TAX MATTERS FOR YOUR MINISTRY

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1 TAX MATTERS FOR YOUR MINISTRY Amos Smith, Attorney at Law The Church Law & Tax Attorney (312) Attorney Amos Smith This is not legal advice. Please consult with an attorney. 1

2 DO WE HAVE TO REPORT EVERYTHING!! This is the starting point for determining which items of income are taxable for federal income tax purposes in the United States. Section 61 (of the Internal Revenue Code (IRC)) states that "except as otherwise provided in this subtitle, gross income means all income from whatever source derived". IS IT INCOME? Offering versus Love Offering versus Pastor Anniversary; Good Shepherd Offering; Christmas and special-occasion offerings; Honorarium for Speaking Engagements; Pastor receives all the tithes; Birthday Celebration; and Anniversary Pastoral, Wedding, Church, etc. 2

3 Criminal penalties AL CAPONE & IRS Hired 700 New Agents A willful attempt to evade taxes. Criminal liability requires an affirmative act such as filing a false return. Tax evasion is a felony punishable by a fine of not more than $100,000 (500,000 for a corporation) or a prison sentence of up to five years or both. IRC

4 UNKNOWINGLY COMMITTING TAX EVASION? 1. Failure to File Tax Return; 2. Failure to Report Gross Income The IRS Wants All Increases ; 3. Having Speaking Honorariums Made in the Name of Your Church; 4. Having Your Living Expenses Paid Through the Church Checking Account; 5. Having Your Home in the Name of the Church; 6. Having Your Vehicle in the Name of the Church; 7. Receiving Compensation & Honorariums in Cash; 8. Having Members to Make Checks Directly Payable to You; and 9. Insisting That You Are Paid in Cash. YOU DO NOT GO TO JAIL IF YOU CANNOT PAY!!! Attorney Amos Smith Amossmith@sbcglobal.net 4

5 Designating the Housing Allowance THE RESOLUTION: (1) adopted by the church board or congregation; (2) in writing; and (3) in advance of the calendar year. FOR INCOME TAX PURPOSES ONLY: (1) the housing allowance and parsonage exclusion; (2) exemption from Social Security coverage (if several conditions are met); (3) self-employed status for Social Security (if not exempt); and (4) exemption from income tax withholding. OPTING OUT OF SOCIAL SECURITY 5

6 ACCOUNTABLE BUSINESS EXPENSE PLAN (1) only business expenses are reimbursed; (2) no reimbursement is allowed without an adequate accounting of expenses within a reasonable period of time (not more than 60 days after an expense incurred); (3) any excess reimbursement or allowance must be returned to the employer within a reasonable period of time (not more than 120 days after an excess reimbursements is paid) 6

7 Substantiation of Donations Charitable contributions must be properly substantiated. (1) all cash contributions, (2) individual contributions or cash or property of $250 or more, (3) "quid pro quo" contributions in excess of $75, (4) contributions of cars, boats and planes, and (5) contributions of noncash property valued by the donor at $500 or more. 7

8 Employee vs Independent RIGHT TO CONTROL How does a PASTOR or LEADER determine whether a Musician or Minister of Music or Secretary is an Employee or Independent Contractor for Taxation Withholding Purposes? The issue as to whether a Musician/Minister of Music/Secretary is an Employee or an Independent Contractor for Taxation Withholding Purposes is determined based on the facts and circumstances but the wrong result can be costly to the Pastor. It is critical that the Pastor and/or Leader correctly determine whether the Musician/ Minister of Music/Secretary providing services are employees or independent contractors. You must withhold Income, Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee. 8

9 What are the benefits of having 501(c)(3) Status or Being a CDC? BENEFITS Exemption from Federal and state income tax; Eligible to receive tax deductible charitable contributions; May be Exempt from certain employment taxes; Determination Letter Corp Donations; Sales Tax; and Bank Loans & Transactions. FUNDING FOR YOUR CDC: (a) educational development; (d) family development; and (b) economic empowerment; (e) financial literacy. (c) crime prevention; 9

10 2018 TAX CHANGES THAT AFFECT CHURCHES Amos Smith, Attorney at Law The Church Law & Tax Attorney (312) Attorney Amos Smith This is not legal advice. Please consult with an attorney. 10

