I’ve posted on this subject before. This is just a supplement to U.S. Income and Employment Taxes for Missionaries which gives much of the background for the tax rules and a broader overview. However, some questions have come up regarding deducting housing and travel expenses, and I thought I share my conclusions with the readers.
Please note that these rules are absurdly complex, and anyone affected by them needs to be guided by a qualified tax professional. I’m not by any means giving an exhaustive explanation.
May housing expenses being paid by a missionary’s employer be excluded from gross income for self-employment tax purposes?
The “housing allowance” that I speak of in U.S. Income and Employment Taxes for Missionaries is different from the exclusion of foreign housing expenses under Internal Revenue Code (IRC) section 911. Both can result in excluding some housing costs from income.
The “housing allowance” is solely for ministers of the gospel who receive compensation for ministerial duties. It is limited as described in U.S. Income and Employment Taxes for Missionaries and the IRS publications that it refers to. The housing allowance can cover the full amount of a minister’s housing costs, but must be declared in advance of the tax year in writing, although there are no particular formalities required. Only a minister of the gospel can claim the allowance, and only for earnings in the performance of his ministry.
For people living in a foreign country, there’s a separate expense allowance for the cost of housing, which is excludible from taxable income under IRC Section 911. This allowance is described at http://www.irs.gov/irb/2008-50_IRB/ar08.html. In certain high cost areas, the allowance is greater. The IRS publishes a table annually with the particulars. Whether a missionary qualifies can be determined by filling out the IRS election form http://www.irs.gov/pub/irs-pdf/f673.pdf.
However, a minister of the gospel can’t claim either housing exclusion for purposes of the self-employment tax, because ministers are always treated as self-employed for social security purposes. See also IRS Publication 517. http://www.irs.gov/pub/irs-pdf/p517.pdf. Neither the housing allowance, the foreign earned income exclusion, nor foreign housing exclusion apply for self-employment tax purposes.
Do missionaries qualify for the exclusion of the value of employer-provided lodgings under IRC Section 119?
If an employee is required to live in employer-provided housing for the convenience of the employer, the value of the housing is generally excluded from the employee’s income under Section 119. A classic example would be a dormitory mother required to live in the dorm. Some mission organizations provide housing for their missionaries, but this would rarely be for the employer’s convenience — and a minister can never qualify for this exclusion for self-employment tax purposes, although he might qualify for income tax purposes in some situations. If a church has a parsonage next to its building and they require the minister to live there so he can lock up and provide security to the building (yes, it really happens), he may qualify for the 119 exclusion. However, the housing allowance will be more generous, and he can’t exclude the same costs twice.
Employees are governed by IRC section 3121(a)(19), http://www.law.cornell.edu/uscode/uscode26/usc_sec_26_00003121—-000-.html, which provides that the value of lodgings is excluded for social security purposes to the same extent excluded for income tax purposes under Section 119. http://www.law.cornell.edu/uscode/uscode26/usc_sec_26_00000119—-000-.html
However, ministers of the gospel can’t qualify under Section 119 for self-employment tax purposes because ministers are always self-employed, which puts them under Section 1402(a)(8), http://www.law.cornell.edu/uscode/search/display.html?terms=self-employment&url=/uscode/html/uscode26/usc_sec_26_00001402—-000-.html, rather than 3121(a)(19).
(8) an individual who is a duly ordained, commissioned, or licensed minister of a church or a member of a religious order shall compute his net earnings from self-employment derived from the performance of service described in subsection (c)(4) without regard to section 107 (relating to rental value of parsonages), section 119 (relating to meals and lodging furnished for the convenience of the employer), and section 911 (relating to citizens or residents of the United States living abroad), but shall not include in such net earnings from self-employment the rental value of any parsonage or any parsonage allowance (whether or not excludable under section 107) provided after the individual retires, or any other retirement benefit received by such individual from a church plan (as defined in section 414 (e)) after the individual retires;
Therefore, it seems very clear that the value of housing provided by a missionary’s employer must be treated as self-employment income.
Can a missionary qualify for the deduction for travel expenses?
Entirely separate from the statutory Section 911 and 119 exclusions, IRC Section 162(a)(2) allows the deduction of traveling expenses if incurred for “business” purposes. And unlike Section 911 and 119, this deduction applies for self-employment tax purposes.
For a self-employed minister of the gospel, “business” is doing ministry. However, a missionary is only traveling if he is away from “home.” And home is defined as his or her tax home. This is all explained pretty well in IRS Publication 463.
To determine whether you are traveling away from home, you must first determine the location of your tax home.
Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
If you have more than one regular place of business, your tax home is your main place of business. …Main place of business or work. If you have more than one place of work, consider the following when determining which one is your main place of business or work.
- The total time you ordinarily spend in each place.
- The level of your business activity in each place.
- Whether your income from each place is significant or insignificant.
You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. …
Temporary Assignment or JobTemporary assignment vs. indefinite assignment. If your assignment or job away from your main place of work is temporary, your tax home does not change. You are considered to be away from home for the whole period you are away from your main place of work. You can deduct your travel expenses if they otherwise qualify for deduction. Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than one year. If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. You may be able to deduct the cost of relocating to your new tax home as a moving expense. See Publication 521 for more information.…Determining temporary or indefinite. You must determine whether your assignment is temporary or indefinite when you start work. If you expect an assignment or job to last for one year or less, it is temporary unless there are facts and circumstances that indicate otherwise. An assignment or job that is initially temporary may become indefinite due to changed circumstances. A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. The following examples illustrate whether an assignment or job is temporary or indefinite.
You are a construction worker. You live and regularly work in Los Angeles. You are a member of a trade union in Los Angeles that helps you get work in the Los Angeles area. Because of a shortage of work, you took a job on a construction project in Fresno. Your job was scheduled to end in 8 months. The job actually lasted 10 months.
You realistically expected the job in Fresno to last 8 months. The job actually did last less than 1 year. The job is temporary and your tax home is still in Los Angeles.
The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. The job actually was completed in 10 months.
Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually lasted less than 1 year. You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home.
The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. After 8 months, however, you were asked to remain for 7 more months (for a total actual stay of 15 months).
Initially, you realistically expected the job in Fresno to last for only 9 months. However, due to changed circumstances occurring after 8 months, it was no longer realistic for you to expect that the job in Fresno would last for 1 year or less. You can only deduct your travel expenses for the first 8 months. You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the job became indefinite.Going home on days off. If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home while you are in your hometown. You cannot deduct the cost of your meals and lodging there. However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. In addition, you can deduct your expenses of returning home up to the amount you would have spent for meals had you stayed at your temporary place of work.
Now, be cautious of a several of things.
First, your tax home for travel expense purposes is not necessarily the same as residence for tax treaty or Section 911 purposes.
Second, travel has to be for business purposes. A missionary who lives in France who travels to the US to raise support and report to his sponsoring congregations has a business reason for the trip. If his tax home is France, the travel to the US is for business purposes and the travel expenses will generally be deductible. But if the trip is to visit family, there is no deduction.
Fourth, the expenses of a spouse generally are not deductible unless, of course, your spouse is also a missionary and is traveling for business reasons, too.
It’s important to carefully study IRS Publication 463, as there are many complexities to these rules.
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