Understanding Clergy Tax Challenges

Sergi taxes income tax has made more Liars out of American people than golf has and that's just because it's complicated I mean for the most part it's easy to get in trouble and so I'm gonna focus on the specific challenges facing pastors churches have their own set of issues that I'm not really going to touch on but I we can address those at some time offline or later if you if you run into them but know that I I do work with churches on solving their issues as well but I'm focusing mainly on the pastor issues goals for this session is one increase awareness of tax challenges facing clergy I don't expect you guys to be clergy tax experts after this but I do want you to be aware of those common pitfalls and challenges that a lot of times trip up trip up pastors want to learn some practical tax tips and strategies again I ran these by some some of my experienced clergy friends and they gave me some good pointers and so that we're gonna these goals or so that a you have more money in your pocket at the end of time I don't want you guys I want you to pay your fair amount of taxes but not more I figure if you take advantage of some of the tax tax advantages that there are then it's better for everybody and to spend an appropriate amount of time and energy worrying about tax issues one thing is if you make some of the errors that I'm going to talk about they will end up costing you months and months of time to get it sorted out plus it's just draining to work with the IRS to resolve an issue it's a RS is one of the most feared organizations in the world so anyway in a nutshell why our clergy tax is so difficult and Albert Einstein once said the hardest thing in the world to understand is the income tax that lets you know something and clergy taxes are more difficult than income tax they're not as hard as farm taxes I don't think that they are difficult and they don't teach accountants this when you sit for the CPA exam or anything else they don't teach the most of these clergy issues or church issues to accounting majors so question number one are pastors employees of the church or self-employed self-employed the answer is yes you see why this is tough the IRS has declared that pastors are employees of the church so you're going to get a w-2 from the front of the church but the Social Security Social Security Administration so that's your self-employment taxes consider pastors to be self-employed and that means you need to file a Schedule se and so since you're self-employed normally if you're a lay employee the employee the employer would pay seven point six five percent or half of your Social Security Medicare now since you are considered self-employed you end up having to pay that both sides of that so fifteen point three percent of your income needs to be paid for into the Social Security Administration for Social Security and Medicare so this is the crux issue of why it's so complicated to be a pastor is that they there's no agreement here you have to play by two sets of rules how do pastors make their tax payments should it be with payroll withholdings or quarterly payments any quarterly and the answer is yes actually for most pastors they're going to do quarterly estimated payments that's that's right but if you do have a church that does have like lay employees and they're already doing withholdings it's perfectly fine for a pastor to have withholdings but you have to tell the church how much to withhold that's that's the issue is they don't you can't use because they can't withhold for Social Security and Medicare but they can withhold for income tax so but you can withhold enough to cover the income tax as well as the self-employment taxes and here's the one thing I just all my clergy colleagues said emphasize this you know you need to when you get your first paycheck you need to put in approximately 30% of that paycheck away for taxes so whether you have the church withhold it or whether you set up a savings account you should plan on about 30 percent I've done with the new rules under the new tax the new tax laws if you have kids you might be able to bring that down I did some just some rough estimating and if you have two kids younger kids under the age of 17 you could maybe withhold it might be closer to 20% as what you have to put aside but again I'm just this is this is kind of new and we're just we'll see what it ends up being but it but that 20 to 30 percent is what you should be putting aside into savings and I can't stress that enough either having them withhold it or putting it into savings one thing to any of you that are being moved by the conference or you're moving for or you're moving yourself maybe are that you're doing some other moving way that moving is now no longer you can no longer exclude that from income now that is a taxable event so if the conference moves you normally it costs us about about five thousand dollars is what it costs us for a move and that's to move a whole household usually over fifty miles or so but anyway so five thousand dollars so that means the taxes on that will be close to fifteen hundred dollars so that's another thing to try to factor in is that if you have a conference move making sure you put aside extra money for the the to pay the taxes on that move and again if you did it you halt and have that reimbursed about thirty percent of that cost you should be putting side for taxes hopefully that makes sense let's see can pastures really opt out of Social Security that's an interesting question what do you think and the answer is yes they can question mark they can if you but the thing is you can't opt out of it just because you think it's a crappy investment I know that's what Dave Ramsey would say yeah I think he has it written on his website is that it's crappy investment but is it is a crappy investment necessarily morally being opposed to a public insurance program because that's the criteria and I know there have been a couple of pastors that have opted out and I've actually know quite a few that opted out and later on the IRS will sometimes do this but they rarely do it or not sentence IRS Social Security Administration they'll allow people to opt back in and though and I've seen a number of them that opted out and initially because they thought and this is 40 years ago when they went into ministry they thought that Social Security was gonna go bust and so they opted out well later on they had an opportunity to opt in so but that's not something you can count on they don't do that that often the one thing is and I'll here's my why would I not opt out of Social Security first of all I don't think Social Security Medicare are going away I do believe they'll be changed and I think finally somebody with enough political courage will fix the issues it's not a difficult issue I mean you just got to match up the expected outflow with the expected inflow of money and then it's fixed but they need to fix it'll be changed it'll likely be changed but I don't think it'll go away number two if you do opt out you need