Author: Mario Hernandez

KT Insights
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Parsonage Allowance for Ministers: Are You Eligible?

To qualify for a parsonage allowance, the IRS first requires you to meet the definition of a minister. The IRS defines a minister as an individual who is “duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.” Additionally, the minister must have the authority to perform key religious functions, such as leading worship, performing sacerdotal duties, and administering sacraments or ordinances according to the practices of their denomination.

What is the Parsonage Allowance?

For many clergy members, the parsonage allowance is an important part of their compensation package. This allowance allows qualified ministers to exclude from their gross income the fair rental value of a home or parsonage, including utilities, provided as part of their earnings.

However, it’s crucial to note that the housing allowance must be explicitly designated by the church or religious organization before the payment is made. If the church fails to designate an amount, the entire salary must be included in income, and the housing allowance will be disallowed.

Limiting Factors

The amount of housing allowance a minister can exclude from gross income is limited by the lowest of three factors:

  1. The designated housing allowance (as decided by the church or organization),
  2. The actual housing expenses incurred by the minister, or
  3. The fair rental value of the home, including furnishings and utilities.

In addition, if the amount of the housing allowance exceeds any of these limits, the excess must be included in the minister’s gross income.

Self-Employment Tax

It’s also important to understand that, although a minister’s housing allowance is generally excluded from gross income for federal income tax purposes, it remains subject to self-employment (SE) tax. Ministers are still required to include the parsonage allowance when calculating their SE tax.

For example, assume Minister Doe was designated a housing allowance from his church for $24,000 for the year. However, the fair rental value of the property, including utilities, was $20,000, and his actual housing expenses were $22,000. In this case, the amount Minister Doe can exclude from gross income is the lowest of these three amounts:

  1. The designated housing allowance: $24,000
  2. The actual housing expenses: $22,000
  3. The fair rental value, including utilities: $20,000

Since $20,000 is the lowest figure, Minister Doe can exclude $20,000 from his gross income. The remaining $4,000 (the difference between the designated allowance and the fair rental value) will be added to his taxable income. However, the full $24,000 (the designated housing allowance) will be subject to SE tax.

The parsonage allowance can be a valuable tax benefit for ministers, but it’s important to understand the restrictions. The amount you can exclude from income is limited to the lowest of the designated allowance, actual housing expenses, or fair rental value, including utilities. Any excess housing allowance above these amounts must be reported as taxable income. And remember, although it’s excluded from income tax, the allowance remains subject to SE tax.

If you have any questions regarding the parsonage allowance or a related matter, please reach out to your KT tax advisor.

November 26, 2024
| Mario Hernandez
KT Insights
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Information Return Forms: W-2 & 1099

As we edge closer to 2025, it’s crucial to start assembling all the essential information required for accurate filing of W-2 and 1099 information return forms. The IRS mandates that any entity — be it a corporation, partnership, individual, estate, or trust — involved in a trade or business and engaged in reportable transactions throughout the calendar year, must file information returns.

These returns serve to report these transactions to the IRS and require providing statements to the other party involved.

Electronic Filing Requirements

In 2023, the IRS began requiring electronic filing for taxpayers who have 10 or more information returns (such as W-2s and 1099s). This requirement is still in effect for the 2024 tax year. The following information return forms must be added together to determine electronic filing requirements:

Form W-2, Form 1099 series, Form 1042-S, the Form 1094 series, Form 1095-B, Form 1095-C, Form 1097-BTC, Form 1098, Form 1098-C, Form 1098-E, Form 1098-Q, Form 1098-T, Form 3921, Form 3922, the Form 5498 series, Form 8027, and Form W-2G.

For example, filing 4 W-2s and 7 1099-NEC forms would total 11 information returns, therefore meeting the requirement to have to file electronically.

1099 Forms

When determining whether to file a 1099, there are a couple of key factors to bear in mind. First, any payment or series of payments totaling over $600 for non-employee services necessitates a 1099. Some common services include contract work, maintenance and repair services, professional services, and rental payments. However, if these services are paid for using a credit card, the responsibility for filing the 1099 rests with the payment processor, not with you.

It’s worth noting that payments made exclusively for purchasing merchandise or inventory items do not need to be reported on a 1099. This covers expenses involving materials and supplies that will become a part of merchandise.

Second, payments to an incorporated entity typically do not mandate a 1099 filing. However, there are two notable exceptions to this guideline. Attorney fees and medical payments, regardless of the entity’s corporate status, require the filing of a 1099.

IRIS

To assist with new filing requirements, the IRS created a free online portal to file the Form 1099 series information returns electronically. Those who typically paper file their 1099 forms may also find this portal useful. The Information Returns Intake System (IRIS), can be utilized to create, upload, edit and view information, and download complete copies of 1099-series forms.

In reference to IRIS, it’s important to note that obtaining a Transmitter Control Code (TCC) is necessary. Please be aware that this process can take up to 45 days, so prompt action is advised. Note that it is not necessary to sign up for a TCC if Ketel Thorstenson is filing your information returns. For more information or to begin the application process, visit: Application For TCC.

