When are individuals of the same sex lawfully married for federal tax purposes?

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage. Tax year 2015 has several changes for same sex couples filing taxes.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act

 

When are individuals of the same sex lawfully married for federal tax purposes?

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

 

In 2015, When are individuals of the same sex lawfully married for federal tax purposes?

For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

 

Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?

es. For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013 (the effective date of Rev. Rul. 2013-17), generally must file using a married filing separately or jointly filing status. For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later.

 

Getting Married and Filing Taxes FAQ

Below are some common questions about getting married and filing taxes. This information is meant to address common questions that people might have the first time that they file taxes after getting married. There are many misconceptions about getting married and filing taxes that the information below hopes to improve knowledge upon.

 

What is the Marriage Penalty?

In what case does it save you money being married? Only when one person make the vast majority of the income?

If one person makes the vast majority of the income, then the combined income (close to majority earner’s income) will move slower through the tax brackets when filing as married than filing separately (the tax brackets when filing as married are about twice as much). It’s only a penalty in certain scenarios – specifically, if you and your spouse have roughly the same income. If you have very different incomes (most commonly, if you work but your spouse is stay-at-home), it is actually a bonus, because the married tax brackets are spaced further apart.Basically, the tax code penalizes marriages between equal income earners and rewards the more traditional breadwinner/homemaker family structure. It’s up toyou whether you think that’s a good thing or a bad thing.

 

If in a couple only one person earn then what the case would be ?

In a one income family, the family could move slower or avoid the upper tax brackets by filing jointly. This would give them a significant tax savings.

 

Married Filing Jointly

So if you’re married, why file separately instead of jointly if the final cost you’re going to pay as a couple is the same? Does this situation where the end cost is the same separately or jointly only apply when you and your significant other are making approximately the same amount?

Married filing separately is beneficial when it comes to Itemized deductions. Certain deductions like Health care expenses have limit you have to meet before you can start claiming it. I believe it is 7%. So if one of the couple had a rough year with medical costs, they might not have met 7% of the combined income; but when viewed against their own income this becomes a significant adjustment. In this situation you would then pile on other deductions (mortgage interest, charitablecontributions, etc) and maximize the deductions on one set of income.

 

Marriage Tax Penalty

What should I do if I don’t want my taxes being taken out right away? What should I write on W-4 form? Or let’s say person made less than $8000, and the taxes have been taken out anyway, what this person should do to avoid this?

The law requires you to have taxes withheld according to prescribed formulas. You should fill out the W-4 accurately, according to the instructions that come with it. The W-4 includes directions for determining whether you are “exempt”, in which case you write the word “exempt” on the right line.

http://www.irs.gov/pub/irs-pdf/fw4.pdf

 

Why is there a marriage penalty in the first place?

The U.S. tax system is progressive, meaning that people with higher incomes pay a higher tax rate than people with lower incomes. Generally speaking, only couples with similar, high incomes will have to pay more taxes if they file jointly versus filing as individuals. For middle class and lower income couples, they tend to benefit from filing jointly. But in the case of couple B the total tax paid is lower than if the person who made $180,000 and the person who made $20,000 filed separately, even though together, their combined income is the same as couple A, who earn $100,000 each. My take on this is that it attempts to discourage concentration of wealth in couples who already have high incomes, and instead encourages the wealth to be more evenly distributed in society.

Taxes Withheld Vs. Actual Tax Burden on Return

The US Internal Revenue Service mandates that money from your paycheck be withheld throughout the year in preparation for paying your taxes by April 15 of the following year. This withholding is based mostly on two things:

  • The size of your paycheck.
  • The number of allowances you claim on your W-4.

 

Taxes Withheld Vs. Actual Tax Burden on Return

There are very simple instructions included on the W-4, but the definition of an “allowance” is often confusing. Each W-4 allowance you claim on your W-4 exempts an additional $3,950 from tax withholding. You should always adjust your w4 each year based on your expected withholding. Things like student credits are a year-to-year thing, and if you’re like me you could wind up with more taxes withheld than necessary because you didn’t account for these one-off events and went with “whatever the worksheet says.”

