Below is a summary of changes made by the recently enacted tax reform that may impact United Methodist annual conferences.
Qualified Moving Expense Reimbursement Exclusion—Temporary Suspension
Before 2018, qualified moving expense reimbursements provided by employers to employees were excludable from gross income if the reimbursements satisfied requirements of Section 132(f) of the Internal Revenue Code (the Code).
Unfortunately, this means that moving expense reimbursements provided by employers to employees (e.g., by an annual conference or local church to clergy) will be taxable income to employees. Although the IRS guidance on Form W-2 reporting for 2018 may not be published for some time, Wespath reasonably presumes this will be reported along with other taxable income on an employee’s Form W-2. For clergy, the impact of losing this exemption means that the reimbursements will become “net earnings from self-employment,” so that the reimbursements will be subject to self-employment (SECA) taxes as well as income taxes (an increased financial impact). Along with the loss of the reimbursement exclusion, moving expenses paid by individuals also will not be deductible.
One important point on this particular change is that, because moving expense reimbursements are now taxable income, they are also considered “plan compensation” under the Clergy Retirement Security Program (CRSP), the United Methodist Personal Investment Plan (UMPIP) and the Comprehensive Protection Plan (CPP). Inclusion of moving expense reimbursements in the definition of taxable income (and, therefore, “plan compensation”) will increase the amount on which accrued benefits, plan sponsor contributions, disability benefits and CPP premiums are based. Plan sponsors will need to consider how this change may impact their procedures on reporting plan compensation to Wespath.
Qualified Transportation Fringe Benefits—New Tax for Tax-Exempt Organizations
Another change is that tax-exempt employers must pay a new tax if they offer qualified transportation fringe benefits to their employees. An example of a qualified transportation fringe would be transit passes purchased by the employer and provided to employees. (Although the employer will pay this new tax, the transportation fringes will generally remain tax-free for employees, with the exception of employer reimbursements of bicycle commuting expenses.)
Qualified Disaster Relief (2016)
The tax act contains special tax relief for distributions from retirement plans made to individuals during 2016 or 2017 whose principal place of abode during 2016 was located in a disaster area (as defined by the Act) and who sustained losses from the disaster. The tax relief consists of being able to avoid the 10% tax on early distributions from retirement plans, being able to spread the income taxes from such distribution over a three-year period, and having the option to repay qualified disaster distributions within a three-year period. Total distributions to a participant eligible for this relief cannot exceed $100,000.
Rollovers of Plan Loan Offsets
UMPIP and the Horizon 401(k) plan offer plan loans to participants and, like many retirement plans outside the UMC, contain a plan loan offset provision. Under this type of plan provision, any unpaid loan balance that exists at termination of employment is offset against a participant’s retirement account balance, and the offset amount constitutes a taxable distribution to the participant unless the participant makes a rollover of this amount (basically, a contribution to an IRA or other retirement plan). A participant who has the funds to make such a rollover might do this to avoid incurring a taxable distribution. Under the Act, the time period during which a rollover of a plan loan offset may occur is extended to the due date for filing one’s tax return for the year (typically April 15 of the following year). Previously, the deadline was 60 days after the plan loan offset.
Provisions That May Impact Charitable Giving
Some provisions of the tax act might have a negative impact on charitable giving. For example, the increase in the standard deduction for individual taxpayers will result in fewer taxpayers being able to itemize charitable donations as deductions. An estimated 94% of taxpayers are now expected to claim the increased standard deduction instead of itemizing deductions. This is an increase from approximately 70% under previous law. Thus, fewer taxpayers will receive a tax benefit when making charitable donations. As another example, the new law doubles the estate and gift tax exemption for estates of decedents and gifts made in 2018, increasing the exclusion amount from $5 million to $10 million. The $10 million exclusion is indexed for inflation (after 2011) and is expected to be approximately $11.2 million in 2018. The higher exclusion amount is expected to reduce the tax incentive for individuals to make deductible charitable bequests.