welcome to the clergy tax training uh for those of you that are going to be brand new pastors in the dakotas conference the umc this is for you i'm hoping to to look at those challenges that you're going to face as a licensed ordained pastor and hopefully help you out my name is jeff fosbasil by the way i'm the conference treasurer and the quote that goes with this section is from will rogers and it says the income taxes made more liars out of american people than golf has and it's mainly because it's so doggone complicated and the irs is kind of vague and so that's gonna at least set the tone for this training session so our goals for this session are one is to increase your awareness of the tax challenges facing clergy which are considerable two learn some practical tax tips and strategies to help you follow through and the reason why we want to do this is so you that you have more money in your own pocket i'm a firm believer that you know a person that has their heart right with god and money in their pocket will find a way to use that money for good and then the other one is spend an appropriate amount of time and energy worrying about tax issues so what happens sometimes is when you don't spend the time up front it almost builds up like compounding interest and then you have a heap of worry time energy that it's going to be focused on tax issues probably right around easter season if you don't get ahead of this so this training has three sections and the first one is the confusing nature of clergy taxes albert einstein said the hardest thing in the world to understand is the income tax back then it was probably a little bit easier when albert was around one of the things that also makes this a challenge is that you might look to a cpa i'm a cpa i'm inactive currently but um you would look to somebody with that's a trained accountant and you think you can ask them questions but most most cpas do not study clergy taxes they only have a vague idea of of the challenges that a pastor might face so that's that's also why it's difficult as it's confusing and the experts are few and far between i'm going to go ahead and start this off with a few questions for you and the first one is are pastors employees of the church or are they self-employed so go ahead and give give your answer and the answer is yes they're both actually so the irs thinks you are an employee of the church and so you're going to get a w-2 the social security administration says guess what you are self-employed and you're going to file a schedule se which is the self-employment one and that's just the way it is so your your w-2 that you get from the church it won't have any withholdings for social security and medicare or it shouldn't if you are a licensed pastor or you're on the track to being ordained you should not have any of that withheld because how it works when you're lay employees you pay 7.65 for social security medicare and then your employer pays the matching amount 7.65 percent so you as a pastor you're going to pay the full both sides which is 15.3 percent so of your compensation 15.3 is already going to go away for for self-employment taxes and just here is another one if you live in your own home and let's say you set up your own office and you might say i wonder if this qualifies for a home office well because you're an irs employee chances are it will not if you have a side business that you and you use that home office exclusively as an office then yes that would probably count but if it's if if you don't have that side hustle then it's most likely not going to count as a home office because you're an employee next question is how can pastors make their tax payments do they have their taxes withheld to their paycheck or do they make quarterly payments and the answer is yes uh what we're what you're going to see is that most pastors will actually make quarterly estimated payments although um it is possible to have it withheld and and i prefer that way it's just easier instead of putting that money aside into a savings account and later remitting it to the irs once a quarter it's just easier for most people to if if your church already has lay employees it's no extra work for them to just withhold yours so you just have to let them know it's through a form w-4 that you let them know how much how much income tax to withhold and you can withhold enough to also cover that self-employment taxes so later on i'll give you a snapshot of my clergy tax estimator but um the old rule of thumb used to be about that you would put 30 of what your take-home pay is aside for for taxes and in 2017 or 2018 i can't remember when the tax laws changed that's changed you know so now if you're a married pastor with a couple of kids it might be 20 or something like that so it's good to either use i have my clergy to access estimator or to talk to a clergy tax expert either one of those would be a good route to go one of the other things is some of you will be getting a conference move or the church will be moving you and you should be putting aside roughly 25 to 30 percent of the value of that move so if let's just say your church i'm just gonna use a round number let's just say your church does really cheap you know and they are able to move you for a thousand dollars you know it's just a u-haul type of move you should be putting aside an extra 300 to cover that tax bill because you will get a 1099 for that so um yeah that and by the way i have this note down here that says you know churches can withhold income tax but they can't withhold social security medicare so although you can withhold enough for it it won't show up on those lines for social security medicare it'll all show up in that federal income tax withholding one which i think is box two the next question is can pastors really opt out of social security and the answer to that is yes kind of they can opt out if they are a morally if they're morally opposed to public insurance programs so not just a crappy investment but it has to hit you morally and