Pastor Owes Social Security Tax On Housing Aid

I do the treasurer job for a small church. Recently we called an interim pastor and voted to compensate him with a $100/week housing allowance. I know housing allowances are tax free for the clergy. The question is, do we need to deduct FICA from this amount?

J.L., Indianapolis

As you noted, the housing allowance you pay your pastor is free from income tax. The allowance is, however, subject to Social Security tax. The church doesn’t have to make the deductions before you pay him his allowance. Typically the way this is reported is that the entire amount is paid to the pastor, and then he reports the amount of the housing allowance as self-employment income on his Schedule SE and calculates the tax on his own tax return.

The IRS wants you to be sure to designate in the church minutes or financial records that the amount paid is an allowance for housing as opposed to a payment for services.

Is it possible to take the adoption tax credit if I adopt my fiancé’s child after we get married, or is this credit just for people who adopt a child who is not living with a natural parent? If I qualify for the credit, exactly how much credit do I get?

Y.G., Indianapolis

The adoption of your spouse’s child does not qualify for the adoption credit.

But since you asked, here are the rules for adoptions that do qualify for the credit. You may adopt a child (other than your spouse’s child) who is under the age of 18, or who qualifies as a special needs child, and take a dollar for dollar credit for the adoption expenses you incur, including adoption fees, attorney fees, court costs, and travel expenses.

You have to have adjusted gross income of less than $115,000 to take the adoption credit, and the amount of credit you get is reduced if your income exceeds $75,000. The credit is limited to a maximum of $5,000 per child, or $6,000 for a special needs child.  The credit is claimed on Form 8839, Qualified Adoption Expenses, which gets attached to your 1040.

I opened an IRA account several years ago and I diligently deposit $2,000 each year. I’ve changed jobs a lot and have always qualified for the deduction on my tax return, but this year I’ve been with an employer long enough to participate in the company 401(k) retirement plan. I made my IRA contribution for 1999 early in the year – now do I have to take the money out of the plan?

R.G., Indianapolis

Yes or no. How you treat the contribution you made to your IRA is your choice, and you have two alternatives.

1. You can choose to take the money out of the IRA. You can withdraw the money penalty free if you take the money out of the account before you file your tax return in the spring. When you withdraw your 1999 contribution, be sure to also withdraw the money that the 1999 contribution earned. The earnings portion of the money you withdraw will be taxable on your 1999 tax return.

2. You can leave the money in your IRA and consider the contribution to be a non-deductible contribution. You don’t get to take a deduction for the money you put in the IRA, but you don’t have to pay tax on the earnings generated by that money (until sometime in the future when you finally withdraw the money).

If you decide to leave the money in the IRA plan you need to make a note of the fact that the $2,000 you contributed in 1999 was not tax-deferred like the other money in the fund. This will be important when you ultimately withdraw the money, since a portion of the money you withdraw will have already been taxed and won’t be subject to tax again.