By Todd Ensign and John Butler
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted in December, includes a host of retroactively resuscitated and extended tax breaks for individuals and businesses. It also contains some items intended to stimulate the economy.
While most of the act focuses on individuals and businesses, several elements affect churches as exempt organizations and employers, as well as key church employees. Here’s how the new law may affect your ministry.
Effect on churches
Individuals age 70 1/2 or older can now make direct charitable distributions of up to $100,000 per tax year from an Individual Retirement Account (IRA) to qualified charitable organizations without paying taxes on the distribution. This was made retroactive to January 1, 2010, and extended through December 31, 2011. Older members may find this a good way to support the church.
Among the new tax breaks for individuals in the 2010 Tax Relief Act, the biggest is a two-percentage-point-reduction of the employee portion of the Social Security payroll tax. This is in effect for 2011 payroll only. Some important details to note:
• The Social Security payroll tax on individual wages will be lowered from 6.2 percent to 4.2 percent. An individual earning $60,000, for example, will save $1,200. If that individual is paid twice a month, it will mean an extra $50 in his or her paycheck starting in January. Employees do not have to repay this reduction when filing Form 1040 for the 2011 calendar year. (These changes will mean an adjustment to payroll withholding beginning January 1, 2011.)
• The employer’s share of Social Security tax is not affected; it stays at 6.2 percent.
• While self-employed workers, including ministers, pay both the employer and employee portion of the Social Security tax, they also get the tax break on the employee portion. Their self-employment taxes will be cut from 12.4 percent to 10.4 percent. The Self-Employment Contributions Act (SECA) tax deduction on Line 27 of Form 1040 – the equivalent of the employer portion of Social Security tax – will not be affected by this change and will remain at 7.65 percent
for 2011.
• Many churches assist their minister by providing voluntary federal tax withheld from their pay. If this voluntary withholding is used to cover SECA tax on a minister’s personal tax return, the minister may wish to reduce the amount of federal tax withheld. We recommend that ministers consult their tax advisor on this.
• Some churches assist their pastors with Social Security taxes by paying them additional salary in the amount the employer would otherwise pay for FICA. Churches that do this would generally not reduce the amount of the subsidy, because the employer is paying the same amount as in other years.
• There is no phase-out (gradual reduction) of the payroll tax break for higher-income workers. It
goes to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 in earnings in 2011, the benefit for high earners tops out at $2,136 ($4,272 for ministers and other self-employed individuals).
• In addition, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35 percent. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. This is generally considered positive for charities, since an estate tax encourages giving through estate planning.
Additional extensions
Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years. It also extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
The exclusion of employer-provided educational assistance from an employee’s gross income (up to $5,250 annually) under Code Sec. 127 has been extended through 2012. The exclusion for graduate-level courses has been extended through 2012 as well.
At the same time, many tax benefits have been extended through the end of 2011. This includes the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes, and the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers.
With so many new members in Congress, 2011 may be dynamic with tax law changes. Unpopular provisions, such as additional Form 1099 reporting and elements of health care reform, remain, while the growing federal debt and long-term Social Security funding issues have not been addressed. It’s an important time to be alert for tax issues that may affect your church.
Todd Ensign CPA is a tax attorney and John Butler is tax counsel for Capin Crouse LLP, Greenwood, IN. www.capincrouse.com
