Article Highlights:

Required Minimum Distributions (RMD)
Excess Accumulation Penalty
Military Spouse Retirement Plan Participation
Clean Vehicle Credit
Credit For Previously Owned Clean Vehicles
Early Distribution Penalty Exceptions
Credit For Energy Efficient Home Modifications
Home Solar Energy Credit
Credit For Small Employer Pension Plan Startup Costs
Nanny Retirement Contributions
Qualified Charitable Distributions

Two recently passed pieces of tax legislation have brought about several tax changes for 2023 that may affect you. The legislation includes the Inflation Reduction Act and the Secure 2.0 Act. Here is a condensed summary of those changes. Check over the list and see if any of the new rules apply to you.

Required Minimum Distributions (RMD) – For 2023 the age at which individuals must begin taking distributions from their traditional IRAs and retirement plans is 73, up from 72 in 2022.
Excess Accumulation Penalty – This is the penalty for failing to take an RMD. In the past, this penalty was a draconian 50% of the amount that should have been withdrawn for the year but wasn’t. Beginning in 2023 the penalty has been reduced to 25%, and if a corrective distribution is timely made the penalty drops to 10%.
Military Spouse Retirement Plan Participation – In the past, because of frequent military moves, a military spouse often failed to qualify to contribute to an employer’s retirement plan. Beginning in 2023, a military spouse can participate in their employer’s plan starting 2 months after their employment begins and and will be immediately 100% vested in all employer contributions.In return, the employer receives a tax credit equal to $200 per military spouse, and 100% of all employer contributions (up to $300) made to the plan on behalf of the military spouse. The result is a maximum tax credit of $500 for the employer. This credit applies for 3 years with respect to each military spouse.
Clean Vehicle Credit – Although the credit can still be as much $7,500, this credit has significantly changed. For 2023, to qualify for the credit, among other requirements, the vehicle’s final assembly must be in North America. In addition, the manufacturer’s suggested retail price (MSRP) cannot be more than $80,000 for a pickup, van, or SUV and not more than $55,000 for other vehicles. To qualify, a purchaser’s adjusted gross income (AGI) must be $300,000 or less for married taxpayers filing jointly, $225,000 for head of household filers, and $150,000 for others.
Credit For Previously Owned Clean Vehicles – This credit has not been available in prior years. A previouslyowned clean vehicle (in other words, a used vehicle) is a formerly owned vehicle that is a model year at least two years earlier than the calendar year in which the taxpayer acquires it. Also it cannot be a vehicle for which a previous credit has been allowed, and it must be acquired from a dealer for a purchase price of $25,000 or less. The available credit is the lesser of $4,000 or 30% of the vehicle’s price.To qualify, a purchaser’s income is limited – their AGI must be no more than $150,000 for married taxpayers filing jointly, $112,500 for heads of household and $75,000 for others.
Early Distribution Penalty Exceptions – Current law imposes a 10% additional tax on early (generally before age 59½) distributions from tax-preferred retirement accounts such as traditional IRAs and 401(k) plans, unless an exception provided in the law applies. Several new exceptions to the penalty begin in 2023.
o   In case of a distribution to a terminally ill individual.o   For public safety officers at least age 50 or with at least 25 years of service with the employer sponsoring the plan, whichever comes first.o   For corrections officersor forensic security employees providing for the care, custody, and control of forensic patientswho are employees of state and local governments.o   In the case of a federally declared disaster.