there's a lot of good reasons not to opt out by the way a lot of your benefits within the united methodist denomination are factoring in that you are enrolled in social security and medicare so we're talking about disability we're talking about retirement income those kind of thing retiree health coverage so those those are things that you really have to if you are morally opposed um you need to be able to cover yourself for disability retirement and your retiree health those are the things that you need to be very well disciplined on our next one is housing taxable or not so the value of living in a parsonage or your cat if you receive a cash housing allowance is it taxable or not and no surprise here the answer is yes i kind of got a theme going on here the value of a parsonage is not taxable for income tax purposes the the the amount of cash housing allowance that you have spent on housing related expenses is not taxable for income tax purposes but both of them are taxable for self-employment purposes so both of them are subject to that 15.3 tax and the tough one is always so how do i value the parsonage and it's supposed to be the fair rental value and it's very subjective i mean you could talk to a realtor you can look for what similar properties are being rented out a lot of times it's going to be tough uh the best way i found and that's just i heard this just the other day from a clergy tax expert connie buckles she said that you can use the zillow values and you can use 12 of that zillow value and that will get you in the ballpark and i tested it and it you might not have a zillow value for your for your specific parsonage but i bet you can find a similar house in your neighborhood and multiply by 12 percent and that will get you in the ballpark the next thing we're going to look at is your clergy compensation form so every pastor that's serving a united methodist church should have a clergy comp form and it's it's a great thing for spelling out your compensation package and also we designed it in such a way is to help your treasure pay you accurately and also complete your w-2 accurately so that's a big thing but there's going to be a number of decisions in there that you can that you will hopefully understand after this that could save you thousands and that goes with this quote by arthur godfrey 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 we're gonna start by looking at the designated housing exclusion and that's right here in section one line d that should almost never be zero if you're living in a parsonage i put something in there because this covers any unreimbursed housing related expenses and i'll go over what housing related expenses are later but so any unreimbursed expenses you have for the parsonage you can write off for income tax purposes up to the amount that you put in the designated housing exclusion so that is the cap so you you almost always want that to be pretty high to cover anything especially a lot of times if you're moving to a new place you might have some extra furniture expenses so again furniture counts and but only up to that limit so you want to set it high enough if you have a cash housing allowance you're going to want to look at how much do i estimate my my total actual expenses are going to be and again round up round up uh generously and then if that calcium cash housing allowance doesn't cover all of that estimate that is that difference is what you're going to set as your designated housing exclusion because all this does is it designates a part of that base salary for housing for tax purposes it's just a legal loophole given to clergy so so again if you have twenty thousand dollar cash housing allowance but you estimate your housing expenses might be as high as twenty five thousand you wanna designate an additional 5 000 then for for your designated housing exclusion and just lastly this is something that um you can't declare retroactively so let's just say for example that you um forget to do it you know that you put zero here and we didn't catch it until october guess what all the all the time that you were living in the parsonage from july this is talking about new clergy that start in july from july till september you're not going to be able to write off any of those expenses but you can write off stuff beginning in october and again this is an annual amount as well so we're going to prorate it so if we put let's just say we put ten thousand dollars in here only five thousand dollars worth of expenses then are going to account for that first half year so if you are serving july through december in your new appointment that's that's the amount that counts for that year so hopefully that makes sense next we're going to look at health insurance related salary reduction so if you are on the conference health plan this applies to you so likely well you have to make these elections through the open enrollment process so when you go to enroll this is when you'd make those elections on all these things the the hill flex pastor share the medical reimbursement account the dependent care account so the hellflex pastor's share that is your portion of the premium but it also includes if you are on a health savings account plan an hsa plan it includes your personal contribution into that hsa plan so just to let you know that's where that shows up if you're not on an hsa plan a lot of times it's a really good idea to to use this medical reimbursement account that's just a flexible spending account so that's uh it'll cover your vision dental all that stuff plus other out-of-pocket medical expenses um then there's dependent care so again if you if you have child care expenses or something similar to that you can you can include something there as well there are maximums and minimums and i don't remember what they are lyanna knows that kind of stuff but this saves for both self-employment and income tax purposes so again if you put aside let's just say 500 for medical reimbursement and 500 for dependent care that might lower your