Rev. John Michaels is the minister of the First United Church. He is married and has one child. The child is considered a qualifying child for the child tax credit. Mrs. Michaels is not employed outside the home. Rev. Michaels is a common-law employee of the church, and he has not applied for an exemption from SE tax.
The church paid Rev. Michaels a salary of $31,000. In addition, as a self-employed person, he earned $4,000 during the year for weddings, baptisms, and honoraria. He made estimated tax payments during the year totaling $8,400. He taught a course at the local community college, for which he was paid $3,400.
Rev. Michaels owns a home next to the church. He makes a $650 per month mortgage payment of principal and interest only. He paid $1,800 in real estate taxes for the year on the home. The church paid him $800 per month as his parsonage allowance (excluding utilities). The home's fair rental value for the year (excluding utilities) is $9,840. The utility bills for the year totaled $960. The church paid him $100 per month designated as an allowance for utility costs.
The parts of Rev. and Mrs. Michaels' income tax return are explained in the order they are completed. They are illustrated in the order that Rev. Michaels will assemble the return to send it to the IRS.
The church completed its Form W-2 for Rev. Michaels as follows.
The church entered Rev. Michaels' $31,000 salary.
The church left this box blank because Rev. Michaels did not request federal income tax withholding.
Rev. Michaels is considered a self-employed person for purposes of social security and Medicare tax withholding, so the church left these boxes blank.
The church entered Rev. Michaels' total parsonage and utilities allowance for the year and identified them.
The community college gave Rev. Michaels a Form W-2 that showed the following.
The college entered Rev. Michaels' $3,400 salary.
The college withheld $272 in federal income tax on Rev. Michaels' behalf.
As an employee of the college, Rev. Michaels is subject to social security and Medicare withholding on his full salary from the college.
The college withheld $210.80 in social security taxes.
The college withheld $49.30 in Medicare taxes.
Some of Rev. Michaels' entries on Schedule C-EZ are explained here.
Rev. Michaels reports the $4,000 from weddings, baptisms, and honoraria.
Rev. Michaels reports his expenses related to the line 1 amount. He paid $87 for marriage and family booklets and drove his car 445 miles for business, mainly in connection with honoraria. Rev. Michaels used the standard mileage rate to figure his car expense, as follows.
| 445 miles × 48.5 cents = $216 |
| | |
These expenses total $303 ($216 + $87). However, he cannot deduct the part of his expenses allocable to his tax-free parsonage allowance.
First, Rev. Michaels uses Worksheet 1 (see page 20) to figure what percentage of his business expenses are not deductible. Then he completes Worksheet 2 (see page 21) to show that 23% (or $70) of his business expenses are not deductible because they are allocable to his tax-free allowance. He subtracts the $70 from the $303, enters the $232 difference on line 2, and adds a note at the bottom of the page to see the attached statement.
Rev. Michaels attaches Worksheets 1 and 2 to his return. This is part of his required statement, Attachment 1 (see pages 20 and 21).
He enters his net profit of $3,768 on both line 3 and Form 1040, line 12.
Rev. Michaels fills out these lines to report information about his car.
Rev. Michaels fills out Form 2106-EZ to report the unreimbursed business expenses he had as a common-law employee of First United Church.
Before completing line 1, Rev. Michaels fills out Part II because he used his car for church business. His records show that he drove 2,521 business miles, which he reports in Part II. Then, he figures his car expense for his line 1 entry.
| 2,521 miles × 48.5 cents = $1,223 |
He enters $231 for his professional publications and booklets.
Before entering the total expenses on line 6, Rev. Michaels must reduce them by the amount allocable to his tax-free parsonage allowance. After completing Worksheet 3 (see page 21), he finds that $334 (23%) of his employee business expenses are not deductible. He subtracts $334 from $1,454 and enters the result, $1,120, on line 6, adding a note at the bottom of the page about the attached statement. He also enters $1,120 on Schedule A (Form 1040), line 21.
Rev. Michaels fills out Schedule A as explained here.
Rev. Michaels deducts $1,800 in real estate taxes.
He deducts $5,572 of home mortgage interest.
Rev. and Mrs. Michaels contributed $4,800 in cash during the year to various qualifying charities. Each individual contribution was less than $250 and they have the required records for all donations.
Rev. Michaels enters his unreimbursed employee business expenses from Form 2106-EZ, line 6.
He can deduct only the part of his employee business expenses that exceeds 2% of his adjusted gross income. He fills out these lines to figure the amount he can deduct.
