Ministers Tax Conference

Originally Posted on March 1, 2021

Webinar Transcript

– All right. I’m glad that you’re here on this February day. And thank you for being here. We’re gonna talk about taxes today, and I hope that I can help you some to save on taxes and hope you could do well. Now, there is a link here alsbom.org/ccs. That’s one of the links that we have for a lot of our different resources about tax and compensation and how you can do well. And we want you to do the best possible. So we want you to save on your taxes. We want you to have a salary plus benefits and also we want you to have an accountable reimbursement plan for your business expenses and all of these kinds of things so that you will do the best possible on your taxes. So notice first of all that link, alsbom.org/ccs. Also, you can find this PowerPoint in a PDF format right there at the administrator resources. So if you will click on that and download that and you can look at it later and you’ll be able to have that for your notes today. Another great source for tax information and financial information and compensation and retirement and insurance is GuideStone and they do a wonderful job. They do a great job with our money. They have some tax advantages because of the way that they’re set up. And so you should be contributing to your church retirement plan through GuideStone, and you will do much better tax wise. And they are very competitive. They’re usually in the top core tile in competing with other similar kinds of mutual funds and in the similar size range. So they’ve done a great job. Every once in a while, they’ll be in the top 10 of those mutual funds. So you’ll wanna check it out and be involved in your retirement plan through GuideStone. There’s also some additional benefits by Southern Baptist minister being involved in GuideStone and contributing. As long as you’re contributing and working for a Southern Baptist church, you can receive two extra benefits which one is like life insurance. It can be as much as $100,000 if something should happen to you when you’re young but later on down the road, it gets smaller through the decades. But even if you’re in your seventies and contributing to GuideStone and working for a Southern Baptist church, it’s still $10,000 worth of life insurance at that point. Another is a disability benefit which can be $500 per month for up to five years. And then a third benefit is that if you’re contributing to your GuideStone account serving a Southern Baptist church then the Baptist State Board of Missions contributes $17.50 a month into your account each month. So those are some great benefits. And in addition, there’s tax benefits and you can put that money in saving on your taxes and saving on Alabama state tax, federal tax and social security taxes as you put the money in. And so that’s a great tax benefit. In fact, if you were gonna talk about some of the things that we’re gonna talk about today and add ways to save on taxes, contributing to the GuideStone retirement plan is one of the best ways to save on taxes, even better than a housing allowance, because out of housing allowance you are gonna pay taxes for your social security. So here’s my contact information. I’m Lee Wright, and there’s my direct line phone number and also my email address. So any way that I can be of help you just give me a call or email me, and I’ll be glad to get in touch with you. So let’s get started. Thank you for being here. I’m glad that you’re here. Now, we have the financial issues book, which is also online and it’s also at that website. alsbom.org/ccs click on the administrator resources and in the financial issues book we’ve got a number of resources you’ve got there. It’s one of the last pages of the book. You’ve got my cell phone there. You’ve got my direct line. You’ve got email. you’ve got the link to the website, alsbom.org/ccs. Also another source that you’ll want to know about is called pinnacle, pinnacle. And this was put together through discipleship of the State Board of Missions, and they have allowed us to have some things on there as well. And so there, you’ll see some videos. Many of the videos are about leadership. Many of them are about discipleship and you’ll want to check those out. And so when we have a webinar online such as we’re doing today, then later on about a week or so later, you can go to pinnaclealabama.org, and you can find that video. follow the State Board of Missions on Facebook for news and events, and what’s going on and get connected to the State Board of Missions’ email. So that you’ll know everything that’s happening and be in touch with that. I mentioned earlier GuideStone is a great resource for many different things, products as well as information and one particular website guidestone.org/compensationplanning is a great tool for all that you do. In fact, in a minute, we’re going to use the compensation planning guide which can be found there online. Now, the mileage rates for 2021 is 56 cents per mile, 56 cents per mile. And I will say that in December, we got some information that it was 58 cents per mile and that information was correct. So be sure that you’ve got the correct information. The business mileage rate for 2021 is 56 cents per mile. And the IRS official announcement of that was not until December 22nd. So it’s about as light as it’s ever been to announce the mileage rate but that is what it is. 56 cents per mile. For medical, like when you go to the doctor, go to the hospital, I’m not talking about going to visit in the hospital. I’m talking about if you should go to the hospital yourself for medical treatment, to your doctor, to get some lab tests or x-rays or things like that, that mileage can be added on to your medical expenses at 16 cents per mile. And then charitable. This would not be your business mileage rate. This would be like, say, if you volunteer, if you volunteer for another organization, not your church, like for example, I serve the State Board of Missions and that’s my job. And I