tax bill by 300 so that's not chump change um so there are some use it or lose it features to this i know they do allow you to carry over some but so again this is something you talk to lyanna so you don't really want to overestimate this one so much you want to be fairly certain of what medical or dependent care expenses you're going to have the next one is salary reductions relating to your umpip contribution so this is your personal contributions into your retirement account ump iep stands for united methodist personal investment plan and you're going to have three options before tax after tax and roth but actually the most important option is putting money aside for retirement period that's the most important thing put that money aside let it grow until you retire that's that's the best thing because this is going to subsidize your retirement for through the pension as well as through social security if you ask me which one should i choose i would say probably before tax because you're gonna lower your tax bill now and because your retirement income from the the united methodist anyway is also still subject to the housing exclusion you're gonna be able to write off housing housing related expenses against any income you get from your retirement account and so you might be able to avoid paying taxes not only today but also in retirement so that's just something to think about uh one question i sometimes get is can i have my taxes my tithe without from my paycheck and and the answer is yes but it will not it will be after tax so won't decrease your tax bill but yeah you can have your tithe with help from your from your paycheck if that's what you want to do now we're going to shift gears a little bit and we are going to talk about the more practical stuff because we i covered a lot of information but it's of no use to you if you cannot apply it so hopefully you're going to be able to see how you can win at clergy taxes the first thing you can do that will really help is to get your treasure on board they can only pay you correctly to your taxes correctly if they have the information and one of the things that i see a lot of times is that a treasure won't have the clergy comp form you know we mail it to them sometimes it gets lost sometimes it doesn't make it to their box i'm we usually email you a copy of your own clergy comp form so if you get it go ahead and print out a copy give it right to your treasure that'll show them how to pay you we we normally do send with that mailing also a link to some of our resources on how to pay your treasurer correctly but those are also found online on our website so www.dakotasumc.org and there's a spreadsheet that'll calculate the paycheck for you or it'll calculate how to fill out your w-2 form those kind of good things are right there in the resources there and lastly i'm going to plug my my blog site jctaccounting.com and i post a number of these questions so i'll get questions from people and then i'll end up turning it into a blog post so there's a couple years worth of articles there and there's usually a related video as well the the next thing you need to think about is you need a system that works for you you know and i don't i really don't care what you use as long as it works for you you need to put aside tax related documents if it's going to be in a folder that's great if you're going to put it in dropbox or google you know just upload them that's great if if you got a spreadsheet to track them all that's great you know but you need some way of being organized that works for you so even if you end up with a shoe box full of stuff at least you have the documentation because the worst thing you can do is not have um the documentation and then you're for sure gonna going to overpay your taxes or get in trouble with the irs and here's what i normally do is that i'll have a folder for taxes and then i'll separate it out by year so i'll have a 20 22 year and then i'd have a folder within that or a section within that for housing expenses one for your funerals weddings those kinds of things that they go on a schedule c and so any income as well as any related expenses with with funerals and weddings um if somebody pays you to speak or something else not your church but some other organization that kind of thing goes right there tax documents and taxes paid so when you receive your w-2 if you receive 1099's any of those kind of documents those should go right here i would also by the way include a place for your clergy comp form which might be in there as well and if you make quarterly estimated payments i would keep record of that also in that folder any unreimbursed expenses so those unreimbursed expenses then business expenses is what we're thinking about the housing expenses by the way are also unreimbursed ones but unreimbursed business expenses can go there because you can write them off for self-employment purposes and then you're gonna have something in your miscellaneous so stuff that you get that you don't know if you need it or not put it in the miscellaneous folder it just doesn't hurt um again the worst thing you can have is is not having the documentation so if you have more than enough documentation they're just going to say we don't need this the question i always get is what housing expenses should i be keeping track of and the irs they never give you a definitive list of what expenses count i think they that's part of their thing they like to keep you on edge but this is a list that i've compiled from various tax experts uh clergy tax experts and it it seems to be trustworthy so i'm just going to go through the list real quick so if you own your own home or you're buying your own home your down payment again there's a timing thing with the with the um housing exclusion so that's going to affect when you make that down payment your mortgage payments uh your real estate taxes so both these things if you itemize you could also write them off again so you they could be withheld but they could reduce your taxable