to be extremely well disciplined in how you handle your finances you need to be preparing for this for retirement if you get disabled that's one of those things you don't plan on but are you are you prepared if you were disabled or are you prepared to help you cover your dependents if you die an untimely death what kind of income will they have you know those are the things that you end up losing if you opt out yeah one other thing is are you MC benefits for retirement and disability rely on pastures being in Social Security so if you get disabled we won't be able to help you or we won't be able to help with your retiree health when you retire if you opt out and so really the only way if you opt out and you want to get back onto Social Security and Medicare the only way to really do it is to leave ministry is that back in so I mean that's you got to no longer be a pastor if you want to back in or you got a hope that Social Security does again want to open up the allow people got back in but that is very rare that that happens all right is a parsonage or Cache housing allowance taxable or not is the question Christa says no and the answer is yes it is not taxable for income tax but it is taxable for social security / self-employment so if so something you will have a parsonage and that is so the parsonage that will not be included on your w-2 if you were a lay person living in a parsonage that gets the value of that gets put in on your w-2 but that will not be on your w-2 but then when you go to fill out your schedule I see for self-employment you end up having to estimate the fair rental value and this is very subjective you know one thing you can do is look for similar properties to the parsonage that are available for rent within the community you're at and that might be a comparison I'm gonna say probably most people underestimate this which I I would just visit with your tax professional or visit with somebody like that to get some kind of an estimate on that cash housing allowance is different a cash housing allowance is when they pay you they don't provide a parsonage so instead they pay you X amount of money for for your housing and usually it's either included with your paycheck or maybe it's a separate monthly check but it's usually a regular amount they should this shouldn't be like a reimbursement or anything like that and that then would not be included that extra payment would not be included on your w-2 but but you do have to include it on your schedule se when you do pay yourself employment taxes so all right the one of the clergy comp forms I'm proud to be paying taxes in the United States the only thing is I could be just as proud for half the money so what are the best tools that we worked on over the years is the clergy comp form we this will help you make some of your tax decisions ahead of time save you thousands we try to tie it right with the w-2 so that it's easy for your treasurer or whoever prepares the w-2 use for the church to go ahead and use your clergy comp form to go ahead and fill out your w-2 accurately so I'm going to go through some of these ones the first one is the designated housing exclusion and and I wonder if I got a let me see here I'm gonna get get my pin here but that's right here designated housing exclusion this if you are a clergy so this doesn't count for people that are working as lace apply if you are a clergy this should never be blank this should never be blank because what this is this is so if you live in a parsonage this covers any of those unreimbursed expand is on your house and I'm gonna go over exactly what what accounts for those expenses later on but just anything but so let's just say you buy Windex you may not want to have that reimbursed by the church but you guess what you can write it off for tax purposes because you're maintaining the home with it so anyway I'll cover it like I said I'll cover that later but that should never be zero if you have a cash housing allowance so instead they don't provide a parsonage but you have a cash housing allowance this should still never be zero because any expenses up and over your cash housing what they provide for the cash housing allowance that you can also write off so and the thing is it doesn't cost the church any extra money this does count for an apartment if you're if the church is providing apartment Chris TAS or or if you are renting apartment yourself that when I say you're providing a cash housing allowance it's just for whatever housing you need if you are sharing an apartment with a friend or have a campsite down in the middle of nowhere you know whatever it is or if you own your own home and you're paying a mortgage whatever it happens to be so the let me see that I don't know if I want to touch on this too much but there is there's always lawsuits that are attacking that cash housing allowance and whether it should or should not be taxable for income tax purposes and just to say you will hear about that and it may one day be a taxable benefit the cash housing allowance so far they are not there they are not challenging the parsonage yet and by them there's a group in Wisconsin called the Freedom From Religion Foundation and they're always trying to make make cash housing allowances taxable I don't know if that's their only goal but that's one of their primary goals so one of the things I say too is that this designated housing exclusion you need to make sure it's on there right away because this is something you can't set retro actively so let's just say you forgot about it and it's zero and then you get to September and you remember about it well guess what all those expenses from July and August those ones you can't include those against your housing expenses it's it just going forward so when you set that so if you forget about it in September it's only those expenses going forward from September through December so that's one of those tricky things and the thing is there's no penalty for going too high so for example if I have 1,000 if I have $1,000 in expenses and I have 5,000 set as my housing exclusion guess what all there's no penalty I do end up having to pay taxes on that 4,000 that extra 4,000 but I'm not penalized but the other conversely let's just say my expenses were 5,000 and I only had $1,000 here so I only had 1,000 here man it's harder to guess what all that excess expenses I can't claim those so I only get $1,000 worth so it's one of those credit things set it high estimate high there's no penalty it's no cost to the church it's just a straight benefit for you so how do I clear that you think there we go the if you are on our health insurance you know you'll automatically have a piece coming out for health insurance which reduces your taxes but it also reduces the amount you're paid but the other thing that I would also stress is that if you're on our health insurance taking advantage of the medical reimbursement account you know or if you have young kids that you need childcare taking care of the dependent care account even if it's like for me I used to do