can be reimbursed the business mileage rate for that service. But I’ve also for many, many many years taught Sunday School. And so, and for many years I’ve taught senior adults. And so if a senior adult went into the hospital and I went to visit them in the hospital, I could record those miles going to the hospital. Now, remember, for my church, I’m not paid, I’m a volunteer. And as a volunteer, I would be able to count 14 cents per mile. Let me stop just for a minute and share one thing with you. On your screen you will see a Q and A. Q and A is for you to ask questions. And every once in a while, we’ll stop and I’ll show those. And we’ll talk about the questions that are there. Also on your screen, you will see a thing for chat and chat is for any other thing, besides questions. If you just wanna comment on how beautiful a day it is, if you want to congratulate somebody that’s also in the audience, if you want to do something, anything other than questions you can use chat to type in your statements there and Q and A to type in your questions. And every so often we’ll stop. And we’ll deal with those questions and hope that we can help you. Any question you wanna ask you feel free to ask it and we’ll be glad to try to deal with it today. So the business mileage rate is 56 cents per mile. Now there’s some IRS forms that are brand new and you need to know specially about one of them. So there’s a new W-4, and that is the form that you fill out for federal withholding. And there’s a new form. And that it now works with the larger standard deduction with the double child tax credit. If you have children under age 17, and then for most people the lack of itemized deductions, they just don’t have enough to itemize because the standard deduction has been doubled. So it’s going to assume that you’re going to take the standard deduction and it accounts for that as you fill out your W-4. It does have a means that you can withhold extra federal income tax. And so you can do that. There is a new 941, about your financial secretary and treasurer, we’ve dealt with that on previous conferences with that. But here’s another one that you need to know about. And that is the 1099 NEC, Non Employee Compensation. Non Employee Compensation. So if you serve, let’s say that you did a revival for another church, not your own church, but you did a revival for another church. Then you might receive from that church a 1099 NEC, Non Employee Compensation. And for church purposes we won’t be using the 1099-MISC anymore. There is about a one in a million situation that a church might use a 1099-MISC but that’s extremely rare. We’re generally going to be paying people that do some work for us or an evangelist that comes and does a revival, or a plumber, a carpenter, you know, people like that. And those people, we would be giving a 1099-MISC. We would not, I mean, 1099 NEC, we would not be using a 1099-MISC. So you might get a 1099 NEC. And that’s what that’s all about. Say, if you did some work other than for your church. Now, for your church, you should only receive a W-2. You should not receive a 1099 from your own church that you serve. Today, we’re going to be talking about a minister who serves a church and you know, we’re not gonna be talking about self-employed ministers such as an evangelist, and we’ll be doing that. So if you have a question about an evangelist, you feel free to ask it and we’ll ask it. But let’s just assume for today that we are talking about a minister who serves a church and then if we do have a question about some other minister we’ll note that that hey, this is really a self-employed minister. Now most of us as ministers have a dual tax status: we are the employee for federal purposes, and we’re self-employed for social security purposes. Back to the new W-4, there’s really only three considerations. Your filing status. So you put your name and address and social security number. Your filing status, such as married filing jointly, filing separately, married filing separately, head of household or single. The standard deduction is what it’s going to assume and so it takes that into account. And then your child tax credits. It’s very simple for the employee. And in fact, you can just complete step one and step five and step five is the signature. The rest of it is optional. but I want to encourage you to look at the whole thing. If you have two jobs or if your wife is working, and so there’s multiple jobs in the home, you’ll want to pay attention to step two. And there, if you’re married filing jointly, then you can check the box in step two. And this will claim half of the standard deduction for each spouse. And both are, if you’re both working, then you both should check that box in number two. And so what it will do is it will claim half of the standard deduction for you and half of the standard deduction for your wife. This is the easiest answer if two people are working in the household. And then there’s step three child tax credits. You can receive a tax credit of $2,000 for each child under age 17. And then finally, number four, there are adjustments for extra deductions or extra withholding. And I do want to suggest that as a minister, you use step four to claim extra federal withholding and I’ll show you how to do that in just a little bit. And that way you can have enough withheld. Then step five is to sign and date. But I have a form for you. And I hope this form is helpful to you. It is a 2021 estimated tax form for ministers. What it does is it takes into account your income, your spouse’s income, takes into account the standard deduction, it takes into account your housing allowance, and it takes into account the child tax credit that might be possible for you. I will tell you that this form is limited. The IRS has several pages of instructions. I’ve whittled it down to a one page form to make it simple, to make it easy, to make it where you can do it in just a few minutes. But my form has limitations. Number one, I thought that the 10% tax break bracket