income and then you could also use it for your itemized taxes as well your property insurance rent payments utilities there's a couple of things to be aware of it's local telephone charges so not long distance and you don't see cable on here either so but you do see internet access homeowners insur association dues renters insurance so you should have renter's insurance if you're living in a parsonage furnishings and appliances so you buy a bed table chairs anything like that you can write that off decorations so curtains blinds wall hangings all that can be written off structural repairs and remodeling so this is mainly if you live in your own home yard maintenance and improvements and any maintenance items so windex pest control light bulbs um pine sol that kind of thing any of these things that if are unre reimbursed by the church you should be keeping track of those and keep a folder for them um one other thing i've said digression from my digression by the way as i mentioned that uh how much do you include for income for housing if you live in a parsonage so here's just a screenshot of zillow that i did today and it before the flanders church and i i tried to pick it i can't remember if i picked the parsonage or if i picked one that house that looks similar to it but it'll give you an estimate you can see that estimate right here 83 300 and you can use that then if you want for estimating what the fair rental value is and again multiply this by 12 percent and you're gonna get something in the neighborhood of ten thousand dollars and so that would be a good place to at least start all right we have a couple of miscellaneous things that i want to throw out and these are more recent changes both of them under president trump so the first one is moving expenses and if you've been around a while you might remember when moving expenses were deductible and you could write off your mileage and any other expenses well that's no longer deductible and if your employer pays you for it it's taxable so if they pay for the move itself or if they reimburse you it's taxable so if your church happens to pay to move you then it should go on your w-2 if the conference pays to move you it you'll get a 1099 for that and again put aside about 30 percent of that amount of whatever the cost of the move was and you can call up joanne from my office if you're removed by the conference the second one is educational assistance and this is a really good deal is that your employer can help you pay down your student loans so if you have any student loans your employer can help you pay those down with tax-free money and it's called the section 127 plan so the church needs to adopt it i have a template online and and you can do that the other nice thing is through diane owen of my office there's up to 25 000 dollars in grants available for for an individual uh i think it's over five years it's called investing in leaders grants so and she will coordinate it with you so your church adopts that section 127 plan she cuts a check at five thousand dollars to the church your church goes ahead and pays your student loan down so that's how that works so you don't have to be taxed on that five thousand dollars because otherwise that five thousand dollars is gonna cost you at least a thousand dollars in taxes so really good deal the next one is you need to get on top if you're not going to have your taxes withheld then you need to get on top of these estimated tax payments these quarterly estimated tax payments so here's the due date these are the regular due dates so uh september 15th january april 15th june 15th by the way this one can be a killer for you because you are going to pay your first quarter tax payment so estimated payment plus if you underpaid your taxes that final tax payment is due also april 15th so you might be hit twice if you didn't plan well um so that's also why again i don't mind churches withholding them either way if you're going to do the estimated payment there's a way to pay it directly online or you can use the coupons i think you can still use the coupons form 1040 es for estimated payments so i do have a clergy tax estimator spreadsheet i should probably use a qualifier that this is not tax advice or anything like that but it kind of is but uh it'll give you an idea you punch in your clergy comp form data and there's some more data that it asks for you and then i'll give you an idea of where you are going to land for for your total tax bill and so you if you're doing quarterly payments divide that by four if you're you know having it taken from your paycheck divided by usually people are paid twice a month so divided by 24 and that'll get you where you need to go and here is my final slide for this almost the final slide the final informational slide is that you need to get a tax professional a clergy tax professional at that these are five people that i trust one of them that used to be on here for years and years was marilyn perry but she's finally retired but it's so important to start out right and it's worth the money at least the first time even if you've done your taxes forever by yourself it's worth going to a clergy tax professional just so you can see what it looks like to be done correctly so there's a lot of ways to make a mistake around it like like you've already heard clergy taxes are different from anything you've ever done so at least get it done correctly once and then you can decide if you want to keep going to them or if you think you can handle it on your own but i think it's money well spent to go to one of the clergy tax experts these ones i know speak united methodist clergy taxes there might be other ones out there and i appreciate it if you do send me a name of somebody that you trust that works with other united methodist clergy it helps to build this list all right i know i probably didn't answer all your questions um but if you have any clergy tax related questions be sure to shoot them over to me and i'll do the best i can to help you all right god bless