§ The permanent rules allow up to $22,000 to be distributed from employer retirement plans or IRAs for affected individuals.§ Such distributions are not subject to the early distribution 10% additional tax and are considered as gross income over 3 years.§ Distributions can be repaid to a tax preferred retirement account.§ Additionally, amounts distributed prior to the disaster to purchase a home can be recontributed.

o   For corrective IRA distributions including the excessive contribution and any earnings allocable to that contribution.o   The exception already applies for births and adoptions. Starting in 2023, recontributions of the distributed amounts are permitted within 3 years.o   For private sector firefighters, extends the age 50 rule (is age 55 for others).o   For domestic abuse survivors for distributions of the lesser of $20,000 or 50% of the retirement account balance.*

* Distributions may be repaid at any time during the 3-year period beginning on the day after the date on which such distribution was received.*

Credit For Energy Efficient Home Modifications – This provision provides a non-refundable tax credit for certain energy-saving improvements to a taxpayer’s home. The has been modified through 2032.The previous lifetime credit limit of $500 has been replaced with anannual maximum creditof $1,200, and the credit percentage increased from 10% to 30%. Although not a complete list, the following are annual credit limits that apply to various energy-efficient improvements:
o   $600 for credits with respect to residential energy property expenditures, windows, and skylights.o   $250 for any exterior door ($500 total for all exterior doors).o   $300 forresidential qualified energy property expenses.o   Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.o   $150 for a home energy audit.o   The new law addsair sealing insulation as a creditable expense.
Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.
Home Solar Energy Credit – Beginning in 2023 the credit returns to 30% and is extended through 2034, though the credit rate drops to 26% and 22%, respectively, for years 2032 and 2034. The change includes a credit for battery storage technology of at least 3 KW hours.
Credit for Small Employer Retirement Plan Start-up Costs – Under prior law, small businesses (100 or fewer employees) qualify for a nonrefundable credit for administrative and retirement education expenses when adopting a new qualified defined benefit or defined contribution plan.Beginning in 2023 a new category was added (50 employees or fewer) and the credit percentage was increased from 50% to 100% and applies for 4 years with the credit percentage reduced to 75%, 50%, and 25% in those succeeding years. The maximum credit per year per employee is $1,000.
Nanny Retirement Contributions – Beginning in 2023, employers of domestic employees (e.g., nannies) are allowed to provide retirement benefits for them under a Simplified Employee Pension (“SEP”) plan.
Qualified Charitable Distributions – Under existing law a taxpayer is allowed to makea Qualified Charitable Distribution (QCD) of up to a total of $100,000 each year that is transferred from their traditional IRA to qualified charities of their choice. The QCD offsets their RMD, up to the amount of the RMD.Beginning in 2023, taxpayers will be allowed to make a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

If you would like details related to any of these provisions, please give this office a call.

Disaster Area Extensions:Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:
FEMA: https://www.fema.gov/disaster/declarationsIRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situationsFor example, disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments.April 18 – Household Employer Return DueIf you paid cash wages of $2,400 or more in 2022 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040 or 1040-SR), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2021 or 2022 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.
April 18 – C-CorporationsFile a 2022 calendar year income tax return (Form 1120) and pay any tax due. If you need an automatic 6 -month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.
April 18- Social Security, Medicare and Withheld Income TaxIf the monthly deposit rule applies, deposit the tax for payments in March.
April 18 – Non-Payroll WithholdingIf the monthly deposit rule applies, deposit the tax for payments in March.
April 18 – C-CorporationsThe first installment of 2023 estimated tax of a calendar year corporation is due.
April 18 – Fiduciary ReturnsLast day to file a 2022calendar year fiduciary return (Form 1041, U.S. Income Tax Return of Estates and Trusts) or file an extension.
Weekends & Holidays:If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.

