Tax Changes for Religious Organizations and Clergy in a Biden Presidency?
Time will tell how much of President-elect Joe Biden’s tax proposal will become law in the next four years. The ease with which the Biden White House can implement its plans depends in part on which political party ends up in control of the Senate after January.
Though the details of specific proposals in the Biden tax plan remain unclear, its general goals and objectives indicate that we may see changes — and new opportunities — in the tax treatment of tax-exempt and religious organizations and their employees.
Some possible changes in store for religious organizations and clergy during the Biden administration are outlined below. This is by no means an exhaustive list, however, of what may change.
Creating community-benefit plans
President-elect Biden has proposed shifting the current Opportunity Zone program toward providing affordable housing and local business development through partnerships with nonprofit organizations.
Under current law, a Qualified Opportunity Zone, or QOZ, is an economically distressed community where new investments may receive preferential tax treatment. Federal tax law gives QOZs special tax status to spur economic development and job creation. An investor putting new capital in a business that operates in a QOZ can defer tax on some of the capital gain from the investment. Some of the gain may even be tax-free if the investor holds the investment long enough.1Internal Revenue Service, Opportunity Zones Frequently Asked Questions, https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions#general, accessed Nov. 22, 2020. As the program requires investors to have a high net worth, an annual income above a certain amount, and to make at least a six-figure investment, investors in QOZs are typically wealthy.
Biden’s tax plan seeks to make it easier for people who live in QOZs to benefit from the program.
Part of the Biden proposal would create incentives for a QOZ’s fund to partner with nonprofit and community-oriented organizations to produce a “community-benefit plan” for investments in the QOZ. A community-benefit plan would focus on creating jobs for low-income residents and finding other ways to help households in the QOZ financially.2 Kiplinger, “Election 2020: Joe Biden’s Tax Plans,” Oct. 22, 2020, https://www.kiplinger.com/slideshow/taxes/t055-s001-2020-election-joe-biden-s-tax-plans/index.html, accessed Nov. 22, 2020. This new focus for community-benefit plans may be interesting to churches that have set up related entities, like housing development organizations, designed to help their surrounding communities.
Reimbursing nonprofit organizations for providing health benefits
While details are elusive, the Biden webpage dedicated to “short-time compensation” proposals outlines a plan to create “a refundable tax credit that would reimburse companies as well as nonprofit organizations for the extra costs of providing full health benefits of all their workers during a period of work hour reductions.”3Biden-Harris website, “The Biden Plan to Scale Up Employment Insurance by Reforming Short-Time Compensation Programs, https://joebiden.com/the-biden-plan-to-scale-up-employment-insurance-by-reforming-short-time-compensation-programs/#, accessed Nov. 26, 2020.
According to the Biden website, this work-hour-reduction proposal, designed to reduce the number of layoffs in hard economic times, represents one of a series of ideas modeled on Germany’s longstanding practice of taking robust measures to protect jobs during recessions.
Under current law, employers must provide full health coverage to employees even if their working hours decrease. The cost of providing employee healthcare benefits when revenues are falling can lead companies to lay off workers. Full healthcare benefits would still be required during economic downturns under Biden’s plan, but the proposed credit would presumably make it easier for employers, including religious organizations, to retain workers in recessions.
Replacing the Section 403(b) contribution deduction with a credit
One part of Joe Biden’s tax plan that seems to have received less attention than it deserves is his proposal to replace the current deduction for contributions to 401(k), 403(b), traditional IRA, and other tax-deferred retirement plans with a credit.
Tax-exempt organizations typically use 403(b) plans as the retirement accounts for their employees. Section 403(b) plans work in largely the same way as 401(k) plans: earnings and returns in a regular 403(b) plan are tax-deferred until withdrawn, while qualified withdrawals from a Roth 403(b) of employee contributions and earnings are tax-free.
A special type of 403(b) plan — a 403(b)(9) — is designed for employees of religious institutions. Section 403(b)(9) plans allow retired clergy to have retirement distributions designated as housing allowance, and they have less onerous reporting requirements than other retirement plans.4 Guidestone, “403(b)(9) Church Plans,” 403(b)(9) Church Plans (guidestoneretirement.org), accessed Nov. 29, 2020.
Biden’s proposal aims to “equalize” the tax benefits of traditional (non-Roth) plans, including 403(b) plans.5Biden-Harris website, “The Biden Plan for Older Americans,” https://joebiden.com/older-americans/, accessed Nov. 26, 2020. The Tax Foundation provides an example of a tax outcome under the current deferral system:
A taxpayer in the current top marginal tax bracket of 37% receives a $37 tax benefit for every $100 she contributes into a pre-tax retirement account, while a taxpayer in the bottom bracket (10%) only receives a $10 tax benefit for every $100 contributed to the same kind of retirement account.6Garrett Watson, “Biden’s Proposal Would Shift the Distribution of Retirement Tax Benefits,” The Tax Foundation, Aug. 26, 2020, https://taxfoundation.org/bidens-proposal-would-shift-the-distribution-of-retirement-tax-benefits/, accessed Nov. 26, 2020.
In other words, the amount of tax benefit available to a taxpayer under the current deferral system depends on the taxpayer’s income tax bracket.
The Biden proposal would replace the deduction with a tax credit for retirement contributions. The credit would equal a flat percentage of the amount contributed to a retirement plan. Tax research institutes like The Tax Foundation and the Tax Policy Center expect the percentage to be 26%.
Under the Biden plan, both taxpayers in the previous example would receive a $26 benefit for every $100 they contribute.7Assuming the credit is 26%.
As the two examples taken together show, the flat credit would likely reduce the benefit of contributing to retirement plans for upper-income families and increase the advantage of contributing for lower-income taxpayers. Taxpayers with incomes of up to around $80,000 filing jointly would benefit from the change, while those with higher incomes would lose some of the advantage compared to current law.8Garrett Watson, “Biden’s Proposal Would Shift the Distribution of Retirement Tax Benefits,” The Tax Foundation, Aug. 26, 2020, https://taxfoundation.org/bidens-proposal-would-shift-the-distribution-of-retirement-tax-benefits/, accessed Nov. 26, 2020.
Clergy and other employees of religious institutions tend to be in relatively low tax brackets. If Joe Biden’s proposal to replace the current deduction-and-deferral mechanics in retirement plans like 403(b) plans with a credit becomes reality, employees of tax-exempt organizations may find it more profitable to contribute to retirement plans than it has been for them in the past. ♦
Allen Calhoun’s career has followed parallel tracks, one in the law and legal publishing field and the other in academics and higher education. He has, among other degrees, a PhD in theological ethics and an LLM in taxation and is currently putting both to use as a Senior Legal Writer for Thomson Reuters and a McDonald Distinguished Fellow at Emory University’s Center for the Study of Law and Religion.
Calhoun, Allen. “Tax Changes for Religious Organizations and Clergy in a Biden Presidency?.” Canopy Forum, December 17, 2020. https://canopyforum.org/2020/12/17/tax-changes-for-religious-organizations-and-clergy-in-a-biden-presidency/.