Comprehensive
Example(p12)

Rev. John White is the minister of the First United Church. He is married and has one child. The child is considered a qualifying child for the child tax credit. Mrs. White is not employed outside the home. Rev. White is a common-law employee of the church, and he has not applied for an exemption from SE tax.

The church paid Rev. White a salary of $31,000. In addition, as a self-employed person, he earned $4,000 during the year for weddings, baptisms, and honoraria. He made estimated tax payments during the year totaling $7,000. He taught a course at the local community college, for which he was paid $3,400.

Rev. White owns a home next to the church. He makes a $650 per month mortgage payment of principal and interest only. He paid $1,800 in real estate taxes for the year on the home. The church paid him $800 per month as his parsonage allowance (excluding utilities). The home's fair rental value for the year (excluding utilities) is $9,840. The utility bills for the year totaled $960. The church paid him $100 per month designated as an allowance for utility costs.

The parts of Rev. and Mrs. White's income tax return are explained in the order they are completed. They are illustrated in the order that Rev. White will assemble the return to send it to the IRS.

The church completed its Form W-2 for Rev. White as follows.

The church entered Rev. White's $31,000 salary.

The church left this box blank because Rev. White did not request federal income tax withholding.

Rev. White is considered a self-employed person for purposes of social security and Medicare tax withholding, so the church left these boxes blank.

The church entered Rev. White's total parsonage and utilities allowance for the year and identified them.

The community college gave Rev. White a Form W-2 that showed the following.

The college entered Rev. White's $3,400 salary.

The college withheld $272 in federal income tax on Rev. White's behalf.

As an employee of the college, Rev. White is subject to social security and Medicare withholding on his full salary from the college.

The college withheld $142.80 in social security taxes.

The college withheld $49.30 in Medicare taxes.

Some of Rev. White's entries on Schedule C-EZ are explained here.

Rev. White reports the $4,000 from weddings, baptisms, and honoraria.

Rev. White reports his expenses related to the line 1 amount. He paid $87 for marriage and family booklets and drove his car 490 miles for business, mainly in connection with honoraria. Rev. White used the standard mileage rate to figure his car expense, as follows.

490 miles × 55.5 cents ($0.555) =

$272

These expenses total $359 ($272 + $87). However, he cannot deduct the part of his expenses allocable to his tax-free parsonage allowance.

First, Rev. White uses Worksheet 1 (see Attachment 1 later) to figure what percentage of his business expenses are not deductible. Then he completes Worksheet 2 (see Attachment 1 later) to show that 23% (or $83 = $359 × 23% (.23)) of his business expenses are not deductible because they are allocable to his tax-free allowance. He subtracts the $83 from the $359, enters the $276 difference on line 2, and adds a note at the bottom of the page to see the attached statement.

Rev. White attaches Worksheets 1 and 2 to his return. This is part of his required statement. See Attachment 1, later.

He enters his net profit of $3,724 ($4,000 − $276) on line 3 and on Form 1040, line 12.

Rev. White fills out these lines to report information about his car.

Rev. White fills out Form 2106-EZ to report the unreimbursed business expenses he had as a common-law employee of First United Church.

Before completing line 1, Rev. White fills out Part II because he used his car for church business. His records show that he drove 2,774 business miles, which he reports in Part II. Then, he figures his car expense for his line 1 entry.

He enters $231 for his professional publications and booklets.

Before entering the total expenses on line 6, Rev. White must reduce them by the amount allocable to his tax-free parsonage allowance. After completing Worksheet 3 (see Attachment 1, later), he finds that 23% [or $407 = ($1,540 + $231) × 23% (.23)] of his employee business expenses are not deductible. He subtracts $407 from $1,771 ($1,540 + $231) and enters the result, $1,364, on line 6, adding a note at the bottom of the page about the attached statement. He also enters $1,364 on Schedule A (Form 1040), line 21.

Rev. White fills out Schedule A as explained here.

He deducts $1,800 in real estate taxes paid in 2012.

He deducts $5,572 of home mortgage interest paid in 2012 (reported on Form 1098, Mortgage Interest Statement (not shown)).

Rev. and Mrs. White contributed $4,800 in cash during the year to various qualifying charities. Each individual contribution was less than $250 and they have the required records for all donations.

Rev. White enters his unreimbursed employee business expenses from Form 2106-EZ, line 6.

He can deduct only the part of his employee business expenses that exceeds 2% of his adjusted gross income. After he completes page 1 of Form 1040, he fills out these lines to figure the amount he can deduct.

The total of all the Whites' itemized deductions is $12,830, which he enters here and on Form 1040, line 40.

After Rev. White prepares Schedule C-EZ and Form 2106-EZ, he fills out Schedule SE (Form 1040). He reads the chart on page 1 of the schedule and determines that he can use Section A—Short Schedule SE to figure his self-employment tax. Rev. White is a minister, so his salary from the church is not considered church employee income. Thus, he does not have to use Section B—Long Schedule SE. He fills out the following lines in Section A.

Rev. White attaches a statement (see Attachment 2, Worksheet 4, later) that explains how he figures the amount ($43,670) to enter.

He multiplies $43,670 by 92.35% (.9235) to get his net earnings from self-employment ($40,329).

The amount on line 4 is less than $110,100, so Rev. White multiplies the amount on line 4 ($40,329) by 13.3% (.133) to get his self-employment tax of $5,364. He enters that amount here and on Form 1040, line 56.

Rev. White multiplies the amount on line 5 by 57.51% (.5751) to get his deduction for the employer-equivalent portion of self-employment tax of $3,085. He enters that amount here and on Form 1040, line 27.

After Rev. White prepares Form 2106-EZ and the other schedules, he fills out Form 1040. He files a joint return with his wife. First, he fills out the address area and completes the appropriate lines for his filing status and exemptions. Then, he fills out the rest of the form as follows.

Rev. White reports $34,640. This amount is the total of his $31,000 church salary, $3,400 college salary, and $240 ($1,200 - $960), his excess utility allowance. The two salaries were reported to him in box 1 of the Forms W-2 he received.

He reports his net profit of $3,724 from Schedule C-EZ, line 3.

He enters $3,085, the deductible part of his SE tax from Schedule SE, line 6.

He enters the total itemized deductions from Schedule A, line 29.

The Whites can take the child tax credit for their daughter, Jennifer. Rev. White figures the credit by completing the Child Tax Credit Worksheet (not shown) in the Instructions for Form 1040. He enters $1,000 credit on line 51.

He enters the self-employment tax from Schedule SE, line 5.

He enters the federal income tax withheld, as shown in box 2 of his Form W-2 from the college.

He enters the $7,000 estimated tax payments he made for the year.

He wants to have any overpayment of tax applied to his 2013 estimated tax.

Attachment 1 (Worksheets 1, 2, and 3) shows the computation of expenses that are nondeductible because they are allocable to tax-free ministerial income and the allowance deductions.

Attachment 2 (Worksheet 4) shows the computation of net self-employment income.