summer daycare for one of my kids so I used to have a dependent care account and use that up this one again every dollar you put in there it's it's really easy to submit your expenses for reimbursement Liana we'll talk about that sometime in the future but the thing is if you're assuming that 30 percent of every dollar is taxable you know what if I put two thousand four hundred away from medical reimbursement that reduces my taxes by eight hundred dollars you know and some of us a lot of us have regular you'll have regular dental you'll have regular vision you know a lot of those things plus maybe a regular office visit so those are things that are important to try to take advantage of it but this is one where you don't want to overestimate this is one where you want to treat it it's not exactly use it or lose it but I would treat it kind of like that in that I would want to estimate conservatively on how much expenses and then the final one for the clergy comp form is this this you want p IP contribution that's a pension contribution and you know no matter what you do whether you take it before tax that reduces your taxes currently or if you do it after tax with raw or or the after-tax one which reduces your taxes in the future you know probably the more important thing is just that you are putting into this retire into this retirement fund it it's nothing but a benefit for you in the future so and just as a side note I was asked this once could you have your tithes withheld from your paycheck and yes you can but it's after-tax so you can't reduce your pay by just having your tithe time taken out ahead of time so anyway your taxable yeah you can't reduce your taxable income by having your tithe deducted but it's not a bad way to do it I mean what I do is my church has electronic donation so I have it set out to come out of my checking account the same day I get paid so it's almost like it comes out of my pay my my paycheck so all right the next one is winning oh is that the question yeah insurance plan are you still eligible for the medical savings account nope you are not until you not unless you're part of that that's a wide oh no a benefit included within the health insurance plan itself thank you yep oh okay winning a taxes if you get up really work late and pay your taxes you'll get ahead if you strike oil this guy was not all that optimistic but here's just some practical stuff to help help you make the best in the best of things the first thing just like you're accountable reimbursement is get your treasure on board so one of the most practical things is if you have a copy of your clergy comp form and we usually email those out to pastors or you might be able to have a copy after the district superintendent fills it out give a copy or email a copy to your treasurer and just walk them through it if you need to but make sure they have a copy that was that was always the most annoying thing and I get the most as a treasurer you know I have to pay my pastor but I don't know how much you know and I don't know how much to withhold and it just helps you guys all get on the same page and the next thing is we do have a lot of resources on our website you know we have a guide that shows them how to turn the clergy comp form into the w-2 we have a guide that shows them actually a lot of the stuff we've been talking about accountable reimbursements policies all that kind of stuff but there's policies that a treasurer might find helpful on our website so if an even telling them to call me or email me is totally an option I help quite a few treasures visit with quite a few of them or SPRC people and trying to get this so the best thing you can do is get your treasure on board because it can be very isolating for a treasurer you might be the only United Methodist treasurer for 30 miles so you don't have anybody else doing exactly what you're doing that you know but at least there might be a connection either through our website or through us in the office here yes yes this information that you gave it's gonna be on the website that we could access it it will and we're actually going to send out an email to you with the links to everything so it'll all be available it'll be on the website as well as available and then we're going to also include a couple bonus materials that go into greater detail on some of the more complex subjects so yep get a system that works for you another thing similar to the accountable reimbursements is you need to set up a system that to capture especially those receipts and those debt documentation and again I say if you want to use Dropbox or Google and you bring that to your tax account at the end of the year that's fine or if you have a binder of some sort you know whatever it happens to be but it has to be something that you collect information so that you're not stressing out when it's April and you're trying to find all your tax your documents you need to file your taxes so whether it's paper or electronic you just need to have some kind of a system and I'm going to show you later I think it might be the next slide there if you and here's how I set up my tax my stacks folders and whether you do this again paper or electronically there's no problem I got a folder that's taxes and then I have a separate folder for each year a subfolder for each year and then within that I have a folder for housing expenses so anything relating to the house and again I'll talk about that a little bit in detail later on anything that's relating to the housing expenses I throw in there anything relating to funerals and weddings because those won't usually be recorded on your w-2 so if you go to do a wedding or a funeral a lot of times you'll get a check either cut directly from the family or from the funeral home so and even tracking mileage that maybe is not reimbursed going to the funeral home or to wherever the wedding location is that that's one of those things if you have any extra expenses that aren't reimbursed for that all those tax documents as well as what tax payments you've made if you if you're not doing withholding you know I would keep track of your quarterly estimated payments but and then any tax documents such as w-2s and 1099s have a folder for that any unreimbursed expenses because again those are still you can still write those off for self-employment purposes even though they're not excludable for our tab for income tax purposes and then the last one I always have is a miscellaneous one because there might be some stuff I don't know is this affects me tax wise put it in your miscellaneous folder let your tax preparer figure it out they're used to this and then they can help you say oh that wouldn't really go in here this folder or whatever it is but it's not a bad idea just it's better to collect more information than you need and then end up paying paying too much in taxes because you didn't collect the right information and then I'd set up one again a complementary one for the next year after that eventually so the housing expenses this is the housing expenses digression I