Working on taxes is an overwhelming and difficult task. You want to be sure you file everything correctly while also being as kind as possible to your bank account. Even more challenging is when tax laws change, and 2016 brought at least 91 such changes that affect reporting for churches and ministers. With all these laws, you’ll want to be sure you’ve completed everything correctly, but you’ll also want to be sure you’ve adjusted and deducted as much as you can in order to reduce the amount you’ll owe.
Here is information on possible adjustments and deductions available for the 2016 tax-filing season.
Adjustments to Gross Income
Most church staff members will be able to make an adjustment to their gross income even if they don’t have enough expenses to itemize their deductions.
For 2016 taxes, one may be able to adjust:
- IRA deduction, including a spouse’s contribution
- Medical savings account deduction
- Health savings account deduction
- Moving expenses one pays that are not reimbursed by the employer
- One-half of one’s self-employment tax
- Self-employed workers’ health insurance deduction
- A penalty incurred on an early withdrawal of funds from time savings account
- Alimony paid
Deductions on Your Taxes
After adjusting your gross income, one ordinarily may reduce taxes even more by either subtracting itemized deductions or subtracting the applicable standard deduction. One should usually itemize deductions only if they total more than the standard deduction.
For 2016 taxes, itemized deductions include:
- Medical expenses (in excess of 10 percent of AGI)
- Certain taxes and interest payments
- Charitable contributions
- Casualty and theft losses (uncompensated by insurance)
- Miscellaneous expenses
Business and Professional Expenses
Most church staff members have business expenses, but whether or not they can deduct those expenses depends on if the staff member is an employee or self-employed, whether expenses are reimbursed by the church, and whether any reimbursed expenses are paid under an accountable or nonaccountable reimbursement arrangement.
Since the exercise of ministry qualifies as a trade or business, many pastors are able to deduct most of the expenses they incurred in the exercise of their ministry (subject to certain conditions and limitations).
For 2016 taxes, some expenses a pastor could deduct include:
- Travel expenses (including meals and lodging)
- Compensation paid for services
- Rent paid for business property
- Expenses paid or accrued in the operation and repair of an automobile used in making professional calls
- Dues to professional societies
- Subscriptions to professional journals
- The cost of the fuel, light, water, telephone, etc., used in offices
This is just an overview of items one can adjust and deduct for 2016 taxes. Find more information about adjusting and deducting taxes in chapter seven of the 2017 Church & Clergy Tax Guide.
Details about the 91 tax laws changes that affect churches and pastors are also in the 2017 Church & Clergy Tax Guide. This guide includes information on whether ministers and church staff are employees or self-employed, parsonages and housing allowances, charitable contributions, retirement plans, and more.
All information in this article is adapted from the 2017 Church & Clergy Tax Guide.
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