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.
Tax Home
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.
Example.
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 Job
You may regularly work at your tax home and also work at another location. It may not be practical to return to your tax home from this other location at the end of each work day.
Temporary 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.Example 1.
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.
Example 2.
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.
Example 3.
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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Readers,
This is going to sound like arcane tax nonsense, but this discussion will hit many readers squarely in the pocketbook this year.
Robert,
Yes, I've mentioned that tax principle at /2007/02/11/tax-guide-for-c…. Here's what I said.
Readers,
The IRS and the Tax Court argue that you cannot deduct expenses paid for with tax-free money (generally true). Therefore, if half your income is a tax-free housing allowance, you lose half your deductions.
It's an argument I disagree with. Here's why —
The argument has limits. For example, if a church has what the IRS calls an accountable plan, both the income and expenses are excluded. For instance, if the church reimburses the preacher for his out-of-pocket expenses for attending a lectureship. In such a case, there is no prorating. Rather, because the income and expenses are matched precisely, neither is taken into account.
Just so, with a housing allowance, the exclusion is limited to costs actually paid to provide housing. The minister has to account for the amount of the exclusion by demonstrating how much he spent on housing — to the penny. It's much like an accountable plan.
It doesn't make sense to allocate particular expenses to the housing allowance when the exclusion is figured and to then allocate different expenses (such as a prorated business deductions) when deductions are figured. That's double counting.
If the IRS is right, then we should all lose some of our itemized deductions for our excluded health insurance premiums and other excluded income. We don't, because exclusions like health insurance are tied to particular costs. The same logic should hold as to the housing allowance.
Of course, if a reader follows my reasoning, he is going against the published positions of the IRS and Tax Court — and there is nothing on my side other than logic. This means the taxpayer may be subjected to penalties as well as having a part of his deductions disallowed, unless he makes proper disclosure of his position on his return. And he may want to have a written opinion of tax counsel — and this comment does not count. See the DISCLAIMER above.
I imagine that most tax return preparers don't know this rule, because (a) it's not in the instructions and (b) who'd ever imagine such an argument prevailing in court? But it has, more than once.
Hence, either prorate your deductions or else consult with a qualified return preparer to consider how to best proceed.
Hi ,
I am a US citizaen that has residency in Britain. I have been sent out from the UK as a missionary to the US. I recieve partial funding from the UK and want to know how I am to declare this on my tax form. Any one got any ideas.
Thanks,
Matthew
Matthew,
You should check out my earlier post at /2008/02/09/us-income-and-e… and the IRS publications linked from there. Much of what I wrote will apply to you as a minister of the gospel, even though the post is focused on missionaries out of the US.
You should also check out the US-UK tax treaty at http://www.irs.gov and you should check to see if there is a totalization agreement in place between the two countries.
But it's all very complicated, and you really need to get with a capable CPA — but I'd give him a copy of my article as many CPAs are not familiar with the special rules for ministers.
Question: A missionary resides in Mexico and receives support from a U.S. church. The funds are automatically deposited into the missionary's account. There is no formal requirements as to the use of the funds. The funds are income, but what expenses are deductible? If the missionary gave "gifts" to residents of Mexico say for health costs or other costs, would this be deductible?
Employed-employee or Self-Employed ? If one is considered by his or her missionary "sending agency" as an "employee" for Taxation (W-2) and as a Self-employed Clergy for FICA/SS does that fact legally (including liability, etc) – actually, determine that the Missionary is in fact "employed" -and an "employee?" Would this be true even though all the incoming funds concerned have been "raised" by the Missionary and is specified or designated to the individual's name and for his or her own discretionary uses. If the foreign country does not tax on income and ministry funds to missionaries from designated "gifted monies"? Can one actual;ly be "employed" – specifically where there is no "Employment Contract?" Does the tax terminology used in the US make one "employed" internationally or can the missionary be a 1040 US Taxation designate while still be viewed overseas as self-employed?
M Blackwell,
The self-employed status of missionaries for self-employment tax and FICA purposes is imposed by statute and has no impact on whether a missionary is an independent contractor or employee for other purposes. A foreign country is not required to follow a US definition of the two terms either. However, my guess (and it's just a guess) is that whether you are an employee or independent contractor for INCOME tax purposes will normally produce the same result in a foreign country. It's hard to argue that you're an employee of a US employer for US tax purposes and not an employee for foreign tax purposes.
Now, the US treats money gifts to a missionary in support of the mission as income to the missionary. A foreign nation may well treat it differently.
I realize this is an old post, but I cannot seem to find an answer to our particular situation. My question is about self-employment taxes in general, but missionary housing specifically.
We are considered employees (W2) of our mission sending agency and foreign residency wipes out our federal income tax liability. But with our self-employment taxes, I can’t seem to find straight answers. Does the amount we are liable for come solely from our W2? (Gross income–salary + SE tax supplement our organization provides–OR gross income less health insurance costs and 403b contributions?)
Or does our SE tax liability also include housing? Our employer pays/reimburses our rent each month and also a portion of our utilities (20%) to cover utilities associated with our home office (the only office we have in country). If we do have to pay SE taxes on the amount of housing costs that are paid on our behalf/we are reimbursed for can we exclude an amount for office space?
I can at least understand the idea behind paying SE taxes on housing benefits we receive, but it doesn’t make sense to me to have to pay hefty SE taxes for designated work space.
Many thanks for any clarity!
Lauren,
Please don’t take me as the final authority but if being a missionary overseas is considered the same by the IRS as domestic ministry then you pay SE tax on the fair rental(market) value of your home plus utilities and other necessary things for your home( called a housing allowance) The housing allowance is supposed to be set up or designated in advance, if not, then the sooner the better (as you will not get an allowance for anything in the past). It should have been set up or agreed to in advance by yourselves and whichever church or 501 sent you. Please do get some professional advice though. This could potentially cost you a lot. Hope this helps some.
P.S. I’m pretty sure you can deduct for a designated home office if you do not have one provided at another facility like the church building.
Our tax advisor has said that we are (SE) taxed on the full portion of our apartment which doesn’t seem to make sense (although the complications of ministerial and overseas living makes very little of the tax code make sense!). Additionally, we are responsible for paying our own utilities except for a portion of our utilities that our organization covers specifically to cover utilities to the space in our apartment that is designated as an office. Our tax advisor has said that we are liable for SE taxes on this reimbursement of utilities as well. I can’t seem to find an authority on the matter.