 

Underwithholding Tax Penalty on Paycheck

Note that there is an underwithholding penalty the IRS imposes for underwithholding too much throughout the year, but claiming additional allowances past what the W-4 instructions indicate for the purposes of reducing your withholding to come closer to your actual tax burden is a legitimate reason. The worksheet is just a rough guide. You can also put in your salary information into the IRS’ Withholding Calculator to see how your withholding lines up with your expected tax burden.

 

Taxes withheld are not necessarily taxes owed.

Taxes withheld are not necessarily taxes owed. You’ll find out how much tax you owe when you put all your information into the form 1040 + supplemental forms when you file your taxes. If your withholding is larger than your tax burden, you get a “refund.” Unless you like giving the government an interest-free loan throughout the year (“forced savings,” which is attractive to some people), it is in your interest you to adjust your withholdings via the W-4 so your withholding is as close to your expected tax burden as possible. This gives you the maximum amount of money to put to work for you throughout the year.

 

Paycheck Withholding and Bonuses

One thing that confuses a lot of people is when they get an outsized paycheck, whether due to a bonus or a payroll screwup in a previous pay period. The IRS doesn’t know that it’s a one-time thing, so withholding is usually calculated according to the tables you can find in IRS Publication 15. If this happens to you, you can submit a new W-4 any time you want to in order to adjust your withholding downward temporarily. Some employers withhold tax from bonuses based on a flat rate – check with your employer if this applies to you.

US income tax is highly confusing, but this is a basic explanation of tax withholding as it applies to most people we see here in PF asking about it.

Selecting the Right Marital Status on Tax Return

It is important that you use the correct filing status to file your tax return. Your filing status and marital status may affect the tax amount you owe for the year. You can also help determine if you really need to file tax return or not. Please note that your marital status on December 31, is their status throughout the tax year.

 

Selecting the Right Marital Status on Tax Return

IRS e-file is the easiest and accurate way to file your return. The tax preparation software you use to file your return electronically helps you choose the correct filing status. Remember, most people can use free software tax preparation and e-file through the IRS Free File. The free service is available only through the website at IRS.gov. Click ” Free-File “on the main page of IRS.gov.

 

Here is a list of the five tax filing statuses:

  1. Single. This category usually applies if you are not married or is divorced or legally separated according to state law.
  2. Married filing jointly. If you are married, you and your spouse can file a joint return. If your spouse died in 2014, usually you may still declare together that year.
  3. Married Filing Separately.  A married couple may elect to file two tax returns separately. This filing status may benefit you if it results in less tax. It’s a good idea to prepare your taxes both ways before deciding which tax status to use. You can also use if you want to be responsible only for their own taxes .
  4. Head of Household. In most cases, this filing status applies if you are not married, but there are some special rules. Also should have paid more than half the cost of maintaining a home for you and other qualified person. Do not select this tax filing status by mistake. Be sure to review all rules before submitting your tax return.
  5. Widow (er) with Dependent Child Qualified. This filing status may apply to you if your spouse died in 2012 or 2013 and you have a dependent child. Some other conditions also apply to select this filing status.

 

Information to Same-Sex Couples

Note for married same-sex couples. In most cases, you and your spouse must use a civil status that applies to married couples to file your federal tax return if you are legally married in a state or foreign country that recognizes marriages same sex. This applies even if we now live in a state that does not recognize same-sex marriages. Visit IRS.gov for more information

Visit IRS.gov and click ‘ Filing ‘ for help with your federal tax return. Use the tool Interactive Tax Assistant  to help you select the correct filing status. For more information on this topic, see Publication 501 Exemptions, Standard Deduction, and Filing Information Statement. Visit IRS.gov/forms to view, download or print the tax products you need.

Additional Resources from the IRS:

 

Eligibility for Head-of-household Tax Filing Status

There are many different tax filing status.

Eligibility for Head-of-household Tax Filing Status

Each tax filing status has its own benefits and requirements for qualifying. For example, you can file your taxes single, married, married filing separately, or head of household. Head of Household tax filing status is one the better ways to file if you can qualify for this tax filing status. It has many benefits that may help parents who live with their children or other dependents.

