Does the Tax Reform Affect Ministers’ Taxes?

By Raul Rivera

On December 20, 2017 the largest tax reform since 1986 was passed by Congress and signed into law by the President of the United States.

With the new tax reform act, known as the Tax Cuts and Jobs Act of 2017, overhauling the tax code, there are many questions in need of answering.

For instance, as it pertains to churches and ministries, “What are the implications of the tax reform on churches and ministries?”

And, perhaps more pressing, “Does the new tax reform affect ministers’ taxes?”

These two questions are just the “tip of the iceberg” when it comes to unraveling and understanding the tax reform as it pertains to pastors, churches, and ministries.

In this blog, I will spend some time addressing the new tax reform and how it affects ministers’ taxes.

With that being said, it should be noted that this blog is not intended to replace the advice of a qualified tax professional as it pertains to your specific situation.

Impact of the new tax reform on ministers’ taxes

Off the bat it is important to note that there are no provisions in the new tax reform that specifically target pastors and ministry leaders.

In other words, the new tax reform affects pastors like all other taxpayers; however, there are some nuances to consider.

So, what changes from the tax reform do you, as a minister, need to know about?

Change 1 - New tax brackets with lower rates

In short, this means that many pastors will most likely see a reduction in their taxable income.

For example, let’s look at the marginal tax rates under the previous law and the current law for someone who files taxes “married filing jointly.”

At a quick glance of the difference in marginal tax rates, we see that under the previous law a couple who earned $76,500 combined fell into the tax bracket at 25%.

Under the new tax law, however, this same couple’s tax liability is now only subject to the 12% bracket. That is a substantial difference.

While not everyone will experience such substantial tax cuts, the new law does afford marginal tax cuts to nearly everyone.

Change 2 - Doubling of the standard deduction

For many pastors, the doubling of the standard deduction may be a significant benefit. Let me explain.

Under the new tax law, the standard deduction was doubled across the board. So if you file your taxes as “married filing jointly,” the standard deduction jumps from $12,700 to $24,000.

In previous years, if your personal exemption plus your itemized deduction were less than the new $24,000 standard deduction, you will see an immediate benefit when filing your taxes.

However, for ministers who have significant mortgage interest, charitable donations, state and local taxes, and medical expenses, the doubling of the standard deduction may have minimal impact.

In addition, some pastors who live in states with high property taxes may be impacted by the new $10,000 cap on deducting, as an itemized deduction, the combined total state and local property taxes and income taxes (or sales tax in some states).

For this reason it is imperative for all ministers to ensure they are maximizing their housing allowance exclusion and other tax benefits afforded to ministers.

If you want to make sure you are maximizing your tax benefits, give us a call at 678-830-2600.

Change 3 - Child tax credit

If you have children then there may be some good news for you as it pertains to the Child Tax Credit.

Under the new tax reform and depending on your income, the Child Tax Credit may be worth as much as $2,000 per child that qualifies - that is double what it was previously.

A qualifying child for this credit must meet all of the following criteria:

• The child must be under the age of 17 (i.e., age 16 or younger) at the end of the tax year.
• The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece, or nephew. An adopted child is always considered your own child.
• The child must not have provided more than half of their own support during the tax year.
• You must claim the child as a dependent on your federal tax return.
• The child must be a U.S. citizen, U.S. national, or U.S. resident alien and you must provide a valid social security number for the child by the time you file your tax return.
• The child must have lived with your for more than half of the tax year (some exceptions apply).

Additionally, under the previous tax law, if you did not have any tax liability (i.e., you didn’t owe any taxes), you essentially couldn’t benefit from the Child Tax Credit - it was simply gone.

Under the new tax law, however, should you have children who meet the qualifications of the Child Tax Credit, you can now receive refundable amount of up to $1,400 per qualifying child of the Child Tax Credit should you not have any tax liability.

Change 4 - Unreimbursed business expenses

According to the new tax law, an employee can no longer deduct on his/her personal income taxes employer-related business expenses that an employer does not reimburse.

For this reason, it is imperative for churches to adopt and implement an accountable reimbursement plan.

Reimbursements to employees under an accountable plan are tax-free to the employee(s).

Every church and ministry that goes through our StartRIGHT® Program receives an accountable reimbursement policy.

It is important to make sure that each reimbursement follows the provisions in your church’s accountable reimbursement policy. In addition, you should make sure that for each reimbursement there -

1. is a business purpose to the expense,
2. expenses are submitted and substantiated in a timely manner, and
3. excess reimbursement amounts be properly returned.

A tax service just for ministers

Even without the new tax reform in place, adequately navigating tax laws can be daunting - especially as they pertain to ministers’ taxes. That’s why we have a tax service just for ministers.

Our tax team knows the nuances of ministers’ taxes, and as a result they know how to best serve you and your tax needs.

Through our ministers’ tax service, you can confidently know that you are taking advantage of every tax benefit available to you as a minister. Give us a call today at 877-494-4655 and find out more about how we can meet your tax needs.

Recommended blogs for you:

• "How to Start a Church the Right Way"
• "IRS Challenges Reimbursements"
• "3 Ways Ministers Can Make the Most of Their Taxes"

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