Disaster Area Extensions:Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:
FEMA: https://www.fema.gov/disaster/declarationsIRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situationsFor example, disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments.April 10 – Report Tips to Employer If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
April 18 – Taxpayers with Foreign Financial Interests A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114. The form must be filed electronically; paper forms are not allowed. The form must be filed with the Treasury Department (not the IRS) no later than April 18, 2023, for 2022. An extension of time to file of up to 6 months is automatically allowed. This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2022. Contact our office for additional information and assistance filing the form.
April 18 – Individual Tax Returns Due Although April 15 is on a Saturday in 2022, and individual income tax returns would normally be due that day, because the Washington, D.C. Emancipation Day holiday is observed on Monday April 17, the due date is pushed to Tuesday, April 18.
File a 2022 income tax return (Form 1040 or 1040-SR) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.Caution: The extension gives you until October 16, 2023, to file your 2022 1040 or 1040-SR return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 18 due date.
April 18 – Last Day to Establish a Keogh Account for 2022If you are self-employed, April 18, 2023, is the last day to establish a Keogh Retirement Account if you plan to contribute for 2022. However, the last day can be extended until October 16, 2023, with a valid six-month extension of time to file your individual 2022 tax return. April 18 – Household Employer Return Due If you paid cash wages of $2,400 or more in 2022 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040 or 1040-SR), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2021 or 2022 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.
April 15 – Estimated Tax Payment Due (Individuals)It’s time to make your first quarter estimated tax installment payment for the 2023 tax year. Our tax system is a ‘pay-as-you-earn’ system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the ‘pay-as-you-earn’ requirement. These include:

Payroll withholding for employees;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis. Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the ‘de minimis amount’), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception. However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty. This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible. CAUTION: Some state de minimis amounts, safe harbor estimate rules, and the dates estimate payments are due are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.
April 18 – Last Day to Make ContributionsLast day to make contributions to Traditional and Roth IRAs for tax year 2022.
Weekends & Holidays:If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.

In 2022 alone, there were approximately 15.4 million layoffs in the United States as per one recent study. About 6.9 million of them happened in the last half of the year, from August to December. It’s also worth noting that this is certainly nothing new. It has been estimated that about 40% of people have been laid off (or fired) from a job at least once in their lifetime, and about half the country experiences full-blown layoff anxiety on a regular basis.
Whether you are laid off or fired, the chances are high that you will quickly find yourself on unemployment. While this can absolutely provide some much-needed financial relief at an important part of your life, there are some things about potential tax implications that you’ll definitely want to be aware of moving forward.

Losing Your Job and Taxes: Breaking Things Down
Whenever people find themselves on unemployment, one of the first things they often ask themselves is whether that money is taxable. To put it simply, it likely is.
When you fill out your income taxes the following year, the IRS will require you to report any unemployment income that you received. You will do this with Form 1099-G. The vast majority of all states do tax this type of unemployment income, so it’s likely that you’ll have to pay something on it. The only exception to that is those states that don’t have any income taxes at all or those that have laws on the book that make unemployment benefits separate from regular income as far as tax purposes are concerned.
When it comes to actually paying any money owed from your unemployment benefits, one of the easiest ways to do it actually involves a choice that you’ll make when you sign up in the first place. At that time, you’ll be able to request that the government take 10% out of each check for the express purpose of being used to pay your taxes. If you don’t want to do that, you can also make estimated payments on a quarterly basis – similar to what you would do if you were self-employed.
Note that if you choose to go that second route, you will make estimated payments four times – on April 15, on June 15, on September 15, and on January 15.Note that if the 15thfalls on a Saturday, Sunday, or Holiday the due date moves to the next business day.

Additional Considerations About Unemployment Benefits and Income Taxes
Another critical thing to remember when it comes to unemployment benefits and your taxes is that signing up at all could impact your ability to get certain other tax credits that you might be depending on. The primary example of this is the Earned Income Tax Credit, otherwise known as the EITC.
Many people don’t realize that unemployment benefits are not actually considered to be earned income. Because of this, depending on how much money you received in unemployment, it could reduce your EITC amount – or prevent you from getting it at all.
The EITC is worth up to a maximum of $6,935, for example. Your credit amount may be reduced to the point where you don’t get it at all. The same is true of the Child Tax Credit or CTC, which is worth $2,000 per child for your 2022 taxes.
Finally, it’s important to understand that if you’re on unemployment due to the sudden loss of a job, it’s entirely possible that you took advantage of other government benefits throughout the year as well. Maybe you needed housing or childcare subsidies, for example, or you’re on SNAP benefits. If you’re worried that they’re taxable like unemployment benefits, don’t be – this typically is not the case.
Having said that, filing your income taxes can certainly be a complicated scenario in the best of years, but it is especially so once you start to enter things like unemployment benefits into the equation. This is why, if you have any questions, it’s always important to consult the help of trained financial professionals. They can eliminate all the guessing and confusion from the equation, allowing you access to every last dollar that you’re entitled to with as few potential issues as possible.

