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Filing Taxes In The Military

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Filing Taxes In The Military

Filing taxes in the military Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Filing taxes in the military S. Filing taxes in the military Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Filing taxes in the military Full-time student. Filing taxes in the military Adjusted gross income. Filing taxes in the military More information. Filing taxes in the military Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Filing taxes in the military Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Filing taxes in the military Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Filing taxes in the military You are a member of a religious order who has taken a vow of poverty. Filing taxes in the military You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Filing taxes in the military See Exemption From Self-Employment (SE) Tax , later. Filing taxes in the military You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Filing taxes in the military For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Filing taxes in the military Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Filing taxes in the military See Ministerial Services , later. Filing taxes in the military Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Filing taxes in the military However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Filing taxes in the military For the specific services covered, see Ministerial Services , later. Filing taxes in the military Ministers defined. Filing taxes in the military   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Filing taxes in the military Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Filing taxes in the military   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Filing taxes in the military Employment status for other tax purposes. Filing taxes in the military   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Filing taxes in the military For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Filing taxes in the military Common-law employee. Filing taxes in the military   Under common-law rules, you are considered either an employee or a self-employed person. Filing taxes in the military Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Filing taxes in the military For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Filing taxes in the military   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Filing taxes in the military However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Filing taxes in the military Example. Filing taxes in the military A church hires and pays you a salary to perform ministerial services subject to its control. Filing taxes in the military Under the common-law rules, you are an employee of the church while performing those services. Filing taxes in the military Form SS-8. Filing taxes in the military   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Filing taxes in the military Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Filing taxes in the military See Ministerial Services , later. Filing taxes in the military However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Filing taxes in the military Vow of poverty. Filing taxes in the military   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Filing taxes in the military You do not need to request a separate exemption. Filing taxes in the military For income tax purposes, the earnings are tax free to you. Filing taxes in the military Your earnings are considered the income of the religious order. Filing taxes in the military Services covered under FICA at the election of the order. Filing taxes in the military   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Filing taxes in the military Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Filing taxes in the military   The order or subdivision elects coverage by filing Form SS-16. Filing taxes in the military The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Filing taxes in the military If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Filing taxes in the military You do not pay any of the FICA tax. Filing taxes in the military Services performed outside the order. Filing taxes in the military   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Filing taxes in the military   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Filing taxes in the military You may, however, be able to take a charitable deduction for the amount you turn over to the order. Filing taxes in the military See Publication 526, Charitable Contributions. Filing taxes in the military Rulings. Filing taxes in the military   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Filing taxes in the military To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Filing taxes in the military R. Filing taxes in the military B. Filing taxes in the military 1, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2014-1_IRB/ar05. Filing taxes in the military html. Filing taxes in the military Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Filing taxes in the military However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Filing taxes in the military Practitioners. Filing taxes in the military   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Filing taxes in the military State law specifically exempts Christian Science practitioners from licensing requirements. Filing taxes in the military   Some Christian Science practitioners also are Christian Science teachers or lecturers. Filing taxes in the military Income from teaching or lecturing is considered the same as income from their work as practitioners. Filing taxes in the military Readers. Filing taxes in the military   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Filing taxes in the military Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Filing taxes in the military Some exceptions are discussed next. Filing taxes in the military Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Filing taxes in the military If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Filing taxes in the military Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Filing taxes in the military 28 during the tax year. Filing taxes in the military However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Filing taxes in the military Churches and church organizations make this election by filing two copies of Form 8274. Filing taxes in the military For more information about making this election, see Form 8274. Filing taxes in the military Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Filing taxes in the military This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Filing taxes in the military Make this choice by filing Form 4029. Filing taxes in the military See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Filing taxes in the military U. Filing taxes in the military S. Filing taxes in the military Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Filing taxes in the military Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Filing taxes in the military S. Filing taxes in the military social security system. Filing taxes in the military To determine your alien status, see Publication 519, U. Filing taxes in the military S. Filing taxes in the military Tax Guide for Aliens. Filing taxes in the military Residents of Puerto Rico, the U. Filing taxes in the military S. Filing taxes in the military Virgin Islands, Guam, the CNMI, and American Samoa. Filing taxes in the military   If you are a resident of one of these U. Filing taxes in the military S. Filing taxes in the military possessions but not a U. Filing taxes in the military S. Filing taxes in the military citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Filing taxes in the military For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Filing taxes in the military Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Filing taxes in the military Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Filing