11 Itemizing won't be worthwhile for millions of households For example, let's say that a married couple pays $8,000 in mortgage interest, makes $4,000 in charitable contributions, and pays $5,000 in state and local taxes. This adds up to $17,000 in deductions, which when compared with the previous $13,000 standard deduction makes itemizing look like a smart idea. However, with the new $24,000 standard deduction for married couples, it would no longer be worth it to itemize. Average Family can keep more $ in THEIR POCKETS BUT CHURCHES & HOME-OWNERSHIP LOSES!!!! 11

12 Standard Deduction The standard deduction is the amount that you can deduct from your income before calculating your tax liability if you do not itemize your deductions. Previous law: The standard deduction for married filing jointly is $12,700 for tax year 2017; $6,350 for single taxpayers; and $9,350 for heads of households, according to the IRS. New law: The standard deduction for married filing jointly would increase to $24,000 for joint filers; $12,000 for single taxpayers; and $18,000 for heads of households, according to the TPC analysis. The increased deduction ends after

13 Personal Exemption A personal exemption is the amount that you can deduct from your income for every taxpayer and most dependents claimed on your return. Previous law: $4,050 per person, which means a married couple with two dependents would receive a personal exemption of $16,200. New law: The personal exemption is eliminated. The exemption returns after

14 Child Tax Credit Previous law: Married couples filing jointly who earn less than $110,000 can receive a tax credit of up to $1,000 for each child under 17 years old that they claim as dependents on their tax returns ($55,000 is the threshold for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers). (See the TurboTax FAQ on the tax credit for more details.) New law: The credit would increase to up to $2,000 per child, and the first $1,400 would be refundable according to the TPC analysis, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit would increase from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after

15 Mortgage Deductions Previous law: Taxpayers who itemize their taxes can deduct interest payments on mortgage debt of up to $1.1 million. That includes up to $100,000 of home equity debt. New law: For current mortgage holders, there is no change. But the deductible limit drops to $750,000 for new debt incurred after Dec. 31, Also, homeowners may not claim a deduction for existing and new interest on home equity debt, beginning Jan. 1, The mortgage deduction changes expire after Attorney Amos Smith Amossmith@sbcglobal.net 15

16 State and Local Tax Deductions State and Local Tax Deductions Previous law: Taxpayers who itemize their taxes can deduct state and local property and real estate taxes, and either state and local income or sales taxes. For more information, see our item The Facts on the SALT Deduction. New law: The SALT deduction will be capped at $10,000. The deduction limit ends after Attorney Amos Smith Amossmith@sbcglobal.net 16

17 Capital Gains Tax Rate Capital gains are the profits realized from the sale of assets such as stocks or real estate. Previous law: The profits on the sale of assets held for more than one year are eligible for a tax break. Turbo Tax explains the 2017 tax rates this way for the profits gained from the sale of such assets: For 2017, the long-term capital gains tax rates are 0, 15, and 20 percent for most taxpayers. If your ordinary tax rate is already less than 15 percent, you could qualify for the zero percent long-term capital gains rate. For high-income taxpayers, the capital gains rate could save as much as 19.6 percent off the ordinary income rate. New law: No changes. 17

18 Catholics ranked low in church giving average family donates $386 a year Despite rising incomes, Roman Catholics are far less willing to dig into their pockets to support their churches than members of other religious denominations, according to a recent report. The average Catholic family contributes $386 annually to its church, compared with $1,696 for families in the Assemblies of God, the denomination with the highest level of giving, according to studies by Catholic University in Washington. Average annual family contributions for the other three denominations included in the report were $1,154 for Southern Baptists, $1,085 for Presbyterians and $746 for Evangelical Lutherans. 18

19 CHURCH GIVING!!! The church of today is not great at giving; This isn t exactly good news, but it is a statistical fact; Tithers make up only percent of a normal congregation; Only 5 percent of the U.S. tithes, with 80 percent of Americans only giving 2 percent of their income; and Christians are only giving at 2.5 percent per capita, while during the Great Depression they gave at a 3.3 percent rate. 19

20 DO WE TRACK? Church Offering Envelopes Revenue Sources (1) TITHE; (2) OFFERING; (3) DAY CARES; (4) RENTAL INCOME; AND (5) CDC S URBAN INITIATIVE --- FUNDING? 20

21 The Church Law & Taxation Attorney Amos Smith Attorney at Law