Clergy expenses

[bryanjh-]

I receive a w2 with no social sec withheld. I did not see a place to itemize my expenses

[DianeW]

Unreimbursed business expenses are treated just like they are for regular employees -- they are deductible if you itemize your deductions on schedule A and they are subject to the 2% exclusion rule.  They get entered on the deductions and credits interview, and you need TurboTax Deluxe or higher.  Your extra housing costs over the allowance are not considered unreimbursed business expenses and you can't deduct them, if your housing expenses are higher, ask the church to increase the allowance, they can decrease your cash wage equally.  Other costs like special clothing, travel, books you buy for sermon prep, etc, are unreimbursed business expenses.  Tithes that you give out of your income are charitable donations, they are also itemized deductions on schedule A and are entered in the deductions and credits section.  Whether you benefit from itemizing your deductions depends on the total itemized deductions compared to the standard deduction.

Separately, you can also deduct your unreimbursed business expenses from the income on your schedule SE so you can reduce your SE tax owed.  (Charity donations are NOT a deduction here, only your expenses directly related to your job as clergy.)  But, this doesn't go on a Schedule C. To deduct these expenses from schedule SE you need access to a special clergy worksheet that is only available through the Desktop installed copy of TurboTax (on your Mac or PC, from a download or CD copy) and can not be accessed from TurboTax online, as far as I can tell.  And it's a bit tricky, you have to know what to look for.  It may help to have a specialist in clergy taxes help out the first time.

[jup]

I am researching the clergy worksheet and this thread popped up. I am trying to find out if there is a way to efile and still include the required clergy worksheet that I must fill out (found in the back of Pub 517). Based upon this worksheet (and the instructions in Pub 517), I must also override expenses in Schedule C (since my housing allowance is nontaxable). I have always paper filed with the additional clergy worksheet and the required asterisk and note on Schedule C, but last year the IRS failed to key in my new dependent and I'm still waiting for it to be corrected. I'd like to avoid further mistakes and efile if possible. Is there a way to add worksheets to the efile? Thanks!

@DianeW 

[Opus 17]

@jup 

A lot of the previous answer is now out of date, because the 2019 date on the topic is the date it was imported into the new forum platform and not the date it was originally posted.

First, when entering a clergy W-2, there is a box to check for “religious Wages” on a page of special circumstances following the main W-2 screen. This will bring up a page to enter information about your housing allowance, and indicate how the housing allowance should be taxed. Most of the time, you are required to pay self-employment tax on both the housing allowance and your taxable income. The other choices in the program are there for special circumstances that I can explain if they are necessary to you. In general, you would check the box for “pay tax on both“ and then you will pay self-employment tax on your housing allowance and your taxable wages and you will only pay income tax on your taxable wages.

Second, W-2 employees can no longer deduct work related expenses on form 2106, because that deduction was eliminated in 2017 for tax years 2018 through 2025.

Third, clergy are still allowed to deduct work related expenses from their income subject to self-employment tax, even though they can’t deduct expenses from income subject to income tax. In TurboTax, this requires a manual entry on line 5c of the schedule C adjustment worksheet, which the program will carry over onto schedule C.  The worksheet is only directly accessible if you are using TurboTax installed on your own computer and you switch to Forms mode. The worksheet is not addressable through TurboTax online.

Fourth, there may be a way to enter clergy expenses directly in the interview, bypassing the need for a manual entry on the schedule C adjustment worksheet. I have seen this talked about but I have not tested it myself yet. If it is there, it is a recent change to the program.  I won’t be able to test it until tonight at the earliest, but if you keep your eyes open you may spot it.

Fifth, if you enter clergy expenses as an adjustment to your schedule C income, you must adjust your expenses according to the Deason rule and you are supposed to attach a written work sheet explaining your expenses and how you made the adjustment.  It sounds like you already understand this rule, but post a new comment if you want more explanation.  TurboTax does not allow for the attachment of a PDF in this situation. (TurboTax is very limited in the attachments that are allowed, due to IRS restrictions on the ability of consumer level software to add free form explanations, because they might cause problems in the IRS computer systems. Tax professionals have much more ability to add attachments.)

If you have Deason rule adjustments to make and you want to e-file, I suggest that you could e-file without providing the adjustments but keep them in your records for at least three years in case the IRS asks to see them. Or, you could pay extra to have your taxes filed with a professional who can include the attachments. Or, you could file by mail, but you have correctly indicated a very good reason to avoid that.

[jup]

@Opus 17 

Thanks again for your response! I posted on this thread, then realized it may not be seen so posted elsewhere, as well. But this info is helpful. I have always done a manual override in the form of Schedule C; I had not thought about adjusting just the Schedule C worksheet or the interview part. And I will consider efiling without the clergy worksheet...I was just astounded at them missing a dependent from my paper 1040 last year. I also realized that I could elect to not deduct business expenses on the Schedule C, thereby eliminating the need for the worksheet completely. I'll have to check what that changes, but I'm sure it's less than the $6200 I'm still owed from last year (because my CTC of course got messed up, too). 

Do you know, if I override the form or the worksheet or the interview, will it get rejected as an efile? I thought I read somewhere that it won't go through with an override. Thanks again!

[Opus 17]

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@jup wrote:

@Opus 17 

Do you know, if I override the form or the worksheet or the interview, will it get rejected as an efile? I thought I read somewhere that it won't go through with an override. Thanks again!

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What you need is not an override.  It is simply a manual entry in Forms mode using line 5c of the Schedule C adjustment worksheet.  Line 5a is your taxable wages, line 5b is your housing allowance, and line 5c is the adjustment for clergy expenses.  Making the entry to line 5c on the worksheet simply reduces your income subject to SE tax, you aren't breaking it down into mileage, supplies, and so on.  

(Those three lines are combined into one dollar amount which is your income subject to SE tax.  The IRS never actually sees the adjustment worksheet, and as a practical matter, the the IRS would never know if the reason you report (for example) $10,000 of SE wages is because you had $5000 taxable income and $5000 housing allowance, or $5000 taxable income, $6000 housing allowance, and $1000 of expenses.)

It's not an override because you are entering data in a place it is meant to be entered.  Direct entry may void the accuracy guarantee, but it does not prevent e-filing.  And it only "may" void the accuracy guarantee, because according to an Intuit VP who posted here a couple years ago, making direct entries can sometimes affect "dependencies" (calculations that are interrelated). But direct entries that don't affect dependencies should not void the accuracy guarantee.

An override is a forcible overriding of a calculated value with something different, and overrides do prevent e-filing.  Typing in a form is only an override if you have to use the "override" menu command, if the form or worksheet accepts your information it's not an override.

Turbotax has so many internal worksheets where interview questions are combined to create a single entry on a tax form, that often you can only change a number on a tax form by either overriding it, or making the change on the worksheet the number came from--which is always preferable.  In this case we know exactly where you need to make the data entry on the worksheet so you don't have to override the actual tax form. (Sorry that was a long explanation.) 

[jup]

@Opus 17 

Perfect - thank you! I will stop using the override feature and manipulate it the other ways :).