3 Tax Deductions That Save Ministers Big Time

By Raul Rivera

I want you to take a moment to contemplate the seriousness of properly saving receipts and strategizing next year's taxes starting today.  I analyzed the tax returns this year of several ministers.  I compared the tax returns of ministers who were in the same income brackets and had the same number of dependents, and what I found was astonishing.

Separated by thousands of dollars in taxes

The current tax code was written to favor ministers.  However, the law only favors ministers if they know those laws.  Unfortunately, for many ministers, their tax accountants do not know those laws either. Let me give you an example.  Two ministers each made $53,000.00 last year.  Married with three kids, they each had very different results on their tax returns.  Below is the difference.

1. Minister X, salary $53,000.00 with 3 kids - Had to pay $5,919.00

2. Minister Y, salary $53,000.00 with 3 kids - Got a refund of $8,294.00

What a dramatic difference.  These two ministers had similar sized churches with similar circumstances.  The difference was that one minister had good consulting, which allowed him to better steward his finances for tax purposes. Below are three things you can focus on today to get ready for the end of the year.

1. Deduct business miles from your home:  To make the miles deductible, the compensation contract must require the pastor to maintain a home business as his/her principal place of business. This office must meet the requirements of section 280A(c)(1)(A). As a pastor defined in section 3401(a)(9), you are also considered self employed, which means that you can declare your home office to be your principal office. Your church office, if you have one, is actually considered your secondary office. Therefore, 100% of all your miles from your home office to your church office are deductible. Furthermore, 100% of the miles from your home to the hospital, a prison, or a member's home that are for the purpose of doing the work of the ministry are deductible. In Curphey v. Commissioner, 73 T.C. 766, the tax court ruled that daily transportation expenses incurred in going between an office in a taxpayer's residence and other work locations were deductible where the home office was the taxpayer's principal place of business within the meaning of § 280A(c)(1)(A) for the trade or business conducted by the taxpayer at those other work locations (See Revenue Ruling 94-24, Revenue Ruling 99-7).

2. Maximize the housing allowance: Maximizing the housing allowance takes some planning and careful documentation upfront.  Thereafter, it becomes quite simple to manage each year.  The key to maximizing the housing allowance is to set it up as a designation of salary and not as part of compensation.  Because of the IRS' "least of these" rules, when a minister receives a housing allowance payment instead of a designation, he/she is guaranteed to leave money on the table each year when it comes to taxes.  You may be thinking that what I am saying makes no sense.  It may take a little bit of time soaking in this concept to fully get it.  Trust me, once you learn it, you will be blown away at how much you will save each year.

3. Get self-employment tax exemption: This is a big one.  Over the last year, 100% of every CPA I spoke with did not know the law concerning this deduction.  I do not know why there exists a massive lack of knowledge in this area.  However, to the surprise of many ministers, one can apply to be exempt from paying the self-employment tax without losing his/her social security benefits.  This could mean a tax savings of $8,000.00 or more.

Each year pastors all across America work hard and are underpaid. Statistics show that the average pastor is severely underpaid...more than in any other profession.  Still, too many pay much more in taxes than they ought.  I believe that one of the reasons why this happens is because many ministers today started their churches not knowing if they would ever receive a salary.  This led them to believe that they did not need to make any plans for minimizing taxes.  Now years later, they find themselves trying to figure out how to get it right, only to realize that the longer one waits the harder it is to make changes.