 

Qualifying for Head-of-Household Tax Filing Status

To qualify as head of household, you must maintain as your home a household which for more than half the year is the principal home of:

  1. A “qualifying child,” i.e., someone who (a) lives in your home for over half the year, (b) is your child, stepchild, adopted child, or foster child, or your sibling or stepsibling (or a descendant of any of these), (c) is under 19 years old (or a student under 24), and (d) does not provide over half of his or her own support for the year. (If a child’s parents are divorced, the child will qualify if he meets these tests for the custodial parent even if that parent released his or her right to a dependency exemption for the child to the noncustodial parent.) A person will not be a “qualifying child” if he is married and cannot be claimed by you as a dependent because he filed jointly or is not a U.S. citizen or resident. Special “tie-breaking” rules apply if the individual can be a qualifying child of (and is claimed as such by) more than one taxpayer.
  2. Any other relative of yours whom you can claim as your dependent (unless you only qualify due to the multiple support rules). See below for a special rule for your parents.

 

What is maintaining a household?

You are considered to “maintain a household” if you live in the household for the tax year and pay over half the cost of running it. In measuring the cost, include house-related expenses incurred for the mutual benefit of household members, including property taxes, mortgage interest, rent, utilities, insurance on the property, repairs and upkeep, and food consumed in the home.  Do not include items such as medical care, clothing, education, life insurance, or transportation.

 

Claiming Parent as Dependent

Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify under this rule, you must be able to claim the parent as your dependent.

 

What marital status do you need?

You must be unmarried to claim head-of-household status. If you are unmarried because you are widowed, you can use the married filing jointly rates as a “surviving spouse” for two years after the year of your spouse’s death if your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household. The joint rates are more favorable than the head-of-household rates. If you are married, you must file either as married filing jointly or separately, not as head of household. However, if you have lived apart from your spouse for the last six months of the year and your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain” the household, you are treated as unmarried. If this is the case, you can qualify as head of household.

Filing 1040X for an Amended Return

Form 1040X is the amended return.

Assuming the original (but incomplete) return was processed, and the Service has not made any changes to what you filed (you would have received a notice if we did.) You were self employed in 2013, and the Form 1099-MISC is the record of your payment.

Do not include a copy of your original return with your amended return.

 

Filing 1040X for an Amended Return

Be sure your input your current address, and check the appropriate tax year and filing status boxes.

Page 1, Column A is where you input the figures on the original return (see my assumption statement above).

Page 1, Column C is the finished product after your corrections.

Page 1, Column B is where you show the math. Negative figures are in (parentheses). You should see changes to AGI on Line 1, Taxable Income and Tax on Lines 5 and 6. Your self employment tax will be on Line 9.

Schedule C (http://www.irs.gov/uac/Schedule-C-(Form-1040),-Profit-or-Loss-From-Business) is where you report your income and expenses from the business, and determine your profit or loss. This schedule is attached to Form 1040X.

Schedule SE (http://www.irs.gov/uac/Schedule-SE-(Form-1040),-Self-Employment-Tax) is where you compute your Self Employment tax liability (Line 9 on the 1040X), and is also attached to your Form 1040X.

Page 2, Part III is your written explanation of the changes. Keep this simple: “Adding Schedule C and Schedule SE”. This assumes no other supporting forms or schedules are changing. You must sign and date the return.

 

Mailing Form 1040X to IRS

After you mail the return, please allow 12 weeks for process. If the return indicates a balance due, pay the amount due when you file. When the claim is processed, the Service will send a notice that explains the change. If the return shows a refund, you will receive a paper check. Four weeks after you mail the return(s), you can track the progress here: (http://www.irs.gov/Filing/Individuals/Amended-Returns-(Form-1040-X)/Wheres-My-Amended-Return-1)

 

Contacting IRS about Amended Return

If you do not receive a notice after 12 weeks, call customer service at 1-800-829-8374 M – F 7am – 7pm, and let the representative know you are checking on your Form 1040X and you have already checked the automated system. You may have to amend your state income tax return as well.

Child Adoption Qualifying child of more than one person

Draft Form 1040 instructions. Page 16 has a chart for qualifying a person as a dependent, and the rules run through page 19, including this:

 

Qualifying child of more than one person.

Even if a child meets the conditions to be the qualifying child of more than one person, only one person can claim the child as a qualifying child for all of the following tax benefits, unless the special rule for Children of divorced or separated parents, described earlier, applies.

  1. Dependency exemption (line 6c).
  2. Child tax credits (lines 52 and 67).
  3. Head of household filing status (line 4).
  4. Credit for child and dependent care expenses (line 49).
  5. Exclusion for dependent care benefits (Form 2441, Part III).
  6. Earned income credit (lines 66a and 66b).