have compiled this from a various list from various trusted sources over the years so these are those things that expenses that are not paid for by the church are reimbursed by the church so if you own your own home it's important that you that the down payment on the home would count you know the mortgage payments in principle and interest so this is one where you might end up being able to double dip if you're able to itemize you know if you have real estate taxes and mortgage interest and you might be able to also itemize as well as exclude this from your income tax property insurance rent payments utilities all these basic utilities long-distance phone service wouldn't count III don't think cell phone service counts either maybe if it's you if it is your home phone maybe it counts they usually have a separate kind of a separate kind of package for that homeowners homeowners association dues renter's insurance if you are in a parsonage you should have renter's insurance that's what protects your stuff so and it's usually very very cheap furnishings and appliances this is the big one so you guys some of you guys will be moving into a parsonage or moving into a new place and there's always whenever I've moved its up I buy extra furnishings for the stuff or I end up having to maybe buy an appliance or something like that or all that kind of stuff so bye-bye if I'm going from a one-bedroom house to a two-bedroom house so I need an extra bed and furnishings and stuff like that all that stuff can be written off for income tax purposes so that's one of those things you got to keep in mind so I would that's why I always want to be high in this decorations curtains blinds wall hangings all that stuff you can write off any repairs oh I'm going to look at Krista's here real quick so keeping a record of this allows you to offset income at tax time it allows you to offset income for income tax purposes not for self-employment taxes so that's what this is for it reduces your income tax and not your self employment tax any repairs sometimes you know what it's easy instead of waiting on the trustees if you live in a parsonage sometimes it's nice to just do something real quick like let's say you wanted painting and they just give you they'll go ahead if you buy the paint you go ahead for it you know what go ahead and do that if they allow you to do it that's not uncommon you know or you got minor maintenance such as you know door jamb it isn't working quite right so you fix it or something like that all those things that you might do that might not reimbursed yard maintenance and improvements you know planning flowers stuff like that or mowing lawn and then all these maintenance items pest control so I mean many of us might not think about buying you know if you buy ant traps for example yeah you can write that off for tax purposes light bulbs household cleaners pine-sol stuff like that anything you're doing that helps keep the house or the home in proper working condition so that's there's a lot of stuff so this is one of those areas where you might as well anything that you think might be included go ahead and put it in that folder so the next one I want to cover is this get a system that works for you if you are going to do quarterly estimated payments you need to put that on a calendar and you need to so it's September 15th January 15th April 15 June 15 whether it's a reminder on your smartphone or on your Cal Outlook or whatever it is or you got sticky notes or you got a physical calendar get this on your calendar because you don't want this to sneak up on you and you definitely don't want to pass it by you if you're making quarterly payments again you can go to then the WWE IRS gov slash payment slash direct pay and that will that's where you can pay it online or you can actually send in a paper coupon into the into the IRS as well if you need to the one thing you'll notice is that there's April 15th that is when your first quarter estimated payment is due but it's also when your final payment is due for your prior year taxes so this might be one if you ended up under paying your quarterly estimated payments you might be this might end up being a huge one so make sure you're prepared for that as well if you end up that's why it's important to do that 30% I mean I'd rather have a small refund than have to all of a sudden scram a lot of thousands of extra dollars at tax time let me see that's it that's the important thing is make sure you got those in mind and that again with every paycheck either having it withheld or putting it into some kind of savings account is the best thing you can do so if you have your treasurer with pools like 30% yep that's right then you don't have to worry about these then your treasurer has to worry about setting it it and but the treasurer is trained to do that they'll send it in every single month so yeah that's why I think that's the best way to do it because honestly unless you want to have complain about the IRS every three months then they do a quarterly estimated payment but if your treasurer can do that for you it just it's a relief so the other thing I say is get a tax professional these are six people that I know personally that I trust to handle clergy United Methodist clergy income tax properly I send them email updates every now and then to make sure that we're all on the same page and when there's an update that goes out some of these whoops shoot I went the wrong way some of these like Marilyn Perry Jim Brown I know for sure that they will do them by they'll use Skype to do it so if you're not by them the they'll they're more than happy to connect with you electronically and some of us that go to the Twin Cities we might end up going through an okapi Anoka and we can stop by I know Marilyn has that happen sometimes too but this first year especially if you've never done clergy taxes before I would strongly encourage you to seek out a professional that knows clergy taxes sometimes you can go to regular CPA and again they don't teach this stuff I talked to a tax professional that mostly does farm taxes and he called me up and he says I don't know this stuff you know walk me through it yeah and I and I did and I'm more than happy to do that but again it's much more comfortable for them if you just go to somebody that has experience here and you will see you might see at least Marilyn will be at our annual conference I where we're in Sioux Falls this your annual conference so that's Connie buckles anyway these are people that like I said I trust any other question