If you’d like to find out more information about unemployment benefits and the potential tax implications they bring with them, or if you have any additional questions you’d like to discuss with someone in a bit more detail, please don’t hesitate to contact us today.

Article Highlights:

If You Can’t Pay
Automatic Extension in Federally Declared Disaster Areas
Family Loans
Home Equity Loans and HELOCs
Credit Card
Short-term Payment Plan
IRS Installment Agreement
Retirement Funds
Filing Extensions
Enforced Collections
Offer-in-Compromise

About 3 out of 4 American taxpayers receive a refund each year when they file their income tax returns, but there are those who for one reason or another end up owing. Of those who owe Uncle Sam many don’t have the means to pay what they owe by the return due date (usually in April).
NOTE: If you live in a federally declared disaster area the due date may have been automatically extended. The extension will apply if you reside in the disaster area, and you need not be directly affected by the disaster to qualify. Check the IRS website at Tax Disaster Relief Situations for areas that have disaster filing relief extensions. For example, taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments. Thus if you owe federal income tax, you have until Oct. 16, 2023, to pay your tax liability. Call this office to confirm you qualify and for information related to state disaster relief due date postponements.
Generally, tax due occurs when a wage earner has under-withheld on his or her payroll or a self-employed individual failed to make adequate estimated tax payments during the year. This can be a huge problem for those who are unable to pay their liability.
It is generally in your best interest to make other arrangements to obtain the funds for paying your 2022 taxes rather than be subjected to the government’s penalties and interest for payments made after April 18, 2023. Here are a few options to consider.

Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Home Equity Loans and HELOCs – Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time, so if you anticipate that you’ll need funds from such a loan to pay your taxes that are due in April, you should get the application process started right away.
Rob a Bank – If you don’t get caught you don’t have to pay back any loan. Just kidding.
Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee (the fee charged by the credit card company), you will have to pay the fees due and pay the higher credit card interest rates.
Short-Term Payment Plan – If you can fully pay the tax owed within 180 days and owe less than $100,000 including tax, penalties, and interest, you can apply for a short-term payment plan online at the IRS web site. You won’t be charged a set-up fee but will still have to pay penalties and interest until the balance owed is fully paid.Set-up fees will be charged if you apply for a payment plan by phone, mail, or in person instead of online.
IRS Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate. There is a user fee to set up the payment plan.However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments.In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement lifestyle and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

Filing Extensions – Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not anddoes not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.
Enforced Collections – If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:

Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt).
Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay.

Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS)) may be subject to a levy through the Federal Payment Levy Program (FPLP).
Fresh Start Initiative – The IRS also has what is called the ‘Fresh Start’ initiative to offer more flexible terms in its existing Offer-in-Compromise program which, under certain circumstances allows taxpayers to settle their tax debt for reduced amounts. This enables financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken four or five years, taxpayers may now be able to resolve their problems in as little as two years.
If you have questions about the payment options or an offer-in-compromise, please call this office for assistance. Don’t just ignore your tax liability because that is the worst thing you can do.

Article Highlights:

Employee Compensation
Self-Employment Compensation
Parsonage Allowance
Primary Residence
Fair-Market-Value Limitation
Designation by the Employing Organization
Business Expenses and Excluded Income
Retirement
Vows of Poverty
Self-Employment Tax Exemption