If you have any questions regarding the filing requirements for information returns make sure to contact your KT advisor sooner than later!

November 22, 2024
| Mario Hernandez
KT Insights
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Estimated Taxes: Pay as You Go

Estimated tax payments can be a confusing aspect of managing personal or business finances, but they’re a crucial part of staying compliant with tax regulations and avoiding penalties. Here’s a concise overview to help you manage estimated tax payments effectively.

What are Estimated Tax Payments?

Estimated tax payments are periodic payments, usually quarterly, made to the government on income that is not subject to withholding. This typically includes income from sources such as self-employment, interest, dividends, rent, alimony, and capital gains.

Unlike traditional employment income where taxes are automatically withheld from paychecks, individuals and businesses are responsible for calculating and remitting estimated tax payments on their own.

Who Needs to Make Estimated Tax Payments?

Individuals, including sole proprietors, partners, S corporation shareholders, C corporations, estates, and trusts generally must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally must make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

However, it’s essential to note that these are general guidelines and may not cover every scenario. Various factors, such as changes in income, deductions, tax credits, and tax law updates, can affect an individual’s or corporation’s tax liability.

What Amount of Quarterly Payments are Required?

To avoid underpayment penalties an individual must pay 90% of the current year tax in quarterly installments. In lieu of that, you can use the “safe harbor” which is simply 100-110% of the prior year tax. The safe harbor is recommended in years of accelerating income.

Estimated Tax Payments Due Dates

For individuals, estimated tax payments are typically due quarterly, with deadlines falling on April 15, June 15, September 15, and January 15 of the following year. However, if any of these dates fall on a weekend or holiday, the deadline shifts to the next business day.

Corporations, on the other hand, follow a slightly different schedule based on their fiscal year. While the quarterly deadlines remain the same, corporations may have different fiscal year ends, which impacts their estimated tax payment schedule.

Consequences of Not Making Estimated Tax Payments

Failing to make the required estimated tax payments can result in penalties and interest charges. The IRS imposes penalties based on the amount of underpayment and the length of the underpayment period. By making timely and accurate estimated tax payments, individuals and businesses can avoid these penalties.

How to Pay Estimated Taxes

There are various methods available for making estimated tax payments: by mail, online, phone, Electronic Funds Withdrawal (EFW), and Electronic Federal Tax Payment System (EFTPS). It’s crucial to note that for payments sent via mail, they must be postmarked by the due date to be considered timely. Failure to adhere to this deadline could result in penalties being imposed.

While estimated tax payments may seem daunting, understanding the process and staying organized can make them more manageable. By proactively estimating and remitting taxes throughout the year, individuals and businesses can avoid penalties, maintain compliance with tax regulations, and ensure smoother financial operations overall.

Please be sure to consult with your KT tax advisor if you have any questions.

June 17, 2024
| Mario Hernandez
KT Insights
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Still Time to Make 2023 IRA and HSA Contributions

As we approach the filing deadline for 2023 individual tax returns, we want to remind you that there is still time to make contributions to your Individual Retirement Account (IRA) and Health Savings Account (HSA) for the 2023 tax year. The IRS allows contributions for a given year anytime between January 1 and the tax-filing deadline of the following year. The filing deadline for 2023 is April 15, 2024, so you still have a couple of weeks to make 2023 contributions and potentially reduce your tax burden.

IRAs

For 2023, the total contributions you can make to your traditional and Roth IRAs is $6,500, or $7,500 if you are age 50 or older. It is important to note that these limits apply to the total contributions to all your IRAs, not to each individual account.

The deduction for your traditional IRA contribution may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

HSAs

For 2023, HSA contribution limits are $3,850 for self-only coverage and $7,750 for family coverage. Those aged 55 and older can contribute an additional $1,000 as a catch-up contribution.

HSAs offer a triple tax advantage: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. It’s important to remember that to contribute to an HSA, you must be enrolled in a high-deductible health plan.

Deadline Fast Approaching

Remember, you have until the tax filing deadline to contribute to your IRA and HSA for the previous tax year. So, there is still time to make contributions and potentially max out your IRA and HSA for the 2023 tax year.

As always, it is recommended you consult with your KT tax advisor if you have any questions about your IRA and HSA contributions.

April 2, 2024
| Mario Hernandez
KT Insights
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New E-Filing Requirements You Need to Know

As we begin 2024, it’s crucial to start assembling all the essential information required for accurate filing of W-2 and 1099 information forms. The IRS mandates that any entity — be it a corporation, partnership, individual, estate, or trust — involved in a trade or business and engaged in reportable transactions throughout the calendar year must file information returns. These returns serve to report these transactions to the IRS and require providing statements to the other involved party.

New for the 2023 tax year, if you have 10 or more information returns (such as W-2s and 1099s), you must file them electronically. The following information return forms must be added together for determining electronic filing requirements: Form W-2, the Form 1099 series, Form 1042-S, the Form 1094 series, Form 1095-B, Form 1095-C, Form 1097-BTC, Form 1098, Form 1098-C, Form 1098-E, Form 1098-Q, Form 1098-T, Form 3921, Form 3922, the Form 5498 series, Form 8027, and Form W-2G.