taxes in the military Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Filing taxes in the military The exemption does not apply to any other income. Filing taxes in the military The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Filing taxes in the military Ministers Most services you perform as a minister, priest, rabbi, etc. Filing taxes in the military , are ministerial services. Filing taxes in the military These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Filing taxes in the military You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Filing taxes in the military A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Filing taxes in the military Services for nonreligious organizations. Filing taxes in the military   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Filing taxes in the military Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Filing taxes in the military   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Filing taxes in the military Services that are not part of your ministry. Filing taxes in the military   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Filing taxes in the military The following are not ministerial services. Filing taxes in the military Services you perform for nonreligious organizations other than the services stated above. Filing taxes in the military Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Filing taxes in the military These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Filing taxes in the military (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Filing taxes in the military ) Services you perform in a government-owned and operated hospital. Filing taxes in the military (These services are considered performed by a government employee, not by a minister as part of the ministry. Filing taxes in the military ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Filing taxes in the military Books or articles. Filing taxes in the military   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Filing taxes in the military   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Filing taxes in the military Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Filing taxes in the military The services are considered ministerial because you perform them as an agent of the order. Filing taxes in the military For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Filing taxes in the military However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Filing taxes in the military Effect of employee status. Filing taxes in the military   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Filing taxes in the military In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Filing taxes in the military This result is true even if you have taken a vow of poverty. Filing taxes in the military Example. Filing taxes in the military Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Filing taxes in the military They renounce all claims to their earnings. Filing taxes in the military The earnings belong to the order. Filing taxes in the military Pat is a licensed attorney. Filing taxes in the military The superiors of the order instructed her to get a job with a law firm. Filing taxes in the military Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Filing taxes in the military Chris is a secretary. Filing taxes in the military The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Filing taxes in the military Chris took the job and gave all his earnings to the order. Filing taxes in the military Pat's services are not duties required by the order. Filing taxes in the military Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Filing taxes in the military Chris' services are duties required by the order. Filing taxes in the military He is acting as an agent of the order and not as an employee of a third party. Filing taxes in the military He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Filing taxes in the military Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Filing taxes in the military Amounts you receive for performing these services are generally subject to SE tax. Filing taxes in the military You may request an exemption from SE tax, discussed next, which applies only to those services. Filing taxes in the military Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Filing taxes in the military Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Filing taxes in the military They do not have to request the exemption. Filing taxes in the military Who cannot be exempt. Filing taxes in the military   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Filing taxes in the military These elections are irrevocable. Filing taxes in the military You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Filing taxes in the military You elected before 1968 to be covered under social security for your ministerial services. Filing taxes in the military Requesting exemption. Filing taxes in the military    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Filing taxes in the military More detailed explanations follow. Filing taxes in the military If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Filing taxes in the military It does not apply to any other self-employment income. Filing taxes in the military Table 2. Filing taxes in the military The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Filing taxes in the military You file Form 4361, described below under Requesting Exemption—Form 4361 . Filing taxes in the military You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Filing taxes in the military You file for other than economic reasons. Filing taxes in the military You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Filing taxes in the military This requirement does not apply to Christian Science practitioners or readers. Filing taxes in the military You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Filing taxes in the military You establish that the organization is a church or a convention or association of churches. Filing taxes in the military You did not make an election discussed earlier under Who cannot be exempt . Filing taxes in the military You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Filing taxes in the military Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Filing taxes in the military The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Filing taxes in the military If it is approved, keep the approved copy of Form 4361 in your permanent records. Filing taxes in the military When to file. Filing taxes in the military   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Filing taxes in the military You have net earnings from self-employment of at least $400. Filing taxes in the military Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Filing taxes in the military The 2 years do not have to be consecutive tax years. Filing taxes in the military    The approval process can take some time, so you should file Form 4361 as soon as possible. Filing taxes in the military Example 1. Filing taxes in the military Rev. Filing taxes in the military Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Filing taxes in the military He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Filing taxes in the military However, if Rev. Filing taxes in the military Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Filing taxes in the military Example 2. Filing taxes in the military Rev. Filing taxes in the military Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Filing taxes in the military She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Filing taxes in the military However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Filing taxes in the military Example 3. Filing taxes in the military In 2011, Rev. Filing taxes in the military David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Filing taxes in the military In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Filing taxes in the military Therefore, he had no net self-employment earnings as a minister in 2012. Filing taxes in the military Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Filing