Members of the clergy are taxed on not just their salary but on other fees and contributions that they receive in exchange for performing services such as marriages, baptisms, funerals, and masses. As a result, clerics will generally report their income in two ways:
As Employees – As employees, clerics receive from the church W-2 forms that show the amount of their income that is subject to tax, any amount paid as a nontaxable housing allowance (discussed later), and any withholding.
As Self-Employed Individuals – Income received by a cleric other than as an employee of a church is reported as self-employment income. Typically, this would include fees received for services provided for baptisms, weddings, funerals, and other religious ceremonies that are not included in the W-2 from the church. This income and any expenses associated with it are reported on Schedule C and are subject to the self-employment tax.
Members of the clergy may qualify for two unique tax benefits: a tax-free parsonage allowance and an exemption from the self-employment tax on their ministerial earnings. Here are the details for both.
Parsonage/Rental Allowance Exclusion from Income – A member of the clergy can qualify to have a rental allowance excluded from taxable income if that allowance is provided as remuneration for services that are ordinarily the duties of a minister of the gospel. The following are the qualifications and details of the exclusion allowance:

The allowance is excludable only to the extent that it is used for expenses related to the minister’s housing (e.g., rent, mortgage payments, utilities, and repairs).
The rental allowance is not excludable to the extent that it exceeds reasonable compensation for the minister’s services.
The allowance only applies to the minister’s primary residence.
The allowance cannot exceed a home’s fair rental value, including furnishings and appurtenances such as garages, plus the cost of utilities.
In advance of the payment, the employing organization must designate the allowance by an official action. If a minister is employed by a local congregation, the designation must come from the local church instead of from the church’s national organization.
The portion of the minister’s business expenses that is attributable to tax-free income is not deductible. This rule does not apply to home-mortgage interest or to taxes that are deductible in full if the minister itemizes deductions.
Retired clerics can exclude a home’s rental value or a rental allowance if it is furnished as compensation for past services and authorized under a convention of a national church organization. However, this exclusion does not extend to the widow or widower of a retired cleric.

Although it is not subject to income tax, a parsonage allowance is subject to the self-employment tax unless the minister is exempt (as discussed below).
Minister’s Exemption from Self-Employment Tax – A minister who hasn’t taken a vow of poverty is subject to self-employment tax on income from services performed as a minister. Non-reimbursed business expenses are deductible when computing which earnings are subject to the self-employment tax, even though the expenses for income tax purposes are not deductible by employees due to suspension of the deduction for miscellaneous itemized deductions in years 2018 through 2025.
An ordained minister may be granted an exemption from the self-employment tax for ministerial services only. To qualify, the church employing the minister must qualify as a religious organization under Code Section 501(c)(3). The application for an exemption is filed with Form 4361 (Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners).
To claim an exemption from the self-employment tax, the minister must meet all of the following conditions and file Form 4361 to request exemption from the self-employment tax. The minister must:

Be conscientiously opposed to public insurance because of his or her individual religious considerations or because of the principles of his or her religious denomination (not because of general conscience).
File for noneconomic reasons.
If a minister or a member of a religious order (other than a vow-of-poverty member), inform the church’s or order’s ordaining, commissioning, or licensing body that he or she is opposed to public insurance. This requirement doesn’t apply to Christian Science practitioners or readers.
Establish that the organization that ordained, commissioned, or licensed him or her (or his or her religious order) is a tax-exempt religious organization.
Establish that the organization is a church (or a convention or association of churches).
Not have previously filed Form 2031 (Revocation of Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners) to elect for Social Security coverage.

Form 4361 must be filed on or before the return’s extended due date for the second tax year in which the individual has net self-employment earnings of $400 or more (part of which is from services as a minister). A late application will be rejected.
The time for application starts over when a minister who previously was not opposed to accepting public insurance (i.e., Social Security benefits) enters a new ministry (e.g., joins a new church and adopts beliefs that include opposition to public insurance). However, the IRS has said that there is no second chance to apply for exemption if a minister is ordained in a different church but does not change his or her beliefs regarding public insurance (i.e., the minister opposed the acceptance of public insurance in both faiths).
Careful consideration should be made before applying for an exemption from the self-employment tax, as once the decision is made, the election is irrevocable.
If you have questions related to any of these issues or how they may apply to your situation, please give this office a call.