April 2020 - The Pastor's Wallet

How The Clergy Housing Allowance Affects The FAFSA

by Amy Monday, April 27, 2020

It’s that time of year again when college students all over the country are filling out the Free Application for Federal Student Aid, more commonly known as the FAFSA. While technically you have from October 1, 2019, until June 30, 2021, to fill out the FAFSA for the 2020-2021 school year, many are getting it done right now. Now is a good time to do it if you want to see the different award packages available to you and start making plans for the fall.

What Is The FAFSA?

If you’re new to this, let me give you a little bit of background. The FAFSA is the form that college students use to apply for government student aid, such as grants, loans, or work study programs. In addition to federal aid, many states and colleges use the FAFSA to award student aid as well. The general rule is that if you want any help at all with school, fill out the FAFSA.

Since a lot of student aid is needs-based, the FAFSA collects financial information. The student will have to provide information from their own personal tax returns. If under age 24, then the parents’ financial information must be included as well. That information is used to calculate an Expected Family Contribution (EFC). The EFC in turn affects how much aid a student can get.

Does The Minister’s Housing Allowance Count As Income For The FAFSA?

One big question that pastors and their college-age kids often have is how the housing allowance fits into everything. The income that you report on the FAFSA is your adjusted gross income (AGI) from your tax return. Your AGI does not include the housing allowance. Does that mean the FAFSA ignores the housing allowance?

Sorry, but no. While the housing allowance does not appear as a part of AGI, it is added back in further down the form. Both the cash housing and parsonage allowances must be reported under the Untaxed Income section. So, yes, the housing allowance counts as income for the FAFSA.

How FAFSA Calculators Can Be Misleading

There are a number of FAFSA calculators online that can be very helpful in estimating your EFC. However, if you are using a FAFSA calculator it may seem that the housing allowance affects you negatively. Pastors sometimes find that if they plug in their housing allowance as part of their AGI instead of as untaxed income it lowers the EFC.

Why is that? Because taxes paid are subtracted from income when calculating the EFC. If you were to pay taxes on your housing allowance, it would lower your available income and therefore lower your EFC.

Does The Housing Allowance Count Against You On The FAFSA?

Because of the way the calculator works, having a tax-free housing allowance can appear unfavorable. Keep in mind, though, that that doesn’t take into account the tax savings that you initially receive from not paying income taxes on the housing allowance. Even if you have a higher EFC and receive less aid for college, the federal income tax savings will likely make up for it. You wouldn’t want to pay $1,000 in taxes just to be eligible for half that amount in student loans, would you?

In summary, the clergy housing allowance is, in fact, included in the FAFSA. It is added under the Untaxed Income section and not with AGI. Also, it may appear to have a negative effect on the FAFSA. That’s only because it doesn’t take into account the original tax savings, though. Have fun filling out your forms!

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Can You Use IRS Form 2031 To Opt Back Into Social Security?

by Amy Monday, April 20, 2020

Someone wrote to me recently with some questions about Form 4361 that is used by clergy to opt out of Social Security. One of the questions was, how hard is it to get Form 2031 approved to revoke Form 4361 and opt back into Social Security? That is a very important question, so today we are going to address it.

What Is IRS Form 2031?

Let me start by explaining these forms. Form 4361 is what pastors use to opt out of participating in the Social Security system. Click on that sentence to learn more about it.

IRS Form 2031 is used to revoke Form 4361 and opt back into Social Security. It is an irrevocable election that makes you liable for self-employment tax and includes your ministerial earnings in Social Security and Medicare coverage.

Can You Use IRS Form 2031 Right Now?

I have heard from a number of pastors that opted out of Social Security when they were young and regretted it later on. I’ve heard from others who said that they now realize that they didn’t really have grounds to opt out and didn’t fully understand what they were proclaiming.

Does that mean that they can reverse their decision and opt back in with Form 2031?

No. At least not right now.

You see, Form 2031 has only been used on special occasions when Congress gave pastors a short window of time to opt back in. In 1978 and again in 1986 this option was made available. It was only a one-time opportunity and the election had to be made by the deadline of the tax return for the year after the law was passed.