taxes in the military In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Filing taxes in the military Rev. Filing taxes in the military Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Filing taxes in the military Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Filing taxes in the military Death of individual. Filing taxes in the military   The right to file an application for exemption ends with an individual's death. Filing taxes in the military A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Filing taxes in the military Effective date of exemption. Filing taxes in the military   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Filing taxes in the military Once the exemption is approved, it is irrevocable. Filing taxes in the military Example. Filing taxes in the military Rev. Filing taxes in the military Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Filing taxes in the military She files an application for exemption on February 20, 2014. Filing taxes in the military If an exemption is granted, it is effective for 2010 and the following years. Filing taxes in the military Refunds of SE tax. Filing taxes in the military   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Filing taxes in the military Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Filing taxes in the military A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Filing taxes in the military   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Filing taxes in the military Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Filing taxes in the military Exception. Filing taxes in the military   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Filing taxes in the military However, if you pay your benefits back, you may be considered for exemption. Filing taxes in the military Contact your local Social Security Administration office to find out the amount you must pay back. Filing taxes in the military Eligibility requirements. Filing taxes in the military   To claim this exemption from SE tax, all the following requirements must be met. Filing taxes in the military You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Filing taxes in the military As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Filing taxes in the military You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Filing taxes in the military The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Filing taxes in the military Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Filing taxes in the military The sect or division must complete part of the form. Filing taxes in the military The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Filing taxes in the military If it is approved, keep the approved copy of Form 4029 in your permanent records. Filing taxes in the military When to file. Filing taxes in the military   You can file Form 4029 at any time. Filing taxes in the military   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Filing taxes in the military See Effective date of exemption next for information on when the newly approved exemption would become effective. Filing taxes in the military    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Filing taxes in the military Effective date of exemption. Filing taxes in the military   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Filing taxes in the military (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Filing taxes in the military )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Filing taxes in the military You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Filing taxes in the military The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Filing taxes in the military Refunds of SE tax paid. Filing taxes in the military    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Filing taxes in the military For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Filing taxes in the military Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Filing taxes in the military Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Filing taxes in the military A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Filing taxes in the military If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Filing taxes in the military Information for employers. Filing taxes in the military   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Filing taxes in the military   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Filing taxes in the military Form W-2. Filing taxes in the military   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Filing taxes in the military ” Do not make any entries in boxes 3, 4, 5, or 6. Filing taxes in the military Forms 941, 943, and 944. Filing taxes in the military   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Filing taxes in the military Instead, follow the instructions given below. Filing taxes in the military Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Filing taxes in the military Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Filing taxes in the military Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Filing taxes in the military Effective date. Filing taxes in the military   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Filing taxes in the military The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Filing taxes in the military Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Filing taxes in the military Regular method. Filing taxes in the military Nonfarm optional method. Filing taxes in the military You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Filing taxes in the military Blank worksheets are in the back of this publication, after the Comprehensive Example. Filing taxes in the military Regular Method Most people use the regular method. Filing taxes in the military Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Filing taxes in the military Then, subtract your allowable business deductions and multiply the difference by 92. Filing taxes in the military 35% (. Filing taxes in the military 9235). Filing taxes in the military Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Filing taxes in the military If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Filing taxes in the military 35% (. Filing taxes in the military 9235). Filing taxes in the military Do not reduce your wages by any business deductions when making this computation. Filing taxes in the military Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Filing taxes in the military If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Filing taxes in the military Amounts included in gross income. Filing taxes in the military   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Filing taxes in the military , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Filing taxes in the military This amount is also subject to income tax. Filing taxes in the military   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Filing taxes in the military Example. Filing taxes in the military Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Filing taxes in the military The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Filing taxes in the military His church owns a parsonage that has a fair rental value of $12,000 per year. Filing taxes in the military The church gives Pastor Adams the use of the parsonage. Filing taxes in the military He is not exempt from SE tax. Filing taxes in the military He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Filing taxes in the military The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Filing taxes in the military Overseas duty. Filing taxes in the military   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Filing taxes in the military S. Filing taxes in the military citizen or resident alien serving abroad and living in a foreign country. Filing taxes in the military   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Filing taxes in the military Example. Filing taxes in the military Diane Jones was the minister of a U. Filing taxes in the military S. Filing taxes in the military church in Mexico. Filing