For example, filing 4 W-2s and 7 1099-NEC forms would total 11 information returns, therefore meeting the requirement to have to file electronically.

When determining whether to file a 1099, there are a couple of key factors to bear in mind. First, any payment or series of payments totaling over $600 for non-employee services necessitates a 1099. Some common services include contract work, maintenance and repair services, professional services, and rental payments. However, if these services were paid for using a credit card, the responsibility for filing the 1099 rests with the payment processor, not with you. It’s worth noting that payments made exclusively for purchasing merchandise or inventory items do not need to be reported on a 1099. This covers expenses involving materials and supplies that will become a part of merchandise.

Second, payments to an incorporated entity typically do not mandate a 1099 filing. Nevertheless, there are two notable exceptions to this guideline. Attorney fees and medical payments, regardless of the entity’s corporate status, require the filing of a 1099.

To assist with the new filing requirements, the IRS has created a new, free online taxpayer portal used to file the Form 1099 series information returns electronically. Those who typically paper file their 1099 forms may also find this portal useful. The portal, known as the Information Returns Intake System (IRIS), can be utilized to create, upload, edit and view information, and download complete copies of 1099-series forms.

In reference to IRIS, it’s important to note that obtaining a Transmitter Control Code (TCC) is necessary. Please be aware that this process may take up to 45 days, so prompt action is advised without delay. For more information or to begin the application process, visit: Application For TCC.

Note that it is not necessary to sign up for a TCC if Ketel Thorstenson is filing your information returns. If there are questions regarding the new e-filing requirements for information returns make sure to contact your KT advisor.

January 5, 2024
| Mario Hernandez
KT Insights
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Is an HSA Right for You?

What is an HSA?

As Health Savings Accounts (HSA) become more popular, you may ask the question, “what is an HSA?” An HSA is a health account that is used for qualified medical expenses. Common examples of qualified medical expenses include dental care, glasses, prescription medication, insulin, and so forth. As such, qualified medical expenses generally do not include health insurance premiums or reimbursed expenses.

For example, Bob has surgery that costs $4,000. He withdraws $4,000 from his HSA to pay for his surgery. However, his employer reimburses $1,500 of the costs. Thus, Bob would only have $2,500 in qualified medical expenses.

HSA Qualifications

There are a few requirements from the IRS to qualify for an HSA:

  • You must be covered under a high-deductible health plan (HDHP) on the first day of the month. For 2023, the HDHP minimum annual deductible for single coverage is $1,500 and for family coverage is $3,000. For 2023, the maximum annual deductible for single coverage is $7,500 and $15,000 for family coverage.
  • The HDHP must be the only form of health insurance coverage with some limited exceptions. These exceptions include a specific illness or disease, disability, and long-term care coverage.
  • You must not be currently enrolled in Medicare. This includes both Medicare Part A and Part B.
  • You should not be claimed on someone else’s 2022 tax return as a dependent.

Benefits of an HSA  

An HSA has been referenced by some as an “IRA on steroids.” How is a health account used for qualified medical expenses referenced as such? The HSA offers a “triple-tax-free” benefit.

  1. Contributions may be 100% tax deductible. This means that contributions made towards an HSA will lower your gross income subject to taxation for the tax year.
  2. HSA’s grow tax-free. This means that there can be growth in an HSA account that will not be subject to tax.
  3. HSA distributions are not taxed so long as they are used for qualified medical expenses.

One more additional benefit is that amounts left in an HSA at year-can be carried forward into the next year.

Another benefit that is often overlooked is that out-of-pocket medical expenses incurred after establishing an HSA may be reimbursed from the HSA account at a later year. For example, let’s assume Bob has established an HSA account and put $3,000 in there. Let’s also assume he has a qualified medical expense in 2022 of $2,000. Of course, he could choose to just pay the $2,000 via his HSA account or he can pay this expense out-of-pocket. If Bob pays the expense out-of-pocket then he can reimburse himself for the expense in a later year. Thus allowing the funds to grow tax-free and allowing Bob to receive the distribution tax-free.

A few requirements that Bob should keep in mind when considering this option are:

  1. The distributions received must be reimbursed for qualified medical expenses.
  2. Qualified medical expenses must not have been reimbursed from another source such as an employer.
  3. Medical expenses must not have been taken as an itemized deduction.
  4. Must keep receipts for the qualified medical expenses reimbursed.

2023 HSA Contribution Limitations

There are of course limitations to HSA contributions. For 2023, the maximum contribution for an individual is $3,850 and is $7,750 for a family. There are also $1,000 catch-up contributions for individuals 55 and over until they reach age 65 or enroll in Medicare.

An HSA is a great tax tool that offers many benefits. Of course, you must meet the requirements from the IRS to qualify for an HSA – most notably, you must be enrolled in a HDHP. As such, it is best to consult your KT advisor to see if an HSA is the right decision for you.

October 9, 2023
| Mario Hernandez