The last opportunity to revoke exemption with Form 2031 was at the turn of the century. The Ticket to Work and Work Incentives Improvement Act of 1999 gave ministers a 2-year window in which they could change their minds about opting out of Social Security. The last deadline to opt back into Social Security was October 15, 2002. Suffice it to say, you’re too late now.

What Are Your Other Options?

Basically, you can’t opt back into Social Security with Form 2031 and there’s no guarantee that the opportunity to do so will ever appear again during your lifetime. What can you do, then?

First, if you really want to get back into the system, you can try to get the IRS to revoke your exemption. They have nullified a minister’s exemption because he did it solely for economic reasons, which is illegal. I don’t know anyone who has tried this, so let me know if you do.

If you don’t want to go to such extreme measures, put your own safety net in place. Provide for yourself that which the Social Security and Medicare system would have provided for you. Purchase life and disability insurance. Save for retirement, including Medicare Part A costs. This article explains what you need to do to make up for opting out of Social Security.

Finally, share your wisdom and experience with others. Let new pastors learn from your mistakes so that they don’t have to make the same ones. Just remember, though, that what is right for you isn’t necessarily right for everyone else. Opting out of Social Security is a personal decision and there isn’t one right or wrong answer.

If you would like to share your experience with opting out of Social Security, go ahead and do so in the comments!

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What The CARES Act Lets You Do (& Not Do) With Your Retirement Savings

by Amy Monday, April 13, 2020

With businesses shutting down and church services closed, you may find yourself reassessing your financial situation. Which expenses are mandatory and which can you do without? What resources do you have available to you that you don’t usually access? As you’re taking stock of your situation, I’d like to let you know about a few changes that the CARES Act stimulus bill makes to the rules about your retirement savings.

2020 Required Minimum Distributions Waived

This is one that really only helps those who already have more than enough to live on. Required minimum distributions (RMDs) from traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k), 403(b), and governmental 457(b) plans are waived for the year 2020. The waiver applies to beneficiary account owners in addition to original account owners. Basically, no one has to take RMDs for 2020.

If you’ve already taken an RMD that you really don’t need, the law allows you to put it back. (This option is only available to original account owners, not beneficiaries of inherited accounts.) Unfortunately, putting it back isn’t quite as simple as it sounds. If your RMD was taken within 60 days, then you can roll it into another account or back into the same one. If your RMD was taken more than 60 days ago, then a more complicated strategy will have to be used. You will want to consult with a financial advisor if you have already taken an RMD for 2020 and want to put the money back into a retirement account.

Penalty-Free Withdrawals Allowed

For most of you, the above doesn’t apply. Instead of having extra money lying around, you’re looking for extra money to meet your expenses. The CARES Act makes it easier to tap into your retirement accounts. Usually, if you withdraw money from an IRA or employer-sponsored retirement account before you reach age 59 ½, you are charged a 10% penalty on the money. The government provides tax-advantaged accounts for you to save for retirement and they don’t like it if you take the money out before retirement.

The CARES Act allows you to withdraw up to $100,000 from your retirement accounts penalty-free if it is a coronavirus-related distribution. What’s a coronavirus-related distribution? It is a distribution made in the year 2020 by people who meet one of the following criteria:

Have been diagnosed with COVID-19
Have a spouse or dependent who has been diagnosed with COVID-19
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease
Are unable to work because they lack childcare as a result of the disease
Own a business that has closed or been forced to operate under reduced hours because of the disease
Meet other IRS-approved criteria

In addition to waiving the 10% penalty, these coronavirus-related distributions are not subject to mandatory tax withholding. Under normal circumstances, 20% of your withdrawals are withheld to pay taxes. So, if you withdraw $1,000 from your retirement account, you only get $800 because the other $200 is set aside for taxes. That isn’t happening right now; you get everything that you take out. Also, you can choose to pay any related income taxes over the next three years instead of all at once.

Should You Access Your Retirement Savings?

