last job back home are considered commuting miles and are not deductible.
Make sure to record business miles in a calendar or record book including:
(1) the date and business purposes of each trip that you take;
(2) the location to which you traveled;
(3) make a note of the number of business miles; and
(4) make a note of the odometer reading for your car at the start and at the conclusion of the year.
Generally it is more advantageous to use a mileage rate but you can also use your actual expenses by keeping all of the receipts for the maintenance and operation of your car, including gas, repairs, oil, and insurance, and any reimbursements that you may have received for these expenses.
Expenses that are incurred when traveling away from "home" for one night or to District or Presbytery meetings or other work-related and continuing education trips can be deducted. Your home is typically considered to be the area or city in which you perform the majority of your work activities. Out-of-town expenses may include meals, transportation, meals, lodging, tips and other items such as laundry, valet, etc.
Make sure that you keep a record of these miles and travel expenses by recording the date, location, and business purpose for your trip. You should make a note of the business miles if you drove to the out-of-town destination.
Additionally, you will want to maintain a clear record of your expenses that include public transportation, meals and lodging. Always maintain meals and lodging separately as a part of your records. Receipts should be maintained for every lodging expenditure. However, if there are business expenses that total less than $75, a receipt is not required if you make sure that you maintain this information in a diary. You should make sure that you keep track of the total amount of meal expenses even though only a small amount of the expenses may be deductible.
Education expenses may be deductible if they meet one of these two conditions: (1) your employer requires that you undergo the training or additional education in order to maintain your current job or pay rate; or (2) the education helps you to maintain or improve your skills as a member of the clergy. The total costs of the courses that are undergone to meet the minimum requirements for a job, or that qualify you for a new trade or business, are not going to be deductible.
Equipment purchases that include computers, pagers or telephone answering machines are indicated differently on your tax return than are general job-related supplies. Make sure that you maintain documentation for these items separately from ordinary expenses so that you can easily reference these items when it is time to prepare your return.
Download our free Organizer for Clergy.
Our staff will be happy to provide you with a personal consultation that will review your options and make sure that you are compliant with your foreign tax reporting. Call us today at 855-5-tax911