Minister Deducting unreimbursed expenses - how enter expenses, following IRS Pub 517 minister adjustments

IRS Pub 517 indicates that my expenses related to my income as the full time minister of a single congregation must be deducted on 1040 Schedule A.  Pub 517 also has worksheets to adjust those expenses when a minister is provided with a parsonage.  However, I have not yet found anywhere in TurboTax where it makes those adjustments.  How do I handle it in TurboTax?  Thanks!  Peace ...
  • I received (automated?) feedback from TurboTax on 5 possible previous answers.  None of those respond to my question or the situation most ministers encounter.

    For other ministers, here is what I believe is the way to handle it.  I am not a tax professional, so please check it out yourself.  Also, if you discover an approriate and more advantageous way to handle things, please post to this question.

    If you work for a congregation, your congregational income is self-employed income only for purposes of the self-employment tax (the alternative to FICA).  Only your independent income (funerals, weddings, etc.) is truly Schedule C income.  Likewise, only your expenses associated with that independent income are Schedule C expenses.

    After research it seems that the IRS would classify most ministers employed by a congregation as an employee for income taxes (income is W-2 income, and expenses can only be claimed on Sched A as unreimbursed job expenses that are subject to the 2% of AGI exclusion and a special exclusion for ministers that receive a housing allowance or parsonage).  I think that the IRS misses the point in how ministers of churches often have to cover their own expenses as a self-employed person, and doing that can be a hardship since being a pastor is often not a very high income profession.  But arguing the point with the IRS is like shouting at the wind.  It doesn't change anything except when the Lord does it.  :-)

    The challenge for ministers is that those Sched A expenses also require special handling when a minister receives a housing allowance or is provided a parsonage.  TurboTax handles most of the implications of that allowance or parsonage fine - including it in the self-employment tax and excluding it from taxable income.  But IRS Pub 517 stipulates that there are special worksheets for ministers claiming unreimbursed employee expenses.

    That is the part that TurboTax does not seem to handle at all.  For example, if the housing allowance or fair rental value of a parsonage is say 20% of our total congregational *and* independent compensation combined, then 20% of our minister's expenses must be excluded before entering an amount on Form 2106.  That gets further reduced when transferred to Schedule A because all expenses in that section of Schedule A get totaled and reduced by 2% of our AGI.  The IRS or the tax code really doesn't treat this too fairly.  But it is what it is.

    Most tax professions do not do many clergy tax returns and may not know this.  Apparently, TurboTax also does not account for the pub 517 worksheets.  Unless someone on the TurboTax team or another minister has found a solution in the software that I missed, I suggest that ministers read Pub 517, and enter only the allowed amount from its worksheets as unreimbursed employee expenses in TurboTax.

    Although this may not be good news, I hope that it is helpful for others.

    Peace ...
  • I am not a tax professional, but have spent a few hours in research and the following appears fairly clear at this point

    To Ministers and Pastors:

    Our income from a congregation, denominational organization, or para-church organization is most likely W-2 income for income taxes (unless serving as an itinerate preacher or minister, or similar truly independent employment).  Our miscellaneous income (funerals, weddings, etc) is most likely self-employment income. Our expenses must be separated and properly assigned.  Expenses which relate to W-2 income is Form 2106 unreimbursed employee expense that transfers to Schedule A.  Expenses which relate to Sched C income is a Sched C expense.

    Note that IRS Pub 517 has 4 worksheets that must be completed and attached to your return.  This is definitely required if you receive a housing allowance, or utility allowance, or the use of a parsonage from the congregation, denominational organization, or para-church organization.  They may be required even if you do not receive any of those items.

    These types of income are not included in taxable income, but have two impacts the return: (a) they are part of the self-employment tax that we pay in lieu of social security, and (b) they result in an adjustment to expenses that offset our income.

    Apparently since the amount or value of these benefits are not subject to income tax, you must reduce any actual expenses you claim on Form 1040 Sched C and on Form 2106 or 2106-EZ.  It can get complicated and it may be easier to consult with a tax professional who is familiar with the Pub 517 requirements and the Pub 517 worksheets.

    If you want to try it using TurboTax, receive these benefits, and you also want to claim your expenses to offset income, then you will not be able to e-file with TurboTax because it requires worksheets and adjustments that TurboTax does not make.  If you still use TurboTax, you may want to note:

    If the worksheets relate to your tax situation, prepare the worksheets from Pub 517 separately from TurboTax before entering your data in TurboTax.  Then enter your data in TurboTax as it is manually recorded in the worksheets.  When you finish your return, go to the Forms view to override the total expenses on Form 1040 Sched C and/or on Form 2106 or 2106-EZ.  If you use TurboTax, you must go to the Forms view, right click on the total expense, elect "override" and enter the amount from the worksheets in Pub 517.  You also must make a hand-written notation on Form 1040 Sched C and on Form 2106 or 2106-EZ next to the overridden amount(s), and add a footnote at the bottom of those pages on those forms.  You must print your returns, add the worksheets according to Pub 517 and mail your return.