taxes in the military She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Filing taxes in the military The United States does not have a social security agreement with Mexico, so Mrs. Filing taxes in the military Jones is subject to U. Filing taxes in the military S. Filing taxes in the military SE tax and must include $35,000 when figuring net earnings from self-employment. Filing taxes in the military Specified U. Filing taxes in the military S. Filing taxes in the military possessions. Filing taxes in the military    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Filing taxes in the military Also see Residents of Puerto Rico, the U. Filing taxes in the military S. Filing taxes in the military Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Filing taxes in the military S. Filing taxes in the military Citizens and Resident and Nonresident Aliens. Filing taxes in the military Amounts not included in gross income. Filing taxes in the military   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Filing taxes in the military Offerings that others made to the church. Filing taxes in the military Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Filing taxes in the military Pension payments or retirement allowances you receive for your past ministerial services. Filing taxes in the military The rental value of a parsonage or a parsonage allowance provided to you after you retire. Filing taxes in the military Allowable deductions. Filing taxes in the military   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Filing taxes in the military These are ministerial expenses you incurred while working other than as a common-law employee of the church. Filing taxes in the military They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Filing taxes in the military Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Filing taxes in the military   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Filing taxes in the military Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Filing taxes in the military Do not complete Schedule C or C-EZ (Form 1040). Filing taxes in the military However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Filing taxes in the military Employee reimbursement arrangements. Filing taxes in the military   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Filing taxes in the military Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Filing taxes in the military Accountable plans. Filing taxes in the military   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Filing taxes in the military Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Filing taxes in the military You must adequately account to your employer for these expenses within a reasonable period of time. Filing taxes in the military You must return any excess reimbursement or allowance within a reasonable period of time. Filing taxes in the military   The reimbursement is not reported on your Form W-2. Filing taxes in the military Generally, if your expenses equal your reimbursement, you have no deduction. Filing taxes in the military If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Filing taxes in the military Nonaccountable plan. Filing taxes in the military   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Filing taxes in the military In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Filing taxes in the military Excess reimbursements you fail to return to your employer. Filing taxes in the military Reimbursement of nondeductible expenses related to your employer's business. Filing taxes in the military   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Filing taxes in the military Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Filing taxes in the military   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Filing taxes in the military Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Filing taxes in the military If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Filing taxes in the military Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Filing taxes in the military The tax rate for the social security part is 12. Filing taxes in the military 4%. Filing taxes in the military In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Filing taxes in the military This tax rate is 2. Filing taxes in the military 9%. Filing taxes in the military The combined self-employment tax rate is 15. Filing taxes in the military 3%. Filing taxes in the military Additional Medicare Tax. Filing taxes in the military   Beginning in 2013, a 0. Filing taxes in the military 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Filing taxes in the military Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Filing taxes in the military A self-employment loss is not considered for purposes of this tax. Filing taxes in the military RRTA compensation is separately compared to the threshold. Filing taxes in the military For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Filing taxes in the military Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Filing taxes in the military In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Filing taxes in the military You may use the nonfarm optional method if you meet all the following tests. Filing taxes in the military You are self-employed on a regular basis. Filing taxes in the military You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Filing taxes in the military The net earnings can be from either farm or nonfarm earnings or both. Filing taxes in the military You have used this method less than 5 prior years. Filing taxes in the military (There is a 5-year lifetime limit. Filing taxes in the military ) The years do not have to be consecutive. Filing taxes in the military Your net nonfarm profits were: Less than $5,024, and Less than 72. Filing taxes in the military 189% of your gross nonfarm income. Filing taxes in the military If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Filing taxes in the military Table 3. Filing taxes in the military Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Filing taxes in the military . Filing taxes in the military . Filing taxes in the military THEN your net earnings are equal to . Filing taxes in the military . Filing taxes in the military . Filing taxes in the military $6,960 or less Two-thirds of your gross nonfarm income. Filing taxes in the military More than $6,960 $4,640. Filing taxes in the military Actual net earnings. Filing taxes in the military   Multiply your total earnings subject to SE tax by 92. Filing taxes in the military 35% (. Filing taxes in the military 9235) to get actual net earnings. Filing taxes in the military Actual net earnings are equivalent to net earnings under the “Regular Method. Filing taxes in the military ” More information. Filing taxes in the military   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Filing taxes in the military Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Filing taxes in the military Note. Filing taxes in the military For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Filing taxes in the military Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Filing taxes in the military Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Filing taxes in the military , in addition to your salary. Filing taxes in the military If the offering is made to the religious institution, it is not taxable to you. Filing taxes in the military Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Filing taxes in the military However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Filing taxes in the military For more information, see Publication 526. Filing taxes in the military Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Filing taxes in the military Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Filing taxes in the military This exclusion applies only for income tax purposes. Filing taxes in the military It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Filing taxes in the military Designation requirement. Filing taxes in the military   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Filing