The CARES Act makes it a lot easier to tap into your retirement savings. But should you? That’s really up for you to figure out; my job is only to make you aware of the consequences.

The obvious consequence is that if you take the money out now, you won’t have it for retirement. However, using $2,000 today isn’t the same as having $2,000 in retirement. Let’s say you plan to retire in 30 years and you’ve got your savings invested in the stock market (which, by the way, had their best week last week since 1974) earning 8%. What is worth $2,000 to you today will be worth about $21,800 at retirement if left invested.

Another downside to tapping into your investments is that now is not a good time to sell. When it comes to investing, the way to make money is to sell when prices are high and buy when prices are low. The most popular way to lose money investing is to buy when prices are high and sell when they are low. Stock prices are pretty low right now, so depending on when you bought, you could be selling at a loss.

What Are Some Other Options?

If I’ve ruined the appeal of tapping into your 403(b), what are your other options? If your plan allows it (not all retirement plans do), then you may be able to take a loan from your current employer’s plan. The CARES Act increased the amounts that people are allowed to borrow from their retirement plans. However, that isn’t without risk. First of all, if you take the money out, then you miss out on any growth in the stock market until it is put back in (selling low again). Second, if you don’t pay the loan back (usually you have 5 years), it will count as an early withdrawal (as discussed above) and may be subject to the 10% penalty (depending on if it qualifies as a coronavirus-related distribution). Finally, if you lose your job, the loan will be due immediately, so you won’t have 5 years to pay it back and you’ll suffer the same consequences mentioned in the last sentence.

Are there any other options? Yes! If you’ve lost your job or even just part of your wages, you can apply for unemployment. The CARES Act made unemployment benefits much more broadly available than usual, so now independent contractors, part-time workers, and those experiencing a pay cut can be eligible. And the Act also increased benefits by $600/week and extended the length of time they are paid.

I know, you’re waiting for me to rain on the parade and start listing the negative consequences, as I’ve done in every other section of this article. There aren’t really negative consequences, but there is a downside. The downside is that unemployment has skyrocketed and most state unemployment agencies are not prepared to handle the applications coming in. So, it could take a while. I have friends who have been waiting for 3 weeks and have yet to see any benefits. But it doesn’t hurt to try, maybe your state is faster!

Finally, if you can’t make ends meet, see what hardship assistance is available to you. The CARES Act suspended payments on student loans through September and a lot of other companies are offering assistance. Talk to your landlord. Call your credit card companies. Call your auto or mortgage lender. Don’t be shy; ask for what you need. And don’t forget to pray before dialing the number! I have a feeling that during this season God is going to provide in some very creative ways.

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Who Is Allowed To Designate A Minister’s Housing Allowance?

by Amy Monday, April 6, 2020

By law, a minister’s housing allowance must be designated by a church or church denomination. But what does that mean? Surely a mosque or synagogue would count since the government isn’t allowed to discriminate between religions.

The IRS uses a different meaning for church than most of us do in our everyday language. Church for them has more to do with an organization’s religious purpose than their actual religion or common vocabulary. The truth is, Section 107 of the Internal Revenue Code that lays out the clergy housing allowance does not actually define the term church.

How The IRS Identifies A Church

Since the law doesn’t spell things out, there have been disagreements that have led to court cases throughout the years. The decisions in those court cases are what the IRS has used to develop a list of characteristics that they attribute to churches. This is what the IRS looks for to be able to call something a church:

Distinct legal existence
Recognized creed (set of fundamental beliefs) and form of worship
Definite and distinct ecclesiastical government
Formal code of doctrine and discipline
Distinct religious history
Membership not associated with any other church or denomination
Organization of ordained ministers
Ordained ministers selected after completing prescribed courses of study
Literature of its own
Established places of worship
Regular congregations
Regular religious services
Sunday schools for the religious instruction of the young
Schools for the preparation of its members

When determining whether an organization is classified as a church for federal tax purposes, the IRS looks at these characteristics along with other facts and circumstances. They look at the organization’s religious purposes and how it accomplishes those religious purposes. A church does not have to have all of the above attributes to qualify. At a bare minimum, a church must have two things:

A body of believers or communicants
The body of believers assembles regularly in order to worship

Examples Of Court Tax Rulings

If you don’t have a group of people that gets together regularly to worship, you are not a church. And if that’s not your primary purpose, then you’re not a church either. The court has stated that if bringing people together for worship is only an incidental part of an organization’s activities, that’s not enough to call the organization a church. Many schools have regular chapel services and teach religious coursework, but they are still considered schools, not churches.

