TAX-SMART STRATEGIES FOR 1992
By: Daniel D. Busby
Rarely do you save money on income taxes at the time you fill in your tax return. Tax-smart moves made before the tax year begins usually render the most savings.
Consider: Any dollars you can honestly rescue from the tax coffers in 1992 will feel like the equivalent of a raise. Here, then, are sound ways to cut your taxes for 1992.
Start by putting your pay package on paper. Important: Separate your salary from fringe benefits and from professional-expense reimbursements. Note: Reimbursements are not compensation but simply a form of church operating expenses.
Suggestion: With your lay leadership, structure your pay plan by determining expense reimbursements, fringe benefits (especially those that are tax-free), and salary, in that order. Goal: To minimize the amount of gross taxable compensation by removing true reimbursements and by making as much compensation as possible a fringe benefit.
*MAXIMUM HOUSING ALLOWANCE
The housing allowance is truly the minister’s best friend.
Key Advice: Every minister should have the maximum allowable housing allowance. Reason: Even ministers in parsonages have some housing expenses, and properly designated in advance, these expenses are not subject to income tax.
Caution:Play fair with the IRS. The housing allowance is not an automatic exclusion. The exclusion is limited to the lowest of:
*The amount used to provide the home.
*The amount officially designated in advance.
*Reasonable compensation, as defined by the courts (Jim Bakker’s was unreasonable!).
*The fair rental value of the home, including furnishings and utilities.
*ACCOUNTABLE EXPENSE REIMBURSEMENTS
If you substantiate your professional expenses that the church reimburses, and if you return any unused payments or cash advances, you have an accountable reimbursement plan. Result: These reimbursements keep your taxes lower, because the payments needn’t be reported to the IRS as income.
Caution: Your plan is non-accountable and all your reimbursements become taxable compensation if either applies:
*The church allows you to keep excess reimbursements by calling them a “bonus.”
*You aren’t required to document your expenses and their business purpose in order to be reimbursed.
Key advice: If you haven’t shifted to an accountable expense-reimbursement plan, do so at once.
*RECHARACTERIZATION OF INCOME
Some churches determine a single dollar amount for combined salaries and reimbursable expenses and then simply deduct the total of expense reimbursements from the salary they report to the IRS. Apparent benefit: Employees keep as salary what they don’t verify as expenses.
Problem: The IRS calls that plan recharacterization of income and taxes employees for both the reported salary and all the reimbursements.
Key advice: Do not fund reimbursements via salary reduction. Best: Keep the salary and reimbursement figures separate. Have the church pay a set salary from one budget item and reimburse substantiated professional expenses from another.
Get the best deduction for your business auto. Next to your salary and housing allowance, the auto-expense reimbursement is the most important part of your pay package.
Method #1: If you love record keeping and drive a newer, larger car, keep track of your actual auto expenses (fuel, repairs, etc.). Turn in the information to your church and get reimbursed for the business portion of the expenses.
Method #2: If you loathe keeping payment records, you can use a mileage method. Note: Reimbursements from the mileage method may be a little lower, but its simplicity is compelling. Here’s what to do:
*Log auto miles, with columns for business and personal use.
*Turn in the business-mileage records monthly and get a reimbursement from your church (based on 27.5 cents per mile for 1991).
Tip: The old commuting rule (the first trip from home and the last trip to home are personal-not business-miles) is no longer true in some situations. Talk to your tax adviser about this possibility.
*TAX-SMART RECORD KEEPING
Keeping track of miles driven and business expenses-especially those paid in cash-is no fun. Yet tax deductions are at stake.
Suggestion: Have a file or portfolio handy to hold your receipts. Note unreceipted cash expenses in a notebook or your pocket calendar.
Guideline: The IRS is satisfied if you note just three items on the back of your receipt:
*Business relationship (including names of persons present).
*Time and place.
Whether you file as an employee or self-employed (for income-tax purposes) on your church income determines how several elements of your pay and fringe benefits are treated for tax purposes.
Suggestion: File as an employee (which most pastors are by common law) and enjoy these results not available to the self-employed:
*Health-insurance premiums paid by the church are tax-free.
*Generally, only employees qualify for tax-sheltered annuities (TSAs), also known as 403(b) plans. Benefit: Money diverted to a TSA isn’t currently taxable.
*Group term life insurance of $50,000 or less provided by the church is tax-free.
If your estimated tax payments for 1992 equal 90 percent of your 1991 tax liability, you won’t be hit with underpayment penalties. Tactic: Don’t give the IRS more money than necessary too early in the year. Reason: They don’t pay interest on excess holdings.
Suggestion: Review your estimated tax payments and fine-tune the amount for 1992 to reflect your expected tax liability. Aim: To come out even with the government on April 15, 1993.
(The above material appeared in a November/December 1991 issue of YOUR
Christian Information Network