and the 12% tax bracket were very similar. So since those two tax brackets were so similar I only use the 12% tax bracket. That means that your tax estimate is gonna be just a little bit high. And then the other thing that I did on this form is I ignored all other tax brackets. So if you have an income, family income, not just your income, but family income of around $115,000 or so, including housing allowance, it’s gonna work for you. If you have a family income of more than about that amount then you’re going to go into the 22% tax bracket beyond that point. And then this form would not be, would not be enough. So I did a simple form, quick form and it will work for most ministers situations. If you want to call me and kind of talk through some of your situation and see how much you need to withhold, I can get it fairly close. I’m not a CPA, but be glad to help you to get it reasonably close for your estimate. And then, once you figure out how much you’re gonna owe for the year in taxes, then you can look at do I want to have the church withhold federal income tax and they can withhold federal income tax. They can withhold state income tax. They cannot withhold social security taxes on you as an ordained minister. Now, I know that that many ministers today as we talk about taxes are not ordained. If you’re not ordained or licensed and serving in ministry then your taxes are going to be different than what I’m talking about. Your taxes in that situation would be more like any other employee, not like a minister for tax purposes. So this form will help you. It is limited. And it does say that, at the bottom of the form, that the limitations on it, but it’ll get you reasonably close to an estimate of what your 2021 taxes will be for that year. All right. Just a few things that are new. First of all, December, 2020. Now, these are things new as of December, 2020 there’s new stimulus being talked about right now as we speak. And we don’t know exactly how that is going to turn out, we’ll see. Probably there will be some kind of stimulus coming. The question is, will it be modified from what the proposals are? And we don’t know that yet, but we’ll probably know very soon even in a matter of days or weeks. So in December, Congress passed the $600 stimulus check per adult to persons up to $75,000 of income or up to 150,000 per couple. And so if you filed electronically in the past and you received any kind of rebate or refund, any kind of money coming back to you from your taxes, then you would have probably already gotten this $600. And it would have been electronically deposited into your checking account. If you did things by paper, it’s gonna be awhile. But then there’s probably going to be some other stimulus that will happen in a few weeks. And we’ll just have to wait and see what the particulars are about that. There are some new unemployment benefits. There’s an extra $300 per week for up to 11 weeks. And that’s from the federal government, in addition to what your state does. And then there’s a new round of PPP loans Paycheck Protection Program loans to small businesses and churches are included in that and you can qualify for that and can qualify for loan forgiveness, potentially. Now, we need to understand the 2018 tax changes. Now I know that’s three years ago but you just got to understand these basics. Most Americans will no longer be able to itemize deductions since Congress doubled the standard deduction. For a married couple in 2021 that standard deduction is $25,100. So you would have to have more than $25,100 to be in itemized deductions to be able to itemize. So just know that. And then another big one that affects us, particularly as ministers, and is that Congress eliminated employee unreimbursed business expenses. And so ministers serving a church will no longer be able to write off business expenses, which points to the need for the church to provide an accountable plan. Now they’re not picking all ministers. This is applicable to any employee of any business. It’s just that a lot of ministers they would tell me, oh, I don’t do an accountable plan. It’s too much trouble. I don’t like that, I have to turn in all that paperwork and things. It’s just too much trouble. I’ll write it off on my taxes. Well, you could no longer write off one dime as an employee. Now, if you do other truly self-employed work, say you preach or revive at another church that would be self-employment work. Then you could write off business expenses related to that. But your business expenses related to your church employment, you could not write off any. You’ve got to have the church reimburse you for those expenses in an accountable way. And that way, those expense money would not be taxable. Also, another thing that happened in 2018 and churches and ministers are still not realizing it yet, moving expenses were eliminated as tax-free as either tax deductible, if you moved yourself or as something if the church pays for it, then that money is taxable money. So that’s another thing. So those are some new things that are going on right now. Now for 2020, there hasn’t been too terribly much new but it’s all leading up to this. And many ministers don’t realize some of these things yet. So the key concept here, if you don’t get anything else today this is the main thing. Dual Tax Status. The minister serving a church is an employee for federal purposes; self-employed for social security purposes. We, who are serving a church, we have a Dual Tax Status. Nobody else is treated like that. And so we do have to pay our own social security and Medicare taxes. The minister for tax purposes is entitled to a housing allowance. And we want you to do the best on your Housing Allowance. I have a friend of mine and he used to say, well, I don’t claim everything that I could claim. And that way, if the IRS audits need, then I’ll have something else to bring out to so that maybe I won’t have to pay anything. Well, that’s not a good thinking. And we should climb everything that we’re entitled