Tax Cuts and Job Act of 2017: What Does It Mean for Clergy and Missionaries?
A brief summary on the TCJA and how it might affect your ministry budget and your personal tax returns as a pastor or missionary.
Did you relocate to a new congregation in 2019?
The IRS no longer allows tax deductions for moving expenses, except in certain circumstances. Unless you are an active duty military person (and if so, you are not considered “clergy” for tax purposes) you cannot deduct moving expenses. If your new congregation arranges and pays for your moving company, the church will treat that payment as income, and include it on your W-2. However, if a larger organization (diocese, annual conference, or synod, for example) reimburses you for moving expenses, this should be considered “other income” and included in box 7 form 1099-MISC.
Will the higher standard deduction lead to less charitable contributions to your church?
Before the TCJA, as many as 31% of U.S. taxpayers itemized deductions. Currently, 13% of taxpayers now itemize[2]. Unfortunately, many individuals give less to charity because there is no longer an incentive to itemize deductions. In 2018, charitable giving to religious organizations dropped 1.7% [3](adjusted for inflation). A drop in charitable giving may or may not be attributed to the TCJA, but one thing is certain: lower overall donations hurt church budgets. To complicate matters further, some taxpayers are looking for ways to reduce tax liability above the newly doubled standard deduction threshold. Some tax planners are advising donors to bunch donations, skipping donations for a year, in order to itemize.[4] This means that charities may not be able to accurately predict future income from donations.
Irregular donations make for difficult financial planning. Communicate concerns to your congregation, explaining financial needs as transparently as possible. Keep a reserve of liquid funds in the event of a particularly low contribution month (it is recommended that churches maintain a bank account holding enough funds to support church ministries for 3-6 months).
Create an accountable reimbursement plan, especially if the pastor receives a housing allowance.
The 2% unreimbursed business expense deduction is gone. If the church reimburses employees with cash in a non-accountable plan, the IRS will treat those payments as income and subject them to federal income tax. An accountable plan protects pastors from taxation of these reimbursements. An accountable plan is an agreement whereby a church will reimburse an employee his reasonable business expenses. Proper planning means creating an accountable plan at the beginning of the tax year, in writing, detailing whether the plan is for unlimited reimbursement or limited. This costs the church nothing, and reduces tax liability for pastors. Noting that the plan is in effect for years to follow will avoid any problems if the church forgets to establish a plan in the future. By earmarking a portion of a pastor’s salary specifically for business expenses, and then reimbursing him for those expenses under an accountable plan, pastors will greatly reduce their personal tax liability
Watch Out for Unused Housing Allowance
Housing allowance is still subject to self-employment tax. However, money designated for housing allowance is not subject to federal income tax. Any housing allowance that was not spent on qualified housing expenses must be added back into taxable earnings on the 1040. The amount of the housing exclusion is also limited by the fair market rental value of the home. Keep records of all eligible expenses such as mortgage payments (both principal and interest); rent payments; real estate taxes; property insurance; utilities (including internet and cell phone service); lawn care equipment, appliances, furniture (purchase or rental cost and repairs), decorations, remodeling expenses; homeowners’ dues; and pest control fees.