taxes in the military It must designate a definite amount. Filing taxes in the military It cannot determine the amount of the housing allowance at a later date. Filing taxes in the military If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Filing taxes in the military   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Filing taxes in the military The local congregation must officially designate the part of your salary that is a housing allowance. Filing taxes in the military However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Filing taxes in the military Rental allowances. Filing taxes in the military   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Filing taxes in the military   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Filing taxes in the military Fair rental value of parsonage. Filing taxes in the military   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Filing taxes in the military However, the exclusion cannot be more than the reasonable pay for your services. Filing taxes in the military If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Filing taxes in the military Example. Filing taxes in the military Rev. Filing taxes in the military Joanna Baker is a full-time minister. Filing taxes in the military The church allows her to use a parsonage that has an annual fair rental value of $24,000. Filing taxes in the military The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Filing taxes in the military Her actual utility costs during the year were $7,000. Filing taxes in the military For income tax purposes, Rev. Filing taxes in the military Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Filing taxes in the military She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Filing taxes in the military Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Filing taxes in the military Home ownership. Filing taxes in the military   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Filing taxes in the military Excess rental allowance. Filing taxes in the military   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Filing taxes in the military   Include in the total on Form 1040, line 7. Filing taxes in the military On the dotted line next to line 7, enter “Excess allowance” and the amount. Filing taxes in the military You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Filing taxes in the military However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Filing taxes in the military Retired ministers. Filing taxes in the military   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Filing taxes in the military However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Filing taxes in the military Teachers or administrators. Filing taxes in the military   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Filing taxes in the military However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Filing taxes in the military    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Filing taxes in the military In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Filing taxes in the military   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Filing taxes in the military Theological students. Filing taxes in the military   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Filing taxes in the military Traveling evangelists. Filing taxes in the military   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Filing taxes in the military You are an ordained minister. Filing taxes in the military You perform ministerial services at churches located away from your community. Filing taxes in the military You actually use the rental allowance to maintain your permanent home. Filing taxes in the military Cantors. Filing taxes in the military   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Filing taxes in the military Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Filing taxes in the military See Members of Religious Orders , earlier, under Social Security Coverage. Filing taxes in the military Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Filing taxes in the military S. Filing taxes in the military possession. Filing taxes in the military Publication 54 discusses the foreign earned income exclusion. Filing taxes in the military Publication 570, Tax Guide for Individuals With Income From U. Filing taxes in the military S. Filing taxes in the military Possessions, covers the rules for taxpayers with income from U. Filing taxes in the military S. Filing taxes in the military possessions. Filing taxes in the military You can get these free publications from the Internal Revenue Service at IRS. Filing taxes in the military gov or from most U. Filing taxes in the military S. Filing taxes in the military Embassies or consulates. Filing taxes in the military Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Filing taxes in the military Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Filing taxes in the military You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Filing taxes in the military You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Filing taxes in the military See Publication 529 for more information on this limit. Filing taxes in the military However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Filing taxes in the military Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Filing taxes in the military You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Filing taxes in the military Exception. Filing taxes in the military   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Filing taxes in the military Figuring the allocation. Filing taxes in the military   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Filing taxes in the military    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Filing taxes in the military Example. Filing taxes in the military Rev. Filing taxes in the military Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Filing taxes in the military He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Filing taxes in the military $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Filing taxes in the military Rev. Filing taxes in the military Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Filing taxes in the military Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Filing taxes in the military   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Filing taxes in the military The statement must contain all of the following information. Filing taxes in the military A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Filing taxes in the military ) plus the amount. Filing taxes in the military A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Filing taxes in the military A list of each item of otherwise deductible ministerial expenses plus the amount. Filing taxes in the military How you figured the nondeductible part of your otherwise deductible expenses. Filing taxes in the military A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Filing taxes in the military   See the attachments prepared for the Comprehensive Example , later. Filing taxes in the military Following the example, you will find blank worksheets for your own use. Filing taxes in the military Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Filing taxes in the military If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Filing taxes in the military See the Instructions for Form 1040 to figure your deduction. Filing taxes in the military The following special rules apply to the self-employed health insurance deduction. Filing taxes in the military You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Filing taxes in the military You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Filing taxes in the military The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Filing taxes in the military Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Filing taxes in the military More information. Filing taxes in the military   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Filing taxes in the military Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Filing