Tuesday, January 19, 2010

Tax and Finance Opportunities for Clergy and Congregation in 2010

The new year 2010 brings new opportunities for congregations and clergy with respect to tax and finance issues. Here are four reminders to help you get the new year off to a good start.

  • Business mileage. The IRS has provided a new maximum business mileage rate for 2010 of 50 cents per mile. The new rate is down from the 55 cents per mile maximum for 2009. The new mileage rate has the following implications for congregations and clergy:
  1. If the congregation has been reimbursing business miles at a rate less than 50 cents per mile, it may be an appropriate time to consider increasing the reimbursement to the new maximum rate. Reimbursing clergy (and other staff) at a rate less than the maximum rate is simply poor stewardship. The difference between the maximum IRS mileage rate and a lower rate of reimbursement has little tax value to the staff member. It is so much better to prospectively establish compensation at a level which allows for a reimbursement of business mileage at the maximum rate.
  2. If the congregation has been reimbursing business miles at a rate more than 50 cents per mile, a reduction in the reimbursement rate to the new maximum is generally appropriate. If a congregation continues to use a reimbursement rate higher than 50 cents per mile in 2010, the amount reimbursed over 50 cents per mile is additional taxable compensation to the staff member.
  • Clergy housing allowance. The first of every year is a good time to review the amount of the housing allowance designation for each clergy employed by the congregation. Retroactive housing allowance designations are invalid, so if a housing allowance designation needs to be increased, the earlier the action is taken in a year, the better for the clergy. A housing allowance designation is appropriate for clergy who own or rent their own home or who live in a parsonage and pay some of their housing expenses.
  • Reimbursement of business expenses. The first of the year is also an excellent time to review the accountable expense reimbursement practices of the congregation. A congregation that only reimburses a portion of clergy business expenses is generally penalizing the clergy from a financial standpoint. What is the value of business expenses not reimbursed by the congregation? They only have minimal value because:
    1. The IRS is increasingly firm about disallowing the portion of unreimbursed expenses that relates to a housing allowance exemption. Example: A clergy receives $50,000 cash compensation, of which $25,000 is designated as a housing allowance. After applying the housing allowance limitations, the clergy excludes $25,000 for federal income tax purposes. The clergy has $5,000 of congregation-related expenses that were not reimbursed. The IRS takes the position that since 50% of the congregation-related compensation is tax-free under the housing allowance rules, only 50% of the unreimbursed expenses are deductible (50% x $5,000 =$2,500).
    2. Clergy that do not itemize deductions on Schedule A (this includes nearly all clergy who live in congregation-provided housing) receive absolutely no income tax benefit from unreimbursed business expenses. Even clergy who itemize deductions, are limited to claiming unreimbursed expenses that exceed 2% of adjusted gross income. And, then the tax savings is limited to the marginal federal income tax rate.
  • Income tax withholding. The first of the year is also a good time to determine whether the congregation will withhold federal (and, perhaps state) income taxes for 2010 on a voluntary basis. (If this withholding was in placed for 2009, then, it may only be a matter of adjusting the voluntary withholding amount for 2010.) Income tax withholding is not required by a congregation for clergy—it is a voluntary issue. But, congregations who offer this option are often doing clergy a good favor by providing this practical way to pay their taxes as they go. The amount of federal income taxes withheld may be set at an amount high enough to cover self-employment social security taxes. The withholding is FICA; it must be withheld as federal income taxes even though it funds the self-employment social security tax obligation.