Debunking 5 Ministerial Tax Myths
By Valerie West
Gear up for the upcoming tax season and start the new year right, Pastor! Did you know you have more control over your tax outcome than you might realize? It's true and could make all the difference between owing taxes or receiving a refund.
As we enter the new year, ensuring you're on the right track with your taxes is essential. Many factors influence your tax outcome, and the unique tax status of ministers adds an extra layer of complexity. Surprisingly, even some tax professionals may not fully grasp the intricacies, potentially leading to costly errors.
Take, for instance, a scenario where a minister approached our team for a review of his completed tax return before submission to the IRS. Discovering and understanding these nuances can significantly impact your financial outcome. Start the new year empowered with knowledge about your ministerial taxes!
With our expertise in ministers' taxes, our tax team identified an extra $1,200 in his tax refund through previously overlooked deductions. He would have overlooked this additional $1,200—a significant financial gain if he hadn't sought our assistance in reviewing his tax return.
Based on our extensive experience aiding ministers with their tax returns, we've observed that ministers who find themselves owing taxes often receive inaccurate information from fellow ministers or, in some instances, tax professionals.
Frequently, these inaccuracies stem from prevalent "myths" circulating about ministers' taxes. Let's delve into five common misconceptions surrounding ministers' taxes to empower you with accurate insights, enabling you to make informed and prudent decisions for your tax matters.
Myth 1: "Ministers do not have to pay income taxes."
Ministers are exempt from income tax withholding and from paying income taxes. There's a huge difference.
Many ministers misunderstand that their wages as ministers are not subject to income tax withholding.
This leads to the false assumption that they do not have to pay income taxes. Not until it is too late and costly do they realize the gravity of their mistake.
Since ministers have a dual tax status, they are responsible for withholding and paying their taxes. As a minister, you can pay your taxes quarterly using Form 1040-ES, Estimated Tax for Individuals.
Did you know that if you want your church to withhold and pay your income taxes like a non-ministerial employee, you can do so but must enter into a voluntary withholding agreement with the church?
Myth 2: "Love offerings are not taxable income."
The confusion surrounding love offerings comes primarily because the term love offering implies a gift given because of love and respect for the recipient.
In the giver's mind, it may be a gift, while it is compensation in the IRS's mind!
Herein lies the conflict.
IRS Code Section 102(a) says, "Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."
While the members of the church are truly giving a love offering as a gift, the IRS says it is taxable income because section 102(c)(1) states that "any amount transferred by or for an employer to, or for the benefit of, an employee" shall be treated as gross income.
While the law clearly says that a gift is tax-free, the fact that the gift is given to the church and then given to the Pastor or leader makes it 100% taxable because of section 102(c)(1). The law makes an exception for a gift the church gives to the Pastor if it is under $25.00.
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Myth 3: "If I do not have the exact figures for my deductions, then I can just round up or make the best faith estimate."
Deductions should not be in round numbers. Inserting rounded numbers on a return tells the IRS that you are likely making them up and can increase your chances of being audited. Do your best to keep receipts organized and easily accessible.
Myth 4: "If I owe taxes and file an extension, then I will not have to pay the taxes I owe until the extension is due."
The truth is that all money owed to the IRS is due by the annual tax deadline.
The filing deadline for the 2023 tax year is April 18th, 2024.
If you owe taxes and fail to meet the April 18th deadline, you will be penalized for each month that you are late (even if you have filed an extension).
In general, if you file a tax extension using Form 4868 and think you may end up owing money for your taxes, it is better to pay the IRS an estimated amount by April 18th than delay and owe more due to penalties. If you happen to overpay, the IRS will reimburse you the amount you overpaid.
Myth 5: "Any CPA is a good CPA for ministers."
While there are many knowledgeable and well-intentioned CPAs, not all of them are familiar with the various caveats of taxes for ministers.
A CPA working on taxes for ministers should be well-versed on the subject and be familiar with nonprofit tax law because many of the tax benefits afforded to a minister are directly tied to a minister's ordination.
For example, IRS Publication 517 explains various rules regarding the tax status of ministers, and this publication defines a minister as:
"[I]ndividuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination." [emphasis added]
With this definition in mind, your chosen CPA should have a working knowledge of nonprofit tax law and how it relates specifically to you as a minister.
A Year of Financial Confidence
Have you ever wondered if you're maximizing every available tax benefit as a minister? Pastor, it would be best to utilize a tax preparer with experience completing ministers' tax returns. Rest assured, our team is here to guide you through this tax season seamlessly. Ensure you're well-informed and make the most of your tax advantages.
Discover more about our minister's tax return service and start your journey to a year of financial confidence today. Please give us a call at 770-638-3444 or click the link below to schedule a call today!
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