Sergi taxes income tax has made more Liars out of American people than golf has and that&#39;s just because it&#39;s complicated I mean for the most part it&#39;s easy to get in trouble and so I&#39;m gonna focus on the specific challenges facing pastors churches have their own set of issues that I&#39;m not really going to touch on but I we can address those at some time offline or later if you if you run into them but know that I I do work with churches on solving their issues as well but I&#39;m focusing mainly on the pastor issues goals for this session is one increase awareness of tax challenges facing clergy I don&#39;t expect you guys to be clergy tax experts after this but I do want you to be aware of those common pitfalls and challenges that a lot of times trip up trip up pastors want to learn some practical tax tips and strategies again I ran these by some some of my experienced clergy friends and they gave me some good pointers and so that we&#39;re gonna these goals or so that a you have more money in your pocket at the end of time I don&#39;t want you guys I want you to pay your fair amount of taxes but not more I figure if you take advantage of some of the tax tax advantages that there are then it&#39;s better for everybody and to spend an appropriate amount of time and energy worrying about tax issues one thing is if you make some of the errors that I&#39;m going to talk about they will end up costing you months and months of time to get it sorted out plus it&#39;s just draining to work with the IRS to resolve an issue it&#39;s a RS is one of the most feared organizations in the world so anyway in a nutshell why our clergy tax is so difficult and Albert Einstein once said the hardest thing in the world to understand is the income tax that lets you know something and clergy taxes are more difficult than income tax they&#39;re not as hard as farm taxes I don&#39;t think that they are difficult and they don&#39;t teach accountants this when you sit for the CPA exam or anything else they don&#39;t teach the most of these clergy issues or church issues to accounting majors so question number one are pastors employees of the church or self-employed self-employed the answer is yes you see why this is tough the IRS has declared that pastors are employees of the church so you&#39;re going to get a w-2 from the front of the church but the Social Security Social Security Administration so that&#39;s your self-employment taxes consider pastors to be self-employed and that means you need to file a Schedule se and so since you&#39;re self-employed normally if you&#39;re a lay employee the employee the employer would pay seven point six five percent or half of your Social Security Medicare now since you are considered self-employed you end up having to pay that both sides of that so fifteen point three percent of your income needs to be paid for into the Social Security Administration for Social Security and Medicare so this is the crux issue of why it&#39;s so complicated to be a pastor is that they there&#39;s no agreement here you have to play by two sets of rules how do pastors make their tax payments should it be with payroll withholdings or quarterly payments any quarterly and the answer is yes actually for most pastors they&#39;re going to do quarterly estimated payments that&#39;s that&#39;s right but if you do have a church that does have like lay employees and they&#39;re already doing withholdings it&#39;s perfectly fine for a pastor to have withholdings but you have to tell the church how much to withhold that&#39;s that&#39;s the issue is they don&#39;t you can&#39;t use because they can&#39;t withhold for Social Security and Medicare but they can withhold for income tax so but you can withhold enough to cover the income tax as well as the self-employment taxes and here&#39;s the one thing I just all my clergy colleagues said emphasize this you know you need to when you get your first paycheck you need to put in approximately 30% of that paycheck away for taxes so whether you have the church withhold it or whether you set up a savings account you should plan on about 30 percent I&#39;ve done with the new rules under the new tax the new tax laws if you have kids you might be able to bring that down I did some just some rough estimating and if you have two kids younger kids under the age of 17 you could maybe withhold it might be closer to 20% as what you have to put aside but again I&#39;m just this is this is kind of new and we&#39;re just we&#39;ll see what it ends up being but it but that 20 to 30 percent is what you should be putting aside into savings and I can&#39;t stress that enough either having them withhold it or putting it into savings one thing to any of you that are being moved by the conference or you&#39;re moving for or you&#39;re moving yourself maybe are that you&#39;re doing some other moving way that moving is now no longer you can no longer exclude that from income now that is a taxable event so if the conference moves you normally it costs us about about five thousand dollars is what it costs us for a move and that&#39;s to move a whole household usually over fifty miles or so but anyway so five thousand dollars so that means the taxes on that will be close to fifteen hundred dollars so that&#39;s another thing to try to factor in is that if you have a conference move making sure you put aside extra money for the the to pay the taxes on that move and again if you did it you halt and have that reimbursed about thirty percent of that cost you should be putting side for taxes hopefully that makes sense let&#39;s see can pastures really opt out of Social Security that&#39;s an interesting question what do you think and the answer is yes they can question mark they can if you but the thing is you can&#39;t opt out of it just because you think it&#39;s a crappy investment I know that&#39;s what Dave Ramsey would say yeah I think he has it written on his website is that it&#39;s crappy investment but is it is a crappy investment necessarily morally being opposed to a public insurance program because that&#39;s the criteria and I know there have been a couple of pastors that have opted out and I&#39;ve actually know quite a few that opted out and later on the IRS will sometimes do this but they rarely do it or not sentence IRS Social Security Administration they&#39;ll allow people to opt back in and though and I&#39;ve seen a number of them that opted out and initially because they thought and this is 40 years ago when they went into ministry they thought that Social Security was gonna go bust and so they opted out well later on they had an opportunity to opt in so but that&#39;s not something you can count on they don&#39;t do that that often the one thing is and I&#39;ll here&#39;s my why would I not opt out of Social Security first of all I don&#39;t think Social Security Medicare are going away I do believe they&#39;ll be changed and I think finally somebody with enough political courage will fix the issues it&#39;s not a difficult issue I mean you just got to match up the expected outflow with the expected inflow of money and then it&#39;s fixed but they need to fix it&#39;ll be changed it&#39;ll likely be changed but I don&#39;t think it&#39;ll go away number two if you do opt out you need to be extremely well disciplined in how you handle your finances you need to be preparing for this for retirement if you get disabled that&#39;s one of those things you don&#39;t plan on but are you are you prepared if you were disabled or are you prepared to help you cover your