 

Child Adoption Qualifying child of more than one person

No other person can take any of the six tax benefits just listed unless he or she has a different qualifying child. If you and any other person can claim the child as a qualifying child, the following rules apply.

If only one of the persons is the child’s parent, the child is treated as the qualifying child of the parent.

Receiving an IRS Letter or IRS Notice

What happens when you receive an IRS Letter or an IRS Notice? Does this mean that the taxpayer is under a full tax audit? Each year, the IRS sends millions of letters and notices to taxpayers for several reasons.

Here are ten things to know if one of these IRS letters or IRS Notices appear in your mailbox.

  1. Do not be alarmed. A simple reply will most likely resolve the matter
  2. There are many reasons why the IRS can send a letter or notice. Usually, it is a specific issue in your federal taxes or your tax account. A notice may inform you about changes to your account or request additional information. It could also tell you who has to make a payment on taxes owed. It does not automatically mean an audit.
  3. Each notice contains detailed instructions on what to do and who to contact
  4. You may receive a notice that the IRS has made a correction to your tax return. If so, review the information and compare it with your original tax return.
  5. If you agree with the information in the notice, generally you do not have to respond to the letter unless stated otherwise or need to submit a payment.
  6. If you disagree with the notice, it is important to respond. You should write a letter explaining the reasons for the opposition. Include all information and documents that you want the IRS to consider. Send your answer by post along with the portion of the notice. Send it to the address shown in the upper left corner of the notice. Allow at least 30 days for reply. Someone in the IRS will review the information.
  7. In most cases, you do not need to call or visit an IRS office. If you have questions, call the number on the top right corner of the notice. Make sure you have copies of your tax return and notice when you call. This will help the IRS to answering your questions.
  8. Keep copies of any notices you receive along with your other tax documents.
  9. The IRS letters and notices sent by mail. The IRS will never communicate by email or social media to ask for personal and / or financial.

For more information on what to do if you receive an IRS Letter or IRS Notice, visit IRS.gov.

Click the ‘link Responding to a Notice  at the bottom left of the homepage.

Form 941 Employer’s Quarterly Federal Tax Return

What forms do employers file?

Generally, you must file Form 941, Employer’s Quarterly Federal Tax Return (QUARTERLY Federal Tax Return, employer) or Form 944 ANNUAL Federal Tax Return Employer’s ) to report all wages that you have paid and tips your employees have reported to you, as well as payroll taxes (withholding of federal income tax, withholding taxes on Social Security and Medicare , and the part that applies to you in taxes on Social Security and Medicare ). Employers who withhold income taxes, social security tax, or Medicare tax from employee’s paychecks or who must pay the employer’s portion of social security or Medicare tax, use Form 941 to report those taxes.

 

Who may use Form 944?

Only small employers who have been notified by the IRS may use Form 944 and submit the form. To report wages and taxes for agricultural employees, you must file Form 943, Employer’s Annual Tax Return for Agricultural Employees (Annual Federal Tax Return for Agricultural Employees employer).

 

When do you File Form 941?

In each quarter are required to file a Form 941 separately. The first quarter is January through March. The second, from April to June. The third quarter from July to September. The fourth, from October to December. The Form 941 must be filed, usually the last day of the month following the end of the quarter. For example, the wages paid during the first quarter, January to March, is reported on Form 941 and is required to be submitted by 30 April.

If the date on which the statement is a Saturday, Sunday, or legal holiday, you may file the return on the next business day. The term “legal holiday” means any public holiday in the District of Columbia. For a list of public holidays, see Publication 15 , (Circular E), Employer’s Tax Guide (Chapter 11) ((Circular E), Tax Guide for Employers (Chapter 11)), or visit IRS. gov and enter the words ” legal holidays ” in the search window.

 

How to File Form 944?

Some employers with small payrolls, employers including government agencies may submit the Form 944 annual, rather than file Form 941 each quarter. Generally, you must file Form 944  by January 31st of the following year. The purpose of Form 944 is to reduce the burden on small employers, allowing them to file a return for the year and in most cases pay payroll taxes with the return. Form 944 is designed for employers with an annual tax liability of payroll taxes of $ 1,000 or less.

