On December 20, the Republican bill overhauling the tax code passed a final vote in the House and went to President Trump’s desk. What implications does the new bill have for churches and church leaders, and what do they need to be aware of as they plan for 2018? To help answer these questions, we reached out to three experts on tax topics.
What are the greatest benefits to pastors (and church workers)?
Frank Sommerville (CPA, attorney, and editorial advisor for Church Law & Tax): Pastors will benefit along with 80.4 percent of other Americans. Nothing affects the pastors differently from the other population.
Ted Batson (CPA, partner and tax counsel of CPA firm CapinCrouse): There are no specific provisions in the new legislation that target pastors or church workers. So any benefits that a pastor or other church worker will experience will be the same benefits that other taxpayers experience. In addition, the significant differences that exist between the individual circumstances of one family or individual over another mean that provisions that will benefit one taxpayer may have little effect on another. Here are some representative examples:
There are new tax brackets with lower tax rates. This will likely mean that many pastors will see a reduction in their taxable income even if nothing else changes (an unlikely scenario given the broad reach of the new tax act).
For pastors that have significant mortgage interest, charitable contributions, state and local taxes, and medical expenses, the doubling of the standard deduction may have little impact. Although the new $10,000 cap on deducting the combined total state and local property taxes and income taxes (or sales tax in some states) may impact some pastors.
For other pastors, the doubling of the standard deduction may be a significant benefit. If, in prior years, their personal exemptions plus their itemized deductions were less than the new $24,000 standard deduction, they will see an immediate benefit.
For families with children under age 16, the increase in the child tax credit to $2,000 will produce a new benefit. Moreover, for some, the increase of the refundable amount of the credit to $1,400 may increase the tax benefit the pastor receives.
Mike Batts (CPA, managing partner of Batts Morrison Wales & Lee, P.A.): The benefits to pastors and church workers parallel those for other taxpayers… with the most significant benefit being lower taxes generally.
What are the greatest benefits to churches?
Sommerville: Since most of the church members will receive an increase in their take-home pay starting in February 2018, members will have a greater capacity to give in 2018. While other charities complain [that] the increased standard deduction will decrease the incentive to give, most members give out of their religious beliefs—not out of some perceived tax benefit. In fact, some [of our clients who do charitable giving] refuse to claim the charitable contribution on their tax returns. The same motives exist for members who remember the church in their will. I do not think the increased standard deduction and increased exclusion from estate taxes will impact giving at churches. The tax decease will definitely benefit the church.
The expansion of Section 529 plans to private K-12 schools will present a new opportunity for those churches that operate Christian schools. This greatly expands the funding options available to parents and grandparents.
Batson: There are no discernible benefits to churches or other nonprofits. If anything the potential negative impact on charitable giving, estimated to be $13 billion in a study performed by the Indiana University Ruth Lilly School of Philanthropy, means churches and charities are a loser from this legislation.
Batts: I wouldn’t characterize any aspect of the law as benefitting churches or other nonprofits particularly. The law is directed at helping individual taxpayers and businesses. Despite predictions that the higher standard deduction for individuals and lower rates will result in decreased charitable contributions, churches and other nonprofits can still hope that the economic impact of the tax reductions, together with economic growth, will spur an increase in giving.
What are the drawbacks for both groups—churches and those employed by the church?
Sommerville: Some are disappointed that the Johnson Amendment [prohibiting certain political activity by churches] was not repealed. Some are concerned that the tax cuts will lead to reductions in the grants given to charities to assist the poor. The changes to the unrelated business income will negatively [affect] a few churches that have multiple sources of unrelated income.
Batson: Churches may experience a decline in giving. This is because the doubling of the standard deduction will mean that some parishioners will not benefit from itemizing their deductions, of which the charitable deduction is one…However, churches may see less of an impact than other nonprofit organizations where tax considerations may have larger bearing on charitable giving. For churches that teach tithing as an act of worship, tax benefits of giving will likely be a secondary consideration.
For some pastors that have claimed deductions for unreimbursed employee expenses, this deduction was suspended, so those pastors will lose a deduction that may or may not be valuable depending on how much they benefit from the increased standard deduction.
For pastors that move in 2018 through 2025, they will no longer be able to deduct their moving expenses, nor with their church be able to reimburse these expenses on a tax-free basis.
Batts: Some studies have predicted that the increase in the standard deduction and the decrease in tax rates will result in decreased overall charitable giving. But it is not at all clear that such studies have adequately considered the impact of economic expansion on their assessments.
Republicans have said they hope to make the tax cuts for individuals permanent rather than letting them expire in 2025 (as currently written). If that is not achieved, what will happen once the tax cuts expire?
Sommerville: According to the nonpartisan Tax Policy Center, over 80.4 percent of individual Americans will receive a tax cut, while only 4.8 percent will see an increase.
Batson: The vast majority of the changes that impact individuals (e.g., the doubling of the standard deduction, the suspension of the personal exemption deduction, etc.) are set to “sunset” on December 31, 2025. That means that on January 1, 2026, those changes will revert back to the law as it exists today. However, the amounts will be adjusted for inflation factors that would have applied had the law as it is in effect today remained unchanged.
Batts: If the tax cuts for individuals expire, it will be because the Republicans no longer control both houses of Congress and the White House. If such a change has occurred, the full extent of implications will hinge on how much control has changed hands.
What, if anything, should church leaders adjust or change in light of the tax law?
Sommerville: Church leaders should encourage members to accelerate giving into 2017 because the gift may have more tax value in 2017 than in 2018, due to the decrease in tax rates.
Batson: Given the individualized impact of the new legislation, church leaders should be prepared to have frank conversations with their employees regarding the real dollar impact of the new tax legislation on their employees. In addition, [for] churches that either do not reimburse their pastor for expenses incurred in their ministry or cap these expenses, the loss of the ability of the pastor to deduct these items might cause the church to review their expense reimbursement policy.
Batts: It would be wise to keep a close eye on the trending in charitable giving, and to be prepared to adapt accordingly.
Emily Lund is assistant editor for Church Law & Tax.
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