taxes in the military This is an income tax deduction only, on Form 1040, line 27. Filing taxes in the military Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Filing taxes in the military Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Filing taxes in the military You must pay the tax as you earn or receive income during the year. Filing taxes in the military An employee usually has income tax withheld from his or her wages or salary. Filing taxes in the military However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Filing taxes in the military You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Filing taxes in the military Your salary is for ministerial services (see Ministerial Services , earlier). Filing taxes in the military If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Filing taxes in the military You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Filing taxes in the military Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Filing taxes in the military Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Filing taxes in the military See Form 1040-ES for the different payment methods. Filing taxes in the military The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Filing taxes in the military For more information, see chapter 2 of Publication 505. Filing taxes in the military If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Filing taxes in the military Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Filing taxes in the military Table 4. Filing taxes in the military 2013 Filing Requirements for Most Taxpayers IF your filing status is . Filing taxes in the military . Filing taxes in the military . Filing taxes in the military AND at the end of 2013 you were* . Filing taxes in the military . Filing taxes in the military . Filing taxes in the military THEN file a return if your gross income** was at least . Filing taxes in the military . Filing taxes in the military . Filing taxes in the military single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Filing taxes in the military ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Filing taxes in the military Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Filing taxes in the military If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Filing taxes in the military Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Filing taxes in the military Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Filing taxes in the military But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Filing taxes in the military *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Filing taxes in the military Additional requirements. Filing taxes in the military   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Filing taxes in the military 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Filing taxes in the military Self-employment tax. Filing taxes in the military   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Filing taxes in the military   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Filing taxes in the military You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Filing taxes in the military You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Filing taxes in the military However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Filing taxes in the military Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Filing taxes in the military Note. Filing taxes in the military For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Filing taxes in the military You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Filing taxes in the military Exemption from SE tax. Filing taxes in the military   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Filing taxes in the military Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Filing taxes in the military However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Filing taxes in the military    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Filing taxes in the military Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Filing taxes in the military More information. Filing taxes in the military   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Filing taxes in the military Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Filing taxes in the military You generally can deduct your contributions to the plan. Filing taxes in the military Your contributions and the earnings on them are not taxed until they are distributed. Filing taxes in the military Retirement plans for the self-employed. Filing taxes in the military   To set up one of the following plans you must be self-employed. Filing taxes in the military SEP (simplified employee pension) plan. Filing taxes in the military SIMPLE (savings incentive match plan for employees) plan. Filing taxes in the military Qualified retirement plan (also called a Keogh or H. Filing taxes in the military R. Filing taxes in the military 10 plan). Filing taxes in the military   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Filing taxes in the military See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Filing taxes in the military This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Filing taxes in the military   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Filing taxes in the military You are not a self-employed person for purposes of setting up a retirement plan. Filing taxes in the military This result is true even if your salary is subject to SE tax. Filing taxes in the military   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Filing taxes in the military   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Filing taxes in the military Individual retirement arrangements (IRAs). Filing taxes in the military   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Filing taxes in the military Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Filing taxes in the military   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Filing taxes in the military You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Filing taxes in the military   If you contribute to a traditional IRA, your contribution may be deductible. Filing taxes in the military However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Filing taxes in the military   For more information on IRAs, see Publication 590. Filing taxes in the military Tax-sheltered annuity plans. Filing taxes in the military   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Filing taxes in the military For more
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The Filing Taxes In The Military

Filing taxes in the military 2. Filing taxes in the military   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. Filing taxes in the military ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. Filing taxes in the military In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. Filing taxes in the military Those cases are called “abusive tax shelters. Filing taxes in the military ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. Filing taxes in the military Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . Filing taxes in the military Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Filing taxes in the military Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. Filing taxes in the military They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. Filing taxes in the military Despite appearances to the contrary, the taxpayer generally risks little. Filing taxes in the military Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. Filing taxes in the military Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. Filing taxes in the military (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. Filing taxes in the military ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. Filing taxes in the military This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. Filing taxes in the military Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. Filing taxes in the military However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. Filing taxes in the military Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. Filing taxes in the military These provisions include the following. Filing taxes in the military Disclosure of reportable transactions. Filing taxes in the military   You must disclose information for each reportable transaction in which you participate. Filing taxes in the military See Reportable Transaction Disclosure Statement , later. Filing taxes in the military   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. Filing taxes in the military To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. Filing taxes in the military   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. Filing taxes in the military They must provide this number to all persons to whom they acted as a material advisor. Filing taxes in the military They must provide the number at the time the transaction is entered into. Filing taxes in the military If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. Filing taxes in the military For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. Filing taxes in the military Requirement to maintain list. Filing taxes in the military   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. Filing taxes in the military The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. Filing taxes in the military See Regulations section 301. Filing taxes in the military 6112-1 for more information (including what information is required to be included on the list). Filing taxes in the military Confidentiality privilege. Filing taxes in the military   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. Filing taxes in the military Appraisal requirement for donated property. Filing taxes in the military   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. Filing taxes in the military If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. Filing taxes in the military If you file electronically, see Form 8453, U. Filing taxes in the military S. Filing taxes in the military Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. Filing taxes in the military For more information about appraisals, including exceptions, see Publication 561. Filing taxes in the military Passive activity loss and credit limits. Filing taxes in the military   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. Filing taxes in the military For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. Filing taxes in the military Interest on penalties. Filing taxes in the military   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. Filing taxes in the military Accounting method restriction. Filing taxes in the military   Tax shelters generally cannot use the cash method of accounting. Filing taxes in the military Uniform capitalization rules. Filing taxes in the military   The uniform capitalization rules generally apply to producing property or acquiring it for resale. Filing taxes in the military Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. Filing taxes in the military For more information, see Publication 538. Filing taxes in the military Denial of deduction for interest on an underpayment due to a reportable transaction. Filing taxes in the military   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. Filing taxes in the military This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. Filing taxes in the military Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. Filing taxes in the military The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. Filing taxes in the military Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. Filing taxes in the military So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. Filing taxes in the military In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. Filing taxes in the military The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. Filing taxes in the military Investor Reporting You may be required to file a reportable transaction disclosure statement. Filing taxes in the military Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. Filing taxes in the military Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. Filing taxes in the military Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). Filing taxes in the military In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. Filing taxes in the military  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. Filing taxes in the military If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. Filing taxes in the military If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. Filing taxes in the military See Penalty for failure to disclose a reportable transaction , later under Penalties. Filing taxes in the military The following discussion briefly describes reportable transactions. Filing taxes in the military For more details, see the Instructions for Form 8886. Filing taxes in the military Reportable transaction. Filing taxes in the military   A reportable transaction is any of the following. Filing taxes in the military A listed transaction. Filing taxes in the military A confidential transaction. Filing taxes in the military A transaction with contractual protection. Filing taxes in the military A loss transaction. Filing taxes in the military A transaction of interest entered into after November 1, 2006. Filing taxes in the military Note. Filing taxes in the military Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. Filing taxes in the military Listed transaction. Filing taxes in the military   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. Filing taxes in the military These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. Filing taxes in the military For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2009-31_IRB/ar07. Filing taxes in the military html. Filing taxes in the military Confidential transaction. Filing taxes in the military   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. Filing taxes in the military A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. Filing taxes in the military The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. Filing taxes in the military Transaction with contractual protection. Filing taxes in the military   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. Filing taxes in the military For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2007-07_IRB/ar15. Filing taxes in the military html. Filing taxes in the military Loss transaction. Filing taxes in the military   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. Filing taxes in the military A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. Filing taxes in the military   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. Filing taxes in the military For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2004-50_IRB/ar11. Filing taxes in the military html. Filing taxes in the military Transaction of interest. Filing taxes in the military   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. Filing taxes in the military The IRS has identified the following transactions of interest. Filing taxes in the military “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. Filing taxes in the military R. Filing taxes in the military B. Filing taxes in the military 545, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2007-36_IRB/ar20. Filing taxes in the military html. Filing taxes in the military Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. Filing taxes in the military R. Filing taxes in the military B. Filing taxes in the military 544, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2007-36_IRB/ar19. Filing taxes in the military html. Filing taxes in the military Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. Filing taxes in the military R. Filing taxes in the military B. Filing taxes in the military 1194, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2008-47_IRB/ar11. Filing taxes in the military html. Filing taxes in the military Certain transactions involving a U. Filing taxes in the military S. Filing taxes in the military taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. Filing taxes in the military R. Filing