Employers may be eligible to file Form 944 because their estimated payroll tax annual tax liability is $ 1,000 or less, and they want to submit this form must contact the IRS to request to file Form 944.  Employers cannot file a Form 944 unless the IRS notifies them to do so.

 

Form 941 Employer’s Quarterly Federal Tax Return

Every time you prepare a Form 941 for the quarter, you must report the number of employees you have, the total wages you paid and the amount of taxes you withheld to arrive at the amount you must send to the IRS. Before starting the return, you need your payroll records plus documentation for any taxable tips your employees report to you.

 

Employers Required to File Form 941

Those employers who are required to file Form 944 who prefer to file Forms 941 must notify the IRS to request to file Forms 941 quarterly. For more information, see Revenue Procedure 2009-51 (Revenue Procedure 2009-51).

Employers that must file Form 944 and whose businesses grow during the year and whose tax liability payroll tax exceed $ 1,000, just have to file Form 944 for the year. Employers who exceed this limit may not file Form 941 to the IRS notifies them that the requirements to file have been changed to Form 941. Generally, employers are required to deposit their payroll taxes instead of paying taxes when the Form 941 or Form 944 is filed. If you deposited all taxes on time, you have 10 days after the deadline to file your return.

In some cases, amounts reported as Social Security taxes and Medicare must be adjusted to arrive at the correct amount of tax liability that applies to you. For example, the total taxes to Social Security and Medicare on the Form 941 or Form 944 can vary by a small amount of the total shown on your payroll records, because fractions of pennies that has gained or lost to rounding ever did calculate payroll for each employee individually.

You can add or subtract the difference in the adjustment path to fractions of cents. You can also use a line adjustments to state taxes and Social Security Medicare could not raise the tips of their employees, or pay compensation for illness, but for which a third party has withheld taxes to Social Security and Medicare , for example, an insurance company.

 

How to Amend Form 941 and Form 944?

If you want to correct an error on a Form 941 or Form 944 has been above, use the Form 941-X , Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund (Set to the federal return QUARTERLY Federal Tax Employer or claim for refund)  or Form 944-X , Adjusted Employer’s ANNUAL Federal Tax Return or Claim for Refund Employer respectively.

If you file Form 941 and is semiweekly depositor, report your tax liability on Schedule B (Form 941) , Report of Tax Liability for semiweekly Schedule Depositors (Declaration of the tax liability of a semiweekly schedule depositors). If you file Form 944 and are a semiweekly depositor, report your tax liability on Form 945-A, Annual Record of Federal Tax Liability (Annual Register of the federal tax liability). This shows the IRS when an employer paid his employees and the tax liability for that pay. The IRS uses this information to determine if you deposited your payroll taxes on time.

In Part 2 of Form 941 or Part 2 of Form 944, monthly depositors must indicate the combined amount of Social Security taxes, Medicare and federal income tax withheld owed ​​each month. The bi-weekly depositors must indicate on Schedule B of Form 941 or Form 945-A, the combined amount of Social Security taxes, Medicare and withheld federal income tax owed ​​each day.

 

Amending Form 941

You incur the tax liability on the payroll when the wages are paid to employees, not when the payroll period ends. For example, if your payroll period ending 24 September, but does not pay its employees until 1 October, the salaries of these would be declared in the fourth quarter, when you really paid the employees their wages and took the tax liability, not in the third quarter, when the payroll period ended.

 

What are the Penalties Related to Form 941 and Form 944?

It is very important that you complete Part 2 of Form 941, Part 2 of Form 944, Schedule B of Form 941 or Form 945-A properly, or might appear to not deposit their taxes on time. There is a penalty for late deposit between 2% and 15%, depending on the length of time it took to make the deposit.

Usually, unless you qualify to pay taxes with your return, you must have deposited their taxes and should not have balance payable on Forms 941 and 944. If you pay taxes with your tax return and they should have been deposited, you could apply a fine. See the Tax Topic 757 and Publication 15 containing the rules for deposits and payment of taxes with your return. Be sure to sign and date the Form 941 or Form 944 before mailing.

See Publication 15 , ( Circular E ), Employer’s Tax Guide ((Circular E) tax for the employer’s Guide) for more information about requirements for filing Form 941 and Form 944.

