Gas prices are higher and 2021 tax refunds might be delayed, but the news on taxes for ministers is not all bad for 2022.
Lee Wright, coordinator of church compensation services for the Alabama Baptist State Board of Missions, shared these and other updates for ministers at a recent conference on ministers and taxes.
One bit of good news is that federal stimulus payments sent out in 2021 are not taxable income. Another positive is that those who file their tax returns electronically probably will see their refund checks quicker than those who file with paper.
On most other tax-related issues, the positives and negatives depend on the individual.
For example, Americans know the price of gasoline has increased in recent months. Accordingly, the IRS increased the business mileage rate for 2022 for ministers, up two and a half cents to 58.5 cents per mile. But that amount cannot be deducted by most on the Federal 1040 form, Wright cautioned.
Limited business deductions
“The ‘Tax Cuts and Jobs Act of 2017’ raised the standard deduction, but it also took away business deductions for those who get a W-2, which ministers should,” Wright noted. “Therefore we’ve been recommending an accountable reimbursement plan for ministers for the past several years. This costs the church nothing, but it saves the minister out-of-pocket, ministry-related expenses.”
Wright affirmed that the ministers’ housing allowance, a benefit used by many, should be around for the foreseeable future. The Seventh Circuit Court of Appeals declined a challenge to this case in 2019, Wright said.
“What I say is that a minister should claim as much as he wants and can justify — whatever fits the situation. In the case of bivocational ministers with other jobs, their church income could be 100% housing allowance,” he said, noting the allowance isn’t as beneficial as it used to be.
“Without itemized deductions, the minister won’t claim mortgage interest on Schedule A as we used to,” he explained. “This used to be a double deduction due to the unique status of an ordained minister as employed for federal income tax purposes and self-employed for Social Security taxes.
“The state of Alabama, however, does continue to offer this deduction and charitable giving and all of the rest we used to claim for federal deductions.”
Ordination issues
Wright said he fields calls from churches wishing to ordain other staff ministers for tax purposes, which he believes is ill-advised.
“Ordination should be for the purpose of calling, not for the purpose of tax savings,” he said. “And when you look at the actual savings that might ensue, they might not really be that substantial.”
Another issue Wright deals with is expenses related to self-employment. He explained that a minister with another business or income from revivals, weddings or other ministry-related events should report that income on Schedule C so expenses related to that employment are deductible.
Wright issued a caution about the home office deduction.
“The IRS says that a minister who uses a housing allowance has already received a housing deduction,” Wright explained. “So the home office deduction can be a red flag.”
Utilize GuideStone
Wright believes the best tax savings for ministers is tax-deferred contributions to GuideStone Financial Resources, Southern Baptists’ retirement and investment arm. GuideStone can designate part or all retirement income as housing allowance, and upon retirement the minister may pay no tax or minimal tax, depending on the amount designated as housing.
“I recommend ministers have at least some direct income so they can participate in the GuideStone retirement plan,” Wright encouraged. “This is a better tax savings than a Roth IRA. The Roth shouldn’t be the ‘first money’ for the minister, but only after he has contributed significantly through GuideStone.”
Wright also noted that the generous child tax credits of 2021 revert to $2,000 for children under 17 this year.
“Parents who received direct payments in the second half of 2021 might be surprised at their tax bill this year if they used these payments to decrease their withholding taxes,” he warned.
Running behind
Wright also noted that the IRS has announced it is running behind and this year refunds might be delayed.
“Electronically filed taxes can get refunds back to the taxpayer sooner than those who file with paper, but another option is to designate a refund as a prepayment on 2022 taxes,” Wright said. “That way the taxpayer doesn’t worry about the actual refund direct deposit or paper check.”
He suggested tax time is a good opportunity to look at the “big picture.”
“Most Americans are lacking in life insurance, disability coverage and retirement savings, and ministers are in the same boat,” Wright said. “Tax time is a good opportunity to make some better financial decisions.”
In doing so, Wright cautioned that not all money management opinions are true. He’s heard erroneous tax advice from some, and recommends GuideStone tax publications and Richard Hammer’s Church Law and Tax organization (churchlawandtax.com). He said Frank and Elaine Sommerville also author helpful articles with Hammer on tax matters for ministers.
Wright offers a number of tax and other financial materials at Alsbom.org/ccs. He can be reached at 800-264-1225, ext. 2241 or lwright@alsbom.org.
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