The total of all the Michaels' itemized deductions is $12,586, which they enter here and on Form 1040, line 40.
After Rev. Michaels prepares Schedule C-EZ and Form 2106-EZ, he fills out Schedule SE (Form 1040). He reads the chart on page 1 of the schedule and determines that he can use Section A—Short Schedule SE to figure his self-employment tax. Rev. Michaels is a minister, so his salary from the church is not considered church employee income. Thus, he does not have to use Section B—Long Schedule SE. He fills out the following lines in Section A.
Rev. Michaels attaches a statement (see Attachment 2, Worksheet 4, on page 22) that explains how he figures the amount ($44,044) to enter.
He multiplies $44,044 by .9235 to get his net earnings from self-employment ($40,675).
The amount on line 4 is less than $97,500, so Rev. Michaels multiplies the amount on line 4 ($40,675) by .153 to get his self-employment tax of $6,223. He enters that amount here and on Form 1040, line 58.
Rev. Michaels multiplies the amount on line 5 by 50% (.5) to get his deduction for one-half of self-employment tax of $3,112. He enters that amount here and on Form 1040, line 27.
After Rev. Michaels prepares Form 2106-EZ and the other schedules, he fills out Form 1040. He files a joint return with his wife. First, he fills out the address area and completes the appropriate lines for his filing status and exemptions. Then, he fills out the rest of the form as follows:
Rev. Michaels reports $34,640. This amount is the total of his $31,000 church salary, $3,400 college salary, and $240, his excess allowance. The two salaries were reported to him in box 1 of the Forms W-2 he received.
He reports his net profit of $3,768 from Schedule C-EZ, line 3.
He enters $3,112, half his SE tax from Schedule SE, line 6.
He enters the total itemized deductions from Schedule A, line 28.
The Michaels can take the child tax credit for their daughter, Jennifer. Rev. Michaels figures the credit by completing the Child Tax Credit Worksheet (not shown) in the instructions for Form 1040. He enters $1000 credit on line 52.
He enters the self-employment tax from Schedule SE, line 5.
He enters the federal income tax withheld, as shown in box 2 of his Form W-2 from the college.
He enters the $8,400 estimated tax payments he made for the year.
He wants to have any overpayment of tax applied to his 2008 estimated tax.
Attachment 1 (Worksheets 1, 2, and 3) shows the computation of expenses that are nondeductible because they are allocable to tax-free ministerial income and the allowance deductions.
Attachment 2 (Worksheet 4) shows the computation of net self-employment income.
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Attachment 1—John E. Michaelsn011-00-2222 Worksheet 1.mFiguring the Percentage of Tax-Free Income Note. For each line, enter the appropriate amount in all boxes that are not shaded.
| |
Source of Income
| (a)
Taxable
| (b)
Tax-free
| (c)
Total
| | 10 | W-2 salary as a minister (from box 1 of Form W-2) | 10 | | 31,000m | | 31,000m | | 20 | Gross income from weddings, baptisms, writing, lecturing, etc. (from line 1 of Schedule C or C-EZ) | 20 | | 4,000m | | 4,000m | | Note. Complete either lines 3a–3e or lines 4a–4i. | | | | | | •nIf your church provides you with a parsonage, complete lines 3a–3e. | | | | | •nIf, instead of providing a parsonage, your church provides you with a rental or parsonage allowance, complete lines 4a–4i.