dependents if you die an untimely death what kind of income will they have you know those are the things that you end up losing if you opt out yeah one other thing is are you MC benefits for retirement and disability rely on pastures being in Social Security so if you get disabled we won&#39;t be able to help you or we won&#39;t be able to help with your retiree health when you retire if you opt out and so really the only way if you opt out and you want to get back onto Social Security and Medicare the only way to really do it is to leave ministry is that back in so I mean that&#39;s you got to no longer be a pastor if you want to back in or you got a hope that Social Security does again want to open up the allow people got back in but that is very rare that that happens all right is a parsonage or Cache housing allowance taxable or not is the question Christa says no and the answer is yes it is not taxable for income tax but it is taxable for social security / self-employment so if so something you will have a parsonage and that is so the parsonage that will not be included on your w-2 if you were a lay person living in a parsonage that gets the value of that gets put in on your w-2 but that will not be on your w-2 but then when you go to fill out your schedule I see for self-employment you end up having to estimate the fair rental value and this is very subjective you know one thing you can do is look for similar properties to the parsonage that are available for rent within the community you&#39;re at and that might be a comparison I&#39;m gonna say probably most people underestimate this which I I would just visit with your tax professional or visit with somebody like that to get some kind of an estimate on that cash housing allowance is different a cash housing allowance is when they pay you they don&#39;t provide a parsonage so instead they pay you X amount of money for for your housing and usually it&#39;s either included with your paycheck or maybe it&#39;s a separate monthly check but it&#39;s usually a regular amount they should this shouldn&#39;t be like a reimbursement or anything like that and that then would not be included that extra payment would not be included on your w-2 but but you do have to include it on your schedule se when you do pay yourself employment taxes so all right the one of the clergy comp forms I&#39;m proud to be paying taxes in the United States the only thing is I could be just as proud for half the money so what are the best tools that we worked on over the years is the clergy comp form we this will help you make some of your tax decisions ahead of time save you thousands we try to tie it right with the w-2 so that it&#39;s easy for your treasurer or whoever prepares the w-2 use for the church to go ahead and use your clergy comp form to go ahead and fill out your w-2 accurately so I&#39;m going to go through some of these ones the first one is the designated housing exclusion and and I wonder if I got a let me see here I&#39;m gonna get get my pin here but that&#39;s right here designated housing exclusion this if you are a clergy so this doesn&#39;t count for people that are working as lace apply if you are a clergy this should never be blank this should never be blank because what this is this is so if you live in a parsonage this covers any of those unreimbursed expand is on your house and I&#39;m gonna go over exactly what what accounts for those expenses later on but just anything but so let&#39;s just say you buy Windex you may not want to have that reimbursed by the church but you guess what you can write it off for tax purposes because you&#39;re maintaining the home with it so anyway I&#39;ll cover it like I said I&#39;ll cover that later but that should never be zero if you have a cash housing allowance so instead they don&#39;t provide a parsonage but you have a cash housing allowance this should still never be zero because any expenses up and over your cash housing what they provide for the cash housing allowance that you can also write off so and the thing is it doesn&#39;t cost the church any extra money this does count for an apartment if you&#39;re if the church is providing apartment Chris TAS or or if you are renting apartment yourself that when I say you&#39;re providing a cash housing allowance it&#39;s just for whatever housing you need if you are sharing an apartment with a friend or have a campsite down in the middle of nowhere you know whatever it is or if you own your own home and you&#39;re paying a mortgage whatever it happens to be so the let me see that I don&#39;t know if I want to touch on this too much but there is there&#39;s always lawsuits that are attacking that cash housing allowance and whether it should or should not be taxable for income tax purposes and just to say you will hear about that and it may one day be a taxable benefit the cash housing allowance so far they are not there they are not challenging the parsonage yet and by them there&#39;s a group in Wisconsin called the Freedom From Religion Foundation and they&#39;re always trying to make make cash housing allowances taxable I don&#39;t know if that&#39;s their only goal but that&#39;s one of their primary goals so one of the things I say too is that this designated housing exclusion you need to make sure it&#39;s on there right away because this is something you can&#39;t set retro actively so let&#39;s just say you forgot about it and it&#39;s zero and then you get to September and you remember about it well guess what all those expenses from July and August those ones you can&#39;t include those against your housing expenses it&#39;s it just going forward so when you set that so if you forget about it in September it&#39;s only those expenses going forward from September through December so that&#39;s one of those tricky things and the thing is there&#39;s no penalty for going too high so for example if I have 1,000 if I have $1,000 in expenses and I have 5,000 set as my housing exclusion guess what all there&#39;s no penalty I do end up having to pay taxes on that 4,000 that extra 4,000 but I&#39;m not penalized but the other conversely let&#39;s just say my expenses were 5,000 and I only had $1,000 here so I only had 1,000 here man it&#39;s harder to guess what all that excess expenses I can&#39;t claim those so I only get $1,000 worth so it&#39;s one of those credit things set it high estimate high there&#39;s no penalty it&#39;s no cost to the church it&#39;s just a straight benefit for you so how do I clear that you think there we go the if you are on our health insurance you know you&#39;ll automatically have a piece coming out for health insurance which reduces your taxes but it also reduces the amount you&#39;re paid but the other thing that I would also stress is that if you&#39;re on our health insurance taking advantage of the medical reimbursement account you know or if you have young kids that you need childcare taking care of the dependent care account even if it&#39;s like for me I used to do summer daycare for one of my kids so I used to have a