taxes in the military B. Filing taxes in the military 312, available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2009-03_IRB/ar10. Filing taxes in the military html. Filing taxes in the military   For updates to this list, go to www. Filing taxes in the military irs. Filing taxes in the military gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. Filing taxes in the military Penalties Investing in an abusive tax shelter may lead to substantial expenses. Filing taxes in the military First, the promoter generally charges a substantial fee. Filing taxes in the military If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. Filing taxes in the military You may also be subject to the penalty for failure to pay tax. Filing taxes in the military These penalties are explained in the following paragraphs. Filing taxes in the military Accuracy-related penalties. Filing taxes in the military   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). Filing taxes in the military Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. Filing taxes in the military Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. Filing taxes in the military   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. Filing taxes in the military   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). Filing taxes in the military Negligence or disregard of rules or regulations. Filing taxes in the military   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. Filing taxes in the military The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. Filing taxes in the military    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Filing taxes in the military It also includes any failure to keep adequate books and records. Filing taxes in the military A return position that has a reasonable basis is not negligence. Filing taxes in the military   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. Filing taxes in the military   The penalty for disregard of rules and regulations can be avoided if all the following are true. Filing taxes in the military You keep adequate books and records. Filing taxes in the military You have a reasonable basis for your position on the tax issue. Filing taxes in the military You make an adequate disclosure of your position. Filing taxes in the military Use Form 8275 to make your disclosure and attach it to your return. Filing taxes in the military To disclose a position contrary to a regulation, use Form 8275-R. Filing taxes in the military Use Form 8886 to disclose a reportable transaction (discussed earlier). Filing taxes in the military Substantial understatement of tax. Filing taxes in the military   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. Filing taxes in the military An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. Filing taxes in the military The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. Filing taxes in the military   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. Filing taxes in the military In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. Filing taxes in the military Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. Filing taxes in the military   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. Filing taxes in the military An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. Filing taxes in the military Substantial valuation misstatement. Filing taxes in the military   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. Filing taxes in the military The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. Filing taxes in the military You underpaid your tax by more than $5,000 because of the misstatement. Filing taxes in the military You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. Filing taxes in the military   You may be assessed a penalty of 40% for a gross valuation misstatement. Filing taxes in the military If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. Filing taxes in the military The penalty rate is also 40% if the property's correct value or adjusted basis is zero. Filing taxes in the military Transaction lacking economic substance. Filing taxes in the military   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. Filing taxes in the military For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. Filing taxes in the military   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. Filing taxes in the military   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. Filing taxes in the military   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. Filing taxes in the military Relevant facts include any facts affecting the tax treatment of the transaction. Filing taxes in the military    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. Filing taxes in the military Undisclosed foreign financial asset understatement. Filing taxes in the military   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. Filing taxes in the military An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. Filing taxes in the military The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. Filing taxes in the military Any foreign business you control, reportable on Form 5471, Information Return of U. Filing taxes in the military S. Filing taxes in the military Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. Filing taxes in the military S. Filing taxes in the military Persons With Respect to Certain Foreign Partnerships. Filing taxes in the military Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. Filing taxes in the military S. Filing taxes in the military Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. Filing taxes in the military Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. Filing taxes in the military    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. Filing taxes in the military See the Instructions for Form 8938 for details. Filing taxes in the military    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. Filing taxes in the military Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Filing taxes in the military Penalty for incorrect appraisals. Filing taxes in the military   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. Filing taxes in the military For details on the penalty amount and exceptions, see Publication 561. Filing taxes in the military Penalty for failure to disclose a reportable transaction. Filing taxes in the military   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). Filing taxes in the military For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). Filing taxes in the military This penalty is in addition to any other penalty that may be imposed. Filing taxes in the military   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. Filing taxes in the military For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. Filing taxes in the military irs. Filing taxes in the military gov/irb/2007-09_IRB/ar12. Filing taxes in the military html. Filing taxes in the military Accuracy-related penalty for a reportable transaction understatement. Filing taxes in the military   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. Filing taxes in the military This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. Filing taxes in the military The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. Filing taxes in the military You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. Filing taxes in the military The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. Filing taxes in the military   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. Filing taxes in the military Civil fraud penalty. Filing taxes in the military   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. Filing taxes in the military Joint return. Filing taxes in the military   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. Filing taxes in the military Failure to pay tax. Filing taxes in the military   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. Filing taxes in the military Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. Filing taxes in the military Prev  Up  Next   Home   More Online Publications