The 2017 legislation passed as the Tax Cuts and Jobs Act (TC&JA) has several implications for tax year 2018. The 1,097-page document amends tax rates and modifies credits and deductions for individuals and businesses. Some of the changes are relevant to pastors as well as churches.
The law lowered 2018 tax brackets for all taxpayers. There are still seven brackets depending on income, but at lower rates and thresholds. The new brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%, which means a 2to 4 percentage point reduction for the majority of income brackets. If an individual reports taxable income of $59,100(median salary for ministers serving congregations),with no deductions or credits, the amount of federal tax due falls by about 15 percent compared to what it would have been under 2017 rules.
The law gives with one hand, yet takes back with the other.
Moving expenses paid by the employer are no longer exempt from tax and must be reported as part of employeecompensation. For ministers, this means that not only are moving expenses taxable, but they will owe SECA taxes on the entire amount.
For many, itemized deductions may disappear altogether. The standard deduction for individuals has doubled this year for each category ($24,000 for married filing jointly, $18,000 for head of household, and $12,000 for all other individuals).
Given the substantial increase in the standard deduction, the TC&JA is expected to reduce the percentageof peoplewho itemize deductions on Schedule A (Form 1040),from 30 percent to as few as 5 percent of all taxpayers. This significantly decreases the number of taxpayers who can claim a deduction for contributions made to churches and other charities, even though the allowable charitable deduction was raised from 50 percent of annual gross income (AGI)to 60 percent of AGI for 2018 and beyond.
Some taxpayers may find that doubling their gifts but contributing every other year may enable them to reach a threshold for itemization. Such strategies could makeannual church budgeting difficult.
Other important deductions include the medical expense deduction (a minimum threshold of 7.5 percent of AGI) and the deduction for state and local taxes (the itemized deduction is capped at $10,000 for single and married filing jointlyand $5,000 for married filing separately). TC&JA eliminated the deduction for home equity debtas well as personal exemptions.
Another significant change is the elimination of the Affordable Care Act (ACA) tax penalty beginning in 2019. The ACA requires individuals to be covered by a health plan that provides at least minimum levels of essential coverage,and the penalty is still in effect for 2018.
The new law has changed the range and types of credits that individuals can claim. While prior law provided a scaling credit of $1,000 to $2,000 for each qualifying child under 17, the new law temporarily increases the child credit to $2,000 per qualifying child. The TC&JA doubled the child tax credit through 2025 to partially offset the loss of personal exemptions. In addition to this credit, there is a $500credit for each adultdependent, including children who are 17 and above andstill supported by the household’s income as well as elderly parents. (Thecredit cannot be claimed for a spouse.)To receive this credit, a tax payer must provide over 50 percent of support for the dependent.
In relation to children’s educational expenses, it is recommended that parents (and grandparents) take advantage of a college savings plan operated by a state or educational institution. Earnings are not subject to federal tax and generally not subject to state tax when used for qualified education expenses, including tuition, fees, books, room and board.
For 2018, thesecollege savings 529 plans were expanded to includeK-12tuition,up to $10,000 per year per student; some home-school costs are considered qualified education expenses. There may be gift-tax consequences if your contributions, plus any other gift to the beneficiary, exceed $15,000 during the year. Tax treatment of these distributions might vary at the state level, so individuals should consult a tax adviser.
Another provision that has caused uproar in the church world is the requirement to calculate the cost of providing transportation benefits to employees— includingthe value of parking spaces. The church must figure out the value, then pay tax on it. Beyond the hassle, churches are upset about having to file Form990-T. At least for 2018, the IRS has issued a temporary rulethat says if the value is less than $1,000, then the church is exempt from this tax. The Board of Pensions is working with other denominations to get this unnecessary entanglement of church and state repealed.
The Board of Pensions’ tax resources are available at http://www.pensions.org/your-path-to-wholeness/lifelong-learning-through-board-university/education-resource-center/tax-resources.The 2018 tax preparation guide will be available beginning January 15, 2019.
By Frank Spencer and the Board of Pensions of the Presbyterian Church (U.S.A.)
Note: Consult your personal accountant or financial adviser before making decisions that will affect the status of your filing.