dependent care account and use that up this one again every dollar you put in there it&#39;s it&#39;s really easy to submit your expenses for reimbursement Liana we&#39;ll talk about that sometime in the future but the thing is if you&#39;re assuming that 30 percent of every dollar is taxable you know what if I put two thousand four hundred away from medical reimbursement that reduces my taxes by eight hundred dollars you know and some of us a lot of us have regular you&#39;ll have regular dental you&#39;ll have regular vision you know a lot of those things plus maybe a regular office visit so those are things that are important to try to take advantage of it but this is one where you don&#39;t want to overestimate this is one where you want to treat it it&#39;s not exactly use it or lose it but I would treat it kind of like that in that I would want to estimate conservatively on how much expenses and then the final one for the clergy comp form is this this you want p IP contribution that&#39;s a pension contribution and you know no matter what you do whether you take it before tax that reduces your taxes currently or if you do it after tax with raw or or the after-tax one which reduces your taxes in the future you know probably the more important thing is just that you are putting into this retire into this retirement fund it it&#39;s nothing but a benefit for you in the future so and just as a side note I was asked this once could you have your tithes withheld from your paycheck and yes you can but it&#39;s after-tax so you can&#39;t reduce your pay by just having your tithe time taken out ahead of time so anyway your taxable yeah you can&#39;t reduce your taxable income by having your tithe deducted but it&#39;s not a bad way to do it I mean what I do is my church has electronic donation so I have it set out to come out of my checking account the same day I get paid so it&#39;s almost like it comes out of my pay my my paycheck so all right the next one is winning oh is that the question yeah insurance plan are you still eligible for the medical savings account nope you are not until you not unless you&#39;re part of that that&#39;s a wide oh no a benefit included within the health insurance plan itself thank you yep oh okay winning a taxes if you get up really work late and pay your taxes you&#39;ll get ahead if you strike oil this guy was not all that optimistic but here&#39;s just some practical stuff to help help you make the best in the best of things the first thing just like you&#39;re accountable reimbursement is get your treasure on board so one of the most practical things is if you have a copy of your clergy comp form and we usually email those out to pastors or you might be able to have a copy after the district superintendent fills it out give a copy or email a copy to your treasurer and just walk them through it if you need to but make sure they have a copy that was that was always the most annoying thing and I get the most as a treasurer you know I have to pay my pastor but I don&#39;t know how much you know and I don&#39;t know how much to withhold and it just helps you guys all get on the same page and the next thing is we do have a lot of resources on our website you know we have a guide that shows them how to turn the clergy comp form into the w-2 we have a guide that shows them actually a lot of the stuff we&#39;ve been talking about accountable reimbursements policies all that kind of stuff but there&#39;s policies that a treasurer might find helpful on our website so if an even telling them to call me or email me is totally an option I help quite a few treasures visit with quite a few of them or SPRC people and trying to get this so the best thing you can do is get your treasure on board because it can be very isolating for a treasurer you might be the only United Methodist treasurer for 30 miles so you don&#39;t have anybody else doing exactly what you&#39;re doing that you know but at least there might be a connection either through our website or through us in the office here yes yes this information that you gave it&#39;s gonna be on the website that we could access it it will and we&#39;re actually going to send out an email to you with the links to everything so it&#39;ll all be available it&#39;ll be on the website as well as available and then we&#39;re going to also include a couple bonus materials that go into greater detail on some of the more complex subjects so yep get a system that works for you another thing similar to the accountable reimbursements is you need to set up a system that to capture especially those receipts and those debt documentation and again I say if you want to use Dropbox or Google and you bring that to your tax account at the end of the year that&#39;s fine or if you have a binder of some sort you know whatever it happens to be but it has to be something that you collect information so that you&#39;re not stressing out when it&#39;s April and you&#39;re trying to find all your tax your documents you need to file your taxes so whether it&#39;s paper or electronic you just need to have some kind of a system and I&#39;m going to show you later I think it might be the next slide there if you and here&#39;s how I set up my tax my stacks folders and whether you do this again paper or electronically there&#39;s no problem I got a folder that&#39;s taxes and then I have a separate folder for each year a subfolder for each year and then within that I have a folder for housing expenses so anything relating to the house and again I&#39;ll talk about that a little bit in detail later on anything that&#39;s relating to the housing expenses I throw in there anything relating to funerals and weddings because those won&#39;t usually be recorded on your w-2 so if you go to do a wedding or a funeral a lot of times you&#39;ll get a check either cut directly from the family or from the funeral home so and even tracking mileage that maybe is not reimbursed going to the funeral home or to wherever the wedding location is that that&#39;s one of those things if you have any extra expenses that aren&#39;t reimbursed for that all those tax documents as well as what tax payments you&#39;ve made if you if you&#39;re not doing withholding you know I would keep track of your quarterly estimated payments but and then any tax documents such as w-2s and 1099s have a folder for that any unreimbursed expenses because again those are still you can still write those off for self-employment purposes even though they&#39;re not excludable for our tab for income tax purposes and then the last one I always have is a miscellaneous one because there might be some stuff I don&#39;t know is this affects me tax wise put it in your miscellaneous folder let your tax preparer figure it out they&#39;re used to this and then they can help you say oh that wouldn&#39;t really go in here this folder or whatever it is but it&#39;s not a bad idea just it&#39;s better to collect more information than you need and then end up paying paying too much in taxes because you didn&#39;t collect the right