    ** To TurboTax personnel **
    If you think TurboTax accounts for Pub 517 requirements, please advise how it does.  My Sched C and Form 2106, completed with TurboTax do not reflect the required worksheet adjustments.  If, as I suspect, TurboTax missed this requirement, please update the software to
    (a) provide an interview that guides a minister, rabbi, or other religious leader through the definition of income that is considered employee and income that is considered Sched C.  Most small religious organizations have volunteer treasurers who are not familiar with the definitions and may be misclassifying the income as 1099-MISC, or not showing the tax-free amounts in box 14 of a W-2.
    (b) review Pub 517 and include interview questions to walk clergy through the four worksheets when tax-free income for housing or utilities is provided.  The software needs to include those worksheets as part of what is submitted when filing or e-filing.
    (c) be sure that Sched C and Form 2106 or 2106EZ take the data off those worksheets.
    (d) be sure that the proper footnotes are provided on the forms per Pub 517
    (e) examine how this impacts state income taxes as well, and make the necessary corrections.

    Best wishes to all.  Peace ...
  • Hi Pastor Ed,

    TurboTax certainly has some gaps in handling clergy income. You're right, that TurboTax doesn't handle the situation you describe above. I also agree that there should be more specialized interview for clergy in these areas. It would go a long way towards clearing up the confusion around these types of returns.

    For reference, you can see a list of some of the calculations we don't support here:

    This is a situation that hasn't gotten as much attention as we'd like because it's not very common, but can be fairly complex. It's an area that we hope to be able to improve in the future but it's late enough now that new features like this aren't likely to be added this season. I will definitely pass this on to our developers. The more they see the demand for this, the higher priority it will be in the future.

    I wish I had a better response. It's an area that we want to improve and I will make sure that your feedback gets to the developers.
TurboTaxTyson - thanks for the feedback and for forwaring the feedback to TurboTax development.  There are a lot of clergy I know who use TurboTax.  You may want to ask them to at least post a caution in the clergy interview questions about housing allowance.

Fellow Clergy - please see my posts from Jan 7 and Jan 10.  Looks like TurboTax has a bit of a gap.  You can still use it, but you'll have to (a) carefully review Pub 517, (b) complete the Pub 517 worksheets on your own and (c) override the amounts that are affected using the TurboTax forms view and the override feature.

Good luck to all.  Peace ...
    Pastor Ed, and others in this situation:

    You are also better off using the Desktop software instead of the online as you have immediate access to the forms themselves as you are entering data, whereas in the online you have only the interview mode.  Overriding entries is far easier in the desktop version.

    Lastly, just put in my word to be careful when dealing with the monies of discretionary funds that a church may make available to  you for charitable and ministerial purposes.  It is generally reported as a so-called "accountable plan."
    • Thanks for asking and researching this, Pastor Ed.  I had these same frustrations last year when completing my return and ended up doing it manually, even after I had gone through TurboTax.  I did not know there were manual override features and I will try that this year instead of manually editing all the forms.

      I understand that TurboTax doesn't support this, but they NEED to change the information here:

      According to the information listed, it does handle the situation, but that is WRONG and it still isn't taken care of in 2011.  It states the following, but then does not actually provide it:

      "Limitation on deductions for ministers receiving parsonage allowances
      The downside to receiving a tax-free rental or parsonage allowance is that the tax code denies a tax deduction for part of the expenses of operating your ministry. The nondeductible amount is the portion of your expenses that is allocated to your tax-free rental or parsonage allowance. But this rule does not limit your deductions for home mortgage interest or real estate taxes on your home.

      Example: Rev. John Schmidt received $50,000 in ministerial earnings consisting of a $28,000 salary for ministerial services, $2,000 for weddings and baptisms, and a $20,000 tax-free parsonage allowance. He incurred $4,000 of unreimbursed expenses connected with his ministerial earnings. $3,500 of the $4,000 is related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person.
      The nondeductible portion of expenses related to Rev. Schmidt's ministerial salary is $1,400, figured by dividing the $20,000 tax-free allowance by the $50,000 of total earnings and multiplying that fraction by $3,500.

      The nondeductible portion of expenses related to Rev. Schmidt's wedding and baptism income is $200, calculated by dividing the $20,000 tax-free allowance by the $50,000 of total earnings and multiplying that fraction by $500.

      If you are affected by this deduction cutback, you'll have to attach a detailed statement to your tax return. TurboTax will walk you through all of the steps necessary to do this."

      Turbotax, please update this information so ministers stop scouring your program looking for the method that is not provided!  Thanks!
    • Pastor TK - glad that my research was helpful.

      As a caution to all - make a note of what you override.  If other amounts are updated in your tax data you may have to post a new override as the amount will not automatically update.  Best to save the overrides for the last step before filing.
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