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Tuesday, May 21, 2013

Kollel Stipends and Taxability

UPDATE:  I found an article on kollel pay in Hamodia from 2010 posted at NCYI's website which looks at the same issues, draws basically the same conclusions except that it also looks at scenario #1 from the perspective of the school and admits the risk.  It looks more from the perspective of what the school should do, although the problem is that the institutions don't always provide the guidance leaving the receipent wondering just what to do with the pay which is where my brief piece came in).  Of course, none of this should be considered tax advice and all should consult their own people.
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An interesting subject came up on imamother and it is clearly the subject of much confusion, so I thought I would give my educated take on tax treatment of kollel stipends [updated:  where the checks came and no 1099 or W-2 was provided and the recipient of the stipend is wondering what they need to consider next]..  Personally I think it much behooves the schools themselves to treat these payments with more formality in order to clear up confusion as I have heard all of the following scenarios when it comes to the treatment of kollel stipends:

1.  They simply aren't claimed as income.
2.  They are treated as self-employment income.
3.  They are treated as a fellowship/scholarship.
4.  They are treated as parsonage.

With the exception of #1, the other scenarios could qualify as proper treatment.  Scenario #1 is highly problematic especially if the taxpayer claims welfare credits on their 1040.

Scenario #3 is probably the most favorable under normal circumstances.  Here the taxable portion of the stipend is subject to federal tax, but not employment taxes. Included in income is the portion of the stipend that was not used to pay for required course tuition, fees, equipment, and materials.  The hitch however is that the academic institution need to be a college of sorts: maintaining regular staff, curriculum, awarding degrees and the recipient must be a degree candidate.  Night kollelim that are connected to synagogues or community kollels normally would not qualify while recognized kollelim could where the recipient is a degree candidate.  One difficulty is that many yeshivot really don't have a straight forward degree program making it challenging to figure out if the student is a degree candidate even where the institution itself awards semicha and other degrees.

A commentor at imamother mentioned that the if a recipient has certain duties the income is parsonage.  I disagree with the interpretation because a recipient of a stipend cannot, unilaterally, declare something to be parsonage.  Certainly a religious institution can pay parsonage, however, the parsonage can only be paid to someone who qualifies to receive parsonage and parsonage must be declared as parsonage in advance of payment of parsonage.  Absent these qualifications and absent the ability to treat the stipend as a fellowship or scholarship, the logical default is self-employment income which, under normal circumstances, would be the least favorable tax treatment, but in the case of low income and a few kids could potentially be the most favorable tax status.

However, if the institution is not a college and the taxpayer is non-Rabbinic but is being required to maintain certain hours and responsibilities, the candidate can report the income as income and file a form declaring that the institution never provided him with a W-2.  However, this is probably the quickest way to lose one's stipend.

Personally I'd encourage the institutions to make the determination of tax treatment for each kollel member based on appropriate (and highly consistent) factors and eliminate confusion.

9 comments:

Miami said...

I think Scenario 1 isn't problematic, I think it's pretty straightforward Tax Evasion.. Claiming parsonage or fellowship when you received neither is probably also evasion.. Those the fellowship might be less bad because it's lacking criminal intent.

But ask a Tax Attorney, not someone on the Internet.

And not a CPA, this is a Tax Law question, not a public accounting one.

Orthonomics said...

Correct, tax evasion, but many act out of pure ignorance here. You can't claim parsonage unless you were paid parsonage (as determined in advance of the payment by the contract).

Of course people should consult their own professionals, not an internet forum. Scholarship vs. Contract pay isn't foreign to CPA firms.

Not a CPA said...

Why can't it be treated like receiving charity which presumably isn't taxable?

There are no specific degrees being worked for.The kollel has no real obligation to pay if they lack the funds.(Many kollelim explicitly warn new recipients of that)It sounds like charity more then a scholarship.

Orthonomics said...

Not a CPA,

See the article I linked to in the update that makes a case for that in limited circumstances.

Here are some issues:

1. It is NOT charity. The qualification is coming to learn, not having low income. In fact a wife might have a respectable income and the kollel still pays a stipend.

2. The organization must be permitted to give grants. Even organizations that give grants will choose not to give cash less it be confused with pay and rather pay bills directly.

3. There has to be consistency from an audit standpoint. A yeshiva might be able to designate some stipends as parsonage/Rabbinic pay and others as scholarships/fellowships based on the ordination, duties, degree path, etc. It is a hard case to then throw other students in as "charity cases."

4. I don't understand the lack of "obligation" you refer to. If the kollel pays when they can it doesn't turn income or fellowship into charity. If someone receives back rent or back pay that was long forgotten about by the landlord or owner, it doesn't turn the money into something else.

Be'er said...

Not a CPA,

Another thought: The kollel is a charity, those working there are not necessarily. Your average 501 (c) 3 pays salaries to it's administrators, etc...

Hesitantly, I wonder how many kollelim provide W2's to the staff, never mind the bachrim. If not, then it's clearly a very large issue, from a tax perspective.

Anonymous said...

Why does the article you linked to say that teaching Chumash to children or giving a lecture as part of kiruv work is considered ministerial duties and eligible for parsonage, absent ordination? I do not believe that that is in accord with the IRS regulations. And if that is somehow okay, does that mean that women who do those things (for surely there are plenty of women teaching Chumash to children and working in kiruv) also get to take parsonage?

My understanding was that even those are ordained can't get/take parsonage, so even a rabbi who was teaching elementary school wouldn't be able to. I thought parsonage was limited to those who run or facilitate prayer services and/or lead congregations and/or act as spiritual advisors to congregations. Or something like that. I Googled it when I was working at a synagogue in a administrative role in adult education (with very occasional teaching). I did not fit the criteria, although the executive director, who taught more than I did but was also primarily an administrator/fundraiser, was ordained and did take parsonage.

Anonymous said...

Clarification: "Even those who are ordained and teaching Chumash or giving Torah lectures..." is what I meant.

I do know women who were certified to organize tefillah in community or coed high schools and take parsonage. Meaning, they find boys to lead tefillah, leyn, and know to tell the kids when to say tachanun, what to do if you forget Al HaNisim, etc. Basic information found in the Shulchan Aruch and mishna brura.

tesyaa said...

I know of a woman teaching elementary school who is "taking" parsonage. I'm not sure what that means, but as a chareidi woman, she is not an "ordained rabbi" or anything like that.

Orthonomics said...

When it comes to ordination there is some flexibility for those who act in the position of ministerial duty and giving religious teaching is my understanding from speaking to various high level accountants and tax lawyers.

Regarding woman and parsonage the Agudah and other Orthodox umbrella groups that assist in such matters are in a bit of a bungle. The Agudah in particular given their outspokeness regarding Maharat issue and even Yotzet Halacha.

That said, I think that woman who receive parsonage have some sort of seminary degree and must perform some type of ministerial duties to be granted parsonages. Most Orthodox schools are not in the habit of paying out parsonage and there are even Rabbis that should be paid as clergy and are not being paid as such.

All and all there is much inconsistency. From the IRS's standpoint it is hard to claim that someone acting as clergy is not clergy because that would put them in a position of interference with religious law and conventions.