Calculating Clergy Income

Members of the clergy are taxed differently than most taxpayers. An authorized clergyman, appointed or ordained is usually employed in accordance with the customary law of the church, denomination, sect, or organization employs to provide this ministry services. However, there are exceptions, such as itinerant evangelists, who are independent contractors (who are self-employed) at common law. If you are a cleric who has ministerial services, all your earnings, including wages, offerings and fees you receive for marriages, baptisms, funerals are subject to income tax, regardless of whether you earn the amount as an employee or as a person who is self-employed. However, the fact whether receiving income as an employee or as a person who is self-employed affect how expenses related to those gains are treated as described below.

 

Calculating Clergy Income

For purposes of the social security tax and Medicare , regardless of their status under the common law, the services performed in the exercise of his ministry are considered earnings from self-employment and are generally subject to tax self-employment. See Publication 517 , Social Security and Other Information for Members of the Clergy and Religious Workers (Social Security and Other Information for Members of the clergy and religious workers). This guide explains basis rules of self employment

You will be considered as an employee or self-employed depends on all the facts and circumstances. Generally, you are an employee if the church or organization it serves has the legal right to control what you do and how you do it, even if you have considerable discretion and freedom of action.

 

Factors in Calculating Clergy Income

If you are a salaried employee of a congregation, usually, you are an employee of the congregation in accordance with law and a salary is considered wages for purposes of income tax. However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services are generally earnings from self-employment for purposes of income tax. Both the salary you receive from the congregation and the fees it receives from members of the congregation are subject to tax on self-employment.

 

Itemizing Deductions as Clergy Member

If you itemize deductions, you may deduct certain unreimbursed business expenses related to their service as an employee on Schedule A (Form 1040) , Itemized Deductions(itemized deductions). You may need to fill out Form 2106 , Employee Business Expenses (Employee Business Expenses),  and attach it to Form 1040 , U.S. Individual Income Tax Return (Declaration of personal income taxes in the United States).

For self-employment income (offerings or fees received for marriages, baptisms, funerals, etc.). Clergy must use the Schedule C (Form 1040) , Profit or Loss From Business (gain or loss of business), or Schedule C-EZ (Form 1040) , Net Profit from Business (Net income for the business), to report these gains and expenses.

It is possible that an authorized cleric named or ordered may exclude from income the fair rental value of a home (a parsonage) or a housing allowance provided as compensation for ministerial services as an employee.

A cleric who is given the parsonage may exclude from income the fair rental value of the parsonage, including the cost of utilities. However, the amount excluded can not exceed the reasonable compensation for the services of the clergy.

The cleric who receives housing allowance may exclude from gross income to the extent used to pay housing maintenance costs. Usually, these expenses include rent, mortgage interest, utilities, repairs and other expenses directly related to the maintenance of housing. The amount excluded can not exceed the reasonable compensation for the services of the clergy.

 

Special Tax Deductions for Clergy

If you own your home, you may still claim deductions for mortgage interest and real estate taxes. If the housing allowance exceeds the lesser of fair compensation, the fair rental value of the home, or your actual expenses, you must include such excess as income.

The organization employing the cleric has to officially designate the housing allowance subsidy and pay it before the cleric.

The fair rental value of a parsonage or housing allowance is excludable only for purposes of income tax. The amount must be included for purposes of the tax self-employment.

For purposes of the social security and Medicare, an ordained clergyman, authorized or appointed to provide ministerial services is considered self-employed. This means that your wages on Form W-2, net income on Schedule C or C-EZ, and housing allowance, unless your employee business expenses are subject to tax on self-employment in the Schedule SE (Form 1040) , Self-Employment Tax (Tax on self-employment).

 

IRS Form 4361

However, you may request an exemption from self-employment for their ministerial earnings, if you object to true public insurance for religious or conscience reasons. You can not apply for exemption for economic reasons. To apply for exemption, submitted to IRS on Form 4361 , Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners (Application for exemption from tax of self-employment for use by clergy members of religious orders and Christian Science practitioners).

You must submit this form no later than the due date for filing your income tax return (including extensions) for the second tax year in which you have net earnings from self-employment of at least $ 400. This rule applies if any part of the net earnings of each of those two years are from the performance of ministerial services. The two years do not have to be consecutive.

For more information, see Publication 517 , Social Security and Other Information for Members of the Clergy and Religious Workers (Social Security and Other Information for Members of the clergy and religious workers).