In one court case, De La Salle Institute v. US, a religious group’s non-profit ran a winery and distillery. On the premises was a chapel where they could worship. They claimed that the non-profit was a church and an integral part of a church and so should be exempt from paying certain taxes. Neither the IRS nor the tax court judge bought it. They determined that it was not a church, it was a winery.

While having prayer meetings at your tech company won’t make it a church, the IRS still goes beyond the usual connotations for their definition of a church. If you’re an ordained minister who preaches, performs weddings, and officiates funerals, you still may be able to take a housing allowance even if you don’t work for a “traditional” church.

This is exemplified in the Whittington v. Commissioner tax court case. There was a ministry that presented the gospel through crusades, services, and publications that had a loyal, regular following. Their leaders conducted daily services and married, performed funerals for, and counseled their followers, many of whom were not associated with other religious organizations. The IRS denied the leaders a housing allowance because they did not work for a church. The leaders challenged it and the tax court judge sided with them, declaring that their ministry counts as a church because they have a body of believers.

They aren’t just flexible about the structure of your “church.” If you act like a church, even if you don’t have traditional beliefs, you can still qualify as a church. That’s what happened in the Foundation of Human Understanding v. Commissioner tax court case. A foundation based on Judeo-Christian principles and the doctrine and teachings of its founder claimed to be a church. They owned buildings in two different locations where they conducted regular services for a congregation of over 50 people. They also had a school where their beliefs were taught to children and owned a retreat center for seminars and meetings. The IRS said that it didn’t qualify as a church but the tax court judge struck that down and ruled that they are a church.

How To Get A Final Determination

While I really hope you don’t start a cult, I highlight these examples to show you that you don’t necessarily have to work for a traditional church for it to qualify to designate you a housing allowance. The IRS is fairly flexible in its definition.

I wish I could spell it out to you more clearly, but this is all that we have because of the way our legal and tax system works. If you have any doubts as to the validity of your organization as a church, you can request a private letter ruling from the IRS. Or, you can get audited and take the IRS to tax court for a final decision. Have fun with that.

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Monthly Archives April 2020

How The Clergy Housing Allowance Affects The FAFSA

What Is The FAFSA?

Does The Minister’s Housing Allowance Count As Income For The FAFSA?

How FAFSA Calculators Can Be Misleading

Does The Housing Allowance Count Against You On The FAFSA?

What The CARES Act Lets You Do (& Not Do) With Your Retirement Savings

2020 Required Minimum Distributions Waived

Penalty-Free Withdrawals Allowed

Should You Access Your Retirement Savings?

What Are Some Other Options?

Who Is Allowed To Designate A Minister’s Housing Allowance?

How The IRS Identifies A Church

Examples Of Court Tax Rulings

How To Get A Final Determination

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Monthly Archives April 2020

What Is The FAFSA?

Does The Minister’s Housing Allowance Count As Income For The FAFSA?

How FAFSA Calculators Can Be Misleading

Does The Housing Allowance Count Against You On The FAFSA?

RELATED

What Is IRS Form 2031?

Can You Use IRS Form 2031 Right Now?

What Are Your Other Options?

RELATED

2020 Required Minimum Distributions Waived

Penalty-Free Withdrawals Allowed

Should You Access Your Retirement Savings?

What Are Some Other Options?

RELATED

How The IRS Identifies A Church

Examples Of Court Tax Rulings

How To Get A Final Determination

RELATED

Looking For Something Specific?

What’s New…

Categories

Tags

Recent Posts

Recent Comments

Archives

Categories

Meta