information and then I&#39;d set up one again a complementary one for the next year after that eventually so the housing expenses this is the housing expenses digression I have compiled this from a various list from various trusted sources over the years so these are those things that expenses that are not paid for by the church are reimbursed by the church so if you own your own home it&#39;s important that you that the down payment on the home would count you know the mortgage payments in principle and interest so this is one where you might end up being able to double dip if you&#39;re able to itemize you know if you have real estate taxes and mortgage interest and you might be able to also itemize as well as exclude this from your income tax property insurance rent payments utilities all these basic utilities long-distance phone service wouldn&#39;t count III don&#39;t think cell phone service counts either maybe if it&#39;s you if it is your home phone maybe it counts they usually have a separate kind of a separate kind of package for that homeowners homeowners association dues renter&#39;s insurance if you are in a parsonage you should have renter&#39;s insurance that&#39;s what protects your stuff so and it&#39;s usually very very cheap furnishings and appliances this is the big one so you guys some of you guys will be moving into a parsonage or moving into a new place and there&#39;s always whenever I&#39;ve moved its up I buy extra furnishings for the stuff or I end up having to maybe buy an appliance or something like that or all that kind of stuff so bye-bye if I&#39;m going from a one-bedroom house to a two-bedroom house so I need an extra bed and furnishings and stuff like that all that stuff can be written off for income tax purposes so that&#39;s one of those things you got to keep in mind so I would that&#39;s why I always want to be high in this decorations curtains blinds wall hangings all that stuff you can write off any repairs oh I&#39;m going to look at Krista&#39;s here real quick so keeping a record of this allows you to offset income at tax time it allows you to offset income for income tax purposes not for self-employment taxes so that&#39;s what this is for it reduces your income tax and not your self employment tax any repairs sometimes you know what it&#39;s easy instead of waiting on the trustees if you live in a parsonage sometimes it&#39;s nice to just do something real quick like let&#39;s say you wanted painting and they just give you they&#39;ll go ahead if you buy the paint you go ahead for it you know what go ahead and do that if they allow you to do it that&#39;s not uncommon you know or you got minor maintenance such as you know door jamb it isn&#39;t working quite right so you fix it or something like that all those things that you might do that might not reimbursed yard maintenance and improvements you know planning flowers stuff like that or mowing lawn and then all these maintenance items pest control so I mean many of us might not think about buying you know if you buy ant traps for example yeah you can write that off for tax purposes light bulbs household cleaners pine-sol stuff like that anything you&#39;re doing that helps keep the house or the home in proper working condition so that&#39;s there&#39;s a lot of stuff so this is one of those areas where you might as well anything that you think might be included go ahead and put it in that folder so the next one I want to cover is this get a system that works for you if you are going to do quarterly estimated payments you need to put that on a calendar and you need to so it&#39;s September 15th January 15th April 15 June 15 whether it&#39;s a reminder on your smartphone or on your Cal Outlook or whatever it is or you got sticky notes or you got a physical calendar get this on your calendar because you don&#39;t want this to sneak up on you and you definitely don&#39;t want to pass it by you if you&#39;re making quarterly payments again you can go to then the WWE IRS gov slash payment slash direct pay and that will that&#39;s where you can pay it online or you can actually send in a paper coupon into the into the IRS as well if you need to the one thing you&#39;ll notice is that there&#39;s April 15th that is when your first quarter estimated payment is due but it&#39;s also when your final payment is due for your prior year taxes so this might be one if you ended up under paying your quarterly estimated payments you might be this might end up being a huge one so make sure you&#39;re prepared for that as well if you end up that&#39;s why it&#39;s important to do that 30% I mean I&#39;d rather have a small refund than have to all of a sudden scram a lot of thousands of extra dollars at tax time let me see that&#39;s it that&#39;s the important thing is make sure you got those in mind and that again with every paycheck either having it withheld or putting it into some kind of savings account is the best thing you can do so if you have your treasurer with pools like 30% yep that&#39;s right then you don&#39;t have to worry about these then your treasurer has to worry about setting it it and but the treasurer is trained to do that they&#39;ll send it in every single month so yeah that&#39;s why I think that&#39;s the best way to do it because honestly unless you want to have complain about the IRS every three months then they do a quarterly estimated payment but if your treasurer can do that for you it just it&#39;s a relief so the other thing I say is get a tax professional these are six people that I know personally that I trust to handle clergy United Methodist clergy income tax properly I send them email updates every now and then to make sure that we&#39;re all on the same page and when there&#39;s an update that goes out some of these whoops shoot I went the wrong way some of these like Marilyn Perry Jim Brown I know for sure that they will do them by they&#39;ll use Skype to do it so if you&#39;re not by them the they&#39;ll they&#39;re more than happy to connect with you electronically and some of us that go to the Twin Cities we might end up going through an okapi Anoka and we can stop by I know Marilyn has that happen sometimes too but this first year especially if you&#39;ve never done clergy taxes before I would strongly encourage you to seek out a professional that knows clergy taxes sometimes you can go to regular CPA and again they don&#39;t teach this stuff I talked to a tax professional that mostly does farm taxes and he called me up and he says I don&#39;t know this stuff you know walk me through it yeah and I and I did and I&#39;m more than happy to do that but again it&#39;s much more comfortable for them if you just go to somebody that has experience here and you will see you might see at least Marilyn will be at our annual conference I where we&#39;re in Sioux Falls this your annual conference so that&#39;s Connie buckles anyway these are people that like I said I trust any other question

Transcript for:Understanding Clergy Tax Challenges

Transcript for:
Understanding Clergy Tax Challenges