| | | | | 3a
| FRV* of parsonage provided by church | 3a | | | | | b
| Utility allowance, if any | 3b | | | | | c
| Actual expenses for utilities | 3c | | | | | | d | Enter the smaller of line 3b or 3c | 3d | | | | | e
| Excess utility allowance (subtract line 3d from line 3b) | 3e | | | | | 4a
| Parsonage or rental allowance | 4a | 9,600m | | | | | b | Utility allowance, if separate | 4b | 1,200m | | | | | c | Total allowance (add lines 4a and 4b) | 4c | 10,800m | | | | d
| Actual expenses for parsonage | 4d | 9,600m | | | | | e | Actual expenses for utilities | 4e | 960m | | | | | f | Total actual expenses for parsonage and utilities (add lines 4d and 4e) | 4f | 10,560m | | | | | g | FRV* of home, plus the cost of utilities | 4g | 10,800m | | | | h
| Enter the smaller of line 4c, 4f, or 4g | 4h | | | 10,560m | 10,560m | i
| Excess allowance (Subtract line 4h from line 4c) | 4i | | 240m | | 240m | 50
| Ministerial income (for columns (a), (b), and (c), add lines 1 through 4i) | 50 | | 35,240m | 10,560m | 45,800m |
60
| Percentage of tax-free income: | Total tax-free incomem$m10,56000
mmmTotal incomemm$m45,800 | = | 230%**0 | | *nFRV (Fair Rental Value): As determined objectively and between unrelated parties, what it would cost to rent a comparable home (including furnishings) in a similar location. | | ** This percentage of your ministerial expenses will not be deductible. Use Worksheets 2 and 3 to figure your allowable deductions. | |
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Attachment 1—John E. Michaelsn011-00-2222n (continued) Worksheet 2.mFiguring the Allowable Deduction for Schedule C or C-EZ Expenses 10
| Percentage of expenses that are nondeductible (from Worksheet 1, line 6): mm23mm% | 20
| Business use of car: mmm445mmm miles × 48.5¢ (.485) | 20 | | 216m | 30
| Meals and entertainment: $mmmm × 50% (.50) | 30 | | | 40
| Other expenses (list item and amount) | | | | | a
| mmMarriage and family booklets | 4a | 87m | | b
| | 4b | | | c
| | 4c | | | d
| | 4d | | | e
| | 4e | | | f
| Total other expenses (add lines 4a through 4e) | 4f | | 87m | 50
| Total Schedule C or C-EZ expenses (add lines 2, 3, and 4f) | 50 | | 303m | 60
| Nondeductible part of Schedule C or C-EZ expenses (multiply line 5 by the percent in
line 1) | 60 | | 70m | 70
| Deduction allowed.* Subtract line 6 from line 5. Enter the result here and on Schedule C, line 27, or Schedule C-EZ, line 2. | 70 | | 232m | | * None of the other deductions claimed in this return are allocable to tax-free income. | Worksheet 3.mFiguring the Allowable Deduction for Form 2106 or 2106-EZ Expenses 10
| Percentage of expenses that are nondeductible (from Worksheet 1, line 6): mm23mm% | 20
| Use of car for church business:mm2,521mm miles × 48.5¢ (.485) | 20 | | 1,223m | 30
| Meals and entertainment: $____________ × 50% (.50) | 30 | | | 40
| Other expenses (list item and amount) | | | | | a
| mmProfessional publications and booklets | 4a | 231m | | b
| | 4b | | | c
| | 4c | | | d
| | 4d | | | e
| | 4e | | | f
| Total other expenses (add lines 4a through 4e) | 4f | | 231m | 50
| Total Form 2106 or 2106-EZ expenses (add lines 2, 3, and 4f) | 50 | | 1,454m | 60
| Reimbursement not included in box 1 of Form W-2 | 60 | | | 70
| Total unreimbursed Form 2106 or 2106-EZ expenses (subtract line 6 from line 5) | 70 | | 1,454m | 80
| Nondeductible part of Form 2106 or 2106-EZ expenses (multiply line 7 by the percent in line 1) | 80 | | 334m | 90
| Ministerial employee business expense deduction allowed.* Subtract line 8 from line 7. Enter the result here and on Form 2106, line 10, or Form 2106-EZ, line 6. | 90 | | 1,120m | | * None of the other deductions claimed in this return are allocable to tax-free income. | |
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Attachment 2—John E. Michaelsn011-00-2222 Worksheet 4.mFiguring Net Self-Employment Income for Schedule SE (Form 1040) 10
| W-2 salary as a minister (from box 1 of Form W-2) | 10 | | 31,000m | 20
| Net profit from Schedule C, line 31, or Schedule C-EZ, line 3 | 20 | | 3,768m | 3a
| Parsonage allowance (from Worksheet 1, line 3a or 4a) | 3a | 9,600m | | b
| Utility allowance (from Worksheet 1, line 3b or 4b) | 3b | 1,200m | | c
| Total allowance (add lines 3a and 3b) | 3c | | 10,800m | 40
| Add lines 1, 2, and 3c | 40 | | 45,568m | 50
| Schedule C or C-EZ expenses allocable to tax-free income (from Worksheet 2, line 6) | 50 | 70m | | 60
| Unreimbursed ministerial employee business expenses (from Worksheet 3,
line 7) | 60 | 1,454m | | 70
| Total business expenses not deducted in lines 1 and 2 above (add lines 5
and 6) | 70 | | 1,524m | 80
| Net self-employment income. Subtract line 7 from line 4. Enter here and on Schedule SE, Section A, line 2, or Section B, line 2. | 80 | | 44,044m | |
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