Clergy members can often face special rules and opportunities that can significantly impact their bottom line in the tax landscape. From health insurance to retirement contributions, understanding these tax breaks can make a substantial difference. Here’s a look at some of the key deductions and credits that clergy members should be aware of.
Health Insurance Deduction
Self-employed clergy members can take advantage of the self-employed health insurance deduction, which allows them to deduct the cost of their health insurance premiums. This deduction includes medical, dental, and qualified long-term care insurance. It’s important to note that this deduction is an adjustment to income, reducing taxable income directly on Schedule 1 of Form 1040.
However, there are some limitations to be mindful of:
- Eligibility: Clergy members who are eligible for health insurance coverage through an employer or their spouse's employer cannot claim this deduction.
- Net Earnings: The deduction cannot exceed the clergy member’s net earnings from self-employment. This means that if your net earnings are low, your deduction will be limited accordingly.
Additionally, these health insurance premiums cannot be deducted again as medical expenses on Schedule A if the clergy member itemizes deductions.
Retirement Contributions and the Saver’s Credit
Saving for retirement is crucial for clergy members, just as it is for everyone else. Fortunately, there are several retirement plans available to self-employed clergy members, including SEP IRAs, SIMPLE IRAs, and solo 401(k) plans. Contributions to these plans can provide significant tax advantages. Additionally, individuals may contribute to a Traditional IRA regardless of employment status.
Moreover, the Saver’s Credit offers an additional benefit to lower- to moderate-income clergy members. This credit, which can be up to $1,000 ($2,000 for those filing jointly), is based on the amount contributed to a retirement account. The credit percentage ranges from 10% to 50%, depending on the taxpayer's adjusted gross income (AGI).
Looking Ahead: Beginning in 2027, the Saver’s Credit will be replaced by the Saver’s Match, thanks to the SECURE Act 2.0. This change will transform the credit into a federal matching contribution that must be deposited into an IRA or retirement plan. The match is set at 50% of contributions, up to $2,000 per individual. The match phases out between $41,000-$71,000 (filing jointly) or $20,500-$35,500 (if filing single).
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a valuable tax break designed to assist low-to-moderate-income workers by offsetting the burden of payroll and income taxes. For clergy members who meet the income thresholds, the EITC can be a significant benefit.
To qualify for the EITC, clergy members must have earned income, which includes wages, salaries, and other taxable employee pay. Importantly, if a clergy member has filed Form 4361 to be exempt from Social Security, their earnings from ministerial duties still count as earned income for the purposes of the EITC.
The amount of the credit is based on a percentage of earned income and is subject to a phaseout as AGI increases. The presence or absence of qualifying children also plays a role in determining the credit amount.
Premium Tax Credit and Advance Payments
For clergy members who purchase health insurance through the Health Insurance Marketplace, the Premium Tax Credit (PTC) can help reduce the cost of premiums. If the clergy member qualifies, they can claim this credit when they file their taxes, or they can opt for advance payments of the credit (APTC) to lower their premiums throughout the year.
However, there’s a catch, if the advance payments exceed the actual credit amount determined at year-end, the clergy member will need to repay the excess. Conversely, if the advance payments are less than the credit amount, the difference can be claimed as a credit when filing the tax return. To reconcile these amounts, clergy members must file Form 8962.
Business Expense Deductions
Clergy members often incur expenses related to their ministry, such as travel, supplies, or educational materials. The ability to deduct these expenses depends largely on whether the clergy member is considered an employee or self-employed:
- Employees: Clergy members treated as employees cannot deduct unreimbursed business expenses on their tax returns due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act (TCJA). However, if their congregation reimburses these expenses under an accountable plan, the reimbursement is tax-free.
- Self-Employed: Self-employed clergy members can deduct ordinary and necessary business expenses on Schedule C, reducing their taxable income. These deductions are subject to the same documentation requirements as any other business expense.
Key Considerations for an Accountable Plan
Organizations should consider formally establishing an accountable plan to avoid reimbursed business expenses from being included in compensation.
An accountable plan requires that each employee:
• Incur the expense while performing services as an employee. The expense must have a business purpose.
• The expense must be submitted and accounted for in a reasonable timeframe. Documentation is crucial.
• Any excess reimbursements must be returned in a reasonable timeframe.
What to Keep in Mind
Whether claiming deductions for health insurance, retirement contributions, or business expenses, meticulous record-keeping is essential. The IRS requires detailed documentation to substantiate these claims, so keeping organized records can save headaches during tax season.
Clergy members have access to a variety of tax deductions and credits that can significantly reduce their tax liability. Understanding and utilizing these tax benefits is crucial for maximizing savings. As always, consulting with a tax professional familiar with the unique tax situations faced by clergy members is recommended to ensure all available tax breaks are properly claimed.
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