Clergy Parsonage - NOT subject to federal (line 1h)

[runpastorrun]

I am using TurboTax for the first time. Ever since I became a minister, I have had my taxes prepared by a professional CPA because of the complicated issues around clergy tax. I thought I could handle this with the software, but I am not navigating well for the parsonage. 

The professionals all used a "clergy worksheet" to gather all the elements (W-2 salary, Fair Rental Value of parsonage provided by church, Utilities). This then showed both the Taxable Ministerial Income and the Tax-Free Ministerial Income. The combined amount less Total unreimbursed emp bus exp produced a Net Self-Employment Income. This number was then put in SE line 2. 
There does not seem to be a way to figure SE line 2 as anything other than what was listed in the W2. The interview took the Fair Rental Value and placed it in 1040 line 1h... which is subject to Federal. 

What am I missing? Did I choose the wrong TurboTax Edition? Thank you for the help!

[DavidD66]

You may have missed the check-box to indicate "Religious employment".  After entering the amounts on your Form W-2, there is a screen that says "Lets check for uncommon situations".  Scroll down and check the box next to "Religious employment".  The next screen says "Let's dig in to your religious employment", you should indicate "Clergy".  On the next screen you will enter your housing allowance and expenses.   Continue through the program to enter the rest of the clergy related information.  

[Opus 17 · Accepted solution]

First:

I assume you have a correct clergy W-2 with your income in box 1, federal withholding is optional in box 2, and boxes 3-6 should be blank.  When entering your W-2, check the box for "religious wages."  You will be asked for the parsonage value or your housing allowance, and your qualified expenses.  If you live in a parsonage, both numbers will be the same, and should be the total of the fair rental value of the parsonage plus any utilities paid by the church.  This will put your wages only on line 1a, but your total wages and parsonage will be put on schedule SE subject to self-employment tax.  You will also be asked how SE tax should be calculated, the correct answer is "on both."

Then as to unreimbursed expenses:

They are not deductible from income subject to income tax as that itemized deduction was removed for 2018-2015.  You can still use them as an adjustment to your self-employment income on schedule SE.  However, there are two important caveats.

1. You must adjust your expenses according to the Deason rule.  For example, if your wages are $30,000 and your parsonage value is $20,000, then 60% of your compensation is subject to income tax.  That means that only 60% of your unreimbursed expenses are allowed as an adjustment to SE income.  You must do the calculation yourself and keep all your records in case of audit.

2. To make the adjustment, you must add your expenses to line 5c of the Schedule SE Adjustment Worksheet (Sch SE Adj Wks). This is only accessible using Forms mode in the Turbotax desktop program installed on your own Mac or PC from a CD or download.  The adjustment can't be made using Turbotax Online because the Online program does not allow direct entry on the forms.   If you are using Turbotax online now, you can buy and install the download and then transfer your data from from online to your computer so you don't have to start from scratch. 

[runpastorrun]

Thank you, David. I did check the box. As it digs in, you get to a section (Part V Clergy, Church Employees, Members...) where you can enter your designated housing or parsonage allowance. I have elected to take $5000 from the salary offered to me and designate it as housing exclusion. I also am offered a parsonage with a fair rental value of $30,000. The first question (7a) does not mention anything about including the fair market value of the parsonage. I originally left it as $5000. The second question (7b) says "Enter the smallest of (a) your designated housing or parsonage allowance, (b) amount spent on qualifying housing expenses, or (c) fair rental value. The "smallest" number would have been my housing exclusion of $5000. If I put that, the fair market value of the parsonage is never included in line 2 of SE. 

I'm writing all of this in hopes that it can help someone in the future. Once I put $35,000 in both 7a and 7b, the right amount was included in line 2 of Sched SE.

[Opus 17]

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@runpastorrun wrote:

Thank you, David. I did check the box. As it digs in, you get to a section (Part V Clergy, Church Employees, Members...) where you can enter your designated housing or parsonage allowance. I have elected to take $5000 from the salary offered to me and designate it as housing exclusion. I also am offered a parsonage with a fair rental value of $30,000. The first question (7a) does not mention anything about including the fair market value of the parsonage. I originally left it as $5000. The second question (7b) says "Enter the smallest of (a) your designated housing or parsonage allowance, (b) amount spent on qualifying housing expenses, or (c) fair rental value. The "smallest" number would have been my housing exclusion of $5000. If I put that, the fair market value of the parsonage is never included in line 2 of SE. 

I'm writing all of this in hopes that it can help someone in the future. Once I put $35,000 in both 7a and 7b, the right amount was included in line 2 of Sched SE.

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You can't do that.  

A housing allowance must be designated in advance and in writing by your church, through the finance committee, board of elders, or however your compensation is determined.  You can't self-designate and it can't be retroactive.  If you have a free parsonage and you want additional funds designated as housing allowance, you can ask your church to do that starting from today (or whenever it can be approved and put in writing) but it can't be retroactive and can't be self-designated.  And as part of the designation, the church would reduce your box 1 wages by $5000.

Note that your W-2 box 1 wages must not include the value of your parsonage or utilities.  If it does, you are being over-taxed and you need a corrected W-2.

If your parsonage and utilities is $30,000, that is what you enter as qualified expenses.  If you enter $35,000, then you are paying MORE tax, because you are paying self-employment tax on an extra $5000 you did not receive, while at the same time you are not actually reducing your box 1 taxable income.  (In the future, if you do get a designation of part of your cash compensation as a housing allowance, you would enter the total of parsonage, utilities and other expenses.)

[runpastorrun]

Poor wording on my part. 

The $5000 was designated in advance and in writing. It shows up on my W2 in box 14 labeled Housing. 

Thanks for confirming

[Opus 17]

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@runpastorrun wrote:

Poor wording on my part. 

The $5000 was designated in advance and in writing. It shows up on my W2 in box 14 labeled Housing. 

Thanks for confirming

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OK, good.  In that case when you are asked about the amount of your parsonage or housing allowance, you enter the total of the FRV parsonage plus utilities plus designated HA.  For your actual expenses, enter the total of the FRV parsonage, utilities, and your other qualified expenses ($5000 or less).  

(Essentially when you have a parsonage, your "expenses" are equal to the costs.)

[runpastorrun]

Thanks for the reminder about the % for expenses and the helpful tip on where it goes in the TT software.