to and including all that the Housing Allowance allows us to claim. but the minister must pay his own self-employment tax. And so these three key concepts are very key, very important that you understand these. So we’re today, we’re gonna talk mainly about how to save on your taxes and we’re going to base this on the GuideStone Compensation Planning Guide. You can find that at guidestone.org/compensationplanning. It’s a great guide. It’s easy to understand. It’s not very long. It’s only about 17, 18 pages, and it’s very well written. It’s one of the best things that GuideStone puts out there. So in terms of saving money on taxes, the GuideStone Planning Guide recommends these three things. Now, actually there’s six steps to the guide. One of those steps is to take a look at what the needs are. Another of the steps is to have written policies. Write these things down so that not only are you doing it correctly this year, but you’re doing it correctly next year and five years from now. And so these are the key areas. These three are to be able to actually save on your taxes. Number one, to have an accountable reimbursement plan. That’s the only way that you can save money on that part of money that’s coming to you. It’s not income but it is a reimbursement for a business expense. We want you to maximize your Housing Allowance and the best way that you possibly can. And then we want you to have benefits. Even our bivocaitonal pastors on average have benefits. The average bivocaitonal pastor in Alabama makes about $19,000. And in addition to that, they have about 1500 in actual benefits provided by the church. So first step in those three steps provide for ministry-related expenses. And this is on page seven of the guide. And so you want to address these expenses with an accountable reimbursement plan, and it deals with vehicle use for business purposes, meetings and workshops and conferences, books, periodicals, software for the use that you have in certain preparations things like that, continuing education opportunities and provision for ministry-related hospitality. Now, hospitality would be that you might take a family to lunch and tell them about the church, explain to them about things and what your church does and what your key things that you emphasize as a church family and how they can get involved and find out where they are spiritually. All those things would have a business purpose and you could get reimbursed for that lunch. Now, step three, also provide for related expenses. The requirements, now these are the IRS requirements, basically, the expenses must have a business purpose. They’ve gotta have a business purpose. Document the amount, date, place, and purpose. And the expenses have to be substantiated in writing within 60 days. Most of us just turn in a report each month. And then any excess allowance. Let’s say, you’re going to the Southern Baptist convention and it’s gonna cost a lot. And you want to get it in advance because it is gonna cost a lot but you don’t know how much. And so you could do that. And then you’d have to settle up with the church when you got back. And at least within 60 days, I mean, 120 days, you would have to settle up. You can use the IRS standard mileage rate for that transportation. And then you could also be reimbursed for meals and lodging. And some churches might use a per diem rate when you’re traveling. Now, this will be out of town overnight, if you’re traveling but most churches want the exact expense. And then any unused accountable reimbursement plan money should not be given as a bonus or additional income. This has got to be a budget line item, not your money, not income and not shown that why we recommend that you put it in a budget that’s separate from your salary, separate from that part of the budget. So that it’s clear to you, that it’s clear to the church, that this is church business expense money not your money. Now it cannot be from salary reduction, cannot be. Concerning business expenses, the IRS States that if done from salary reduction, that it is a non-accountable plan and therefore the money would be taxable. Now you could have turned in reports, but if it’s done from salary reduction, it’s still a non-accountable plan. And if you were audited, it would be shown to be taxable money. The IRS audit technique guide, actually instructs agents to ask about basis expenses. They know how churches work. You know, the IRS is more familiar with churches than you realize. Although they may not know the difference between Baptist and Methodist, but they are more familiar and they know that churches often do business expenses from salary deduction. So you would be asked if you’re ever audited. And that if you were audited, if they said, hey, you were doing this out of salary reduction so therefore it’s all taxable money. It would result in additional taxes and penalty. So if you’re trying to write off business expenses on tax forms, the minister is an employee of the church in every way, except social security and tax experts call this dual tax status. And so this was reboot from taxes in 2018. So if the church doesn’t reimburse you for your business expenses, you’re out of luck. You have no means to write them off, except for if you did truly self-employment work like you did a revival for a church, or you did something like that. Okay. So step one, we want to have an accountable reimbursement plan. Step two, we want to maximize the housing allowance. And housing is a strange kind of an animal. It is an exclusion from income. It’s not a deduction. It is excluded from income. And so you can only use church, our church-related income to provide it. So, for example, let’s say that I’m a bivocaitonal pastor, I’ll make 15,000. And let’s say that I could actually have 19,000 towards housing allowances but I don’t have that much income. So I can’t deduct the rest. I can only take what is actual church income as housing allowance. Now I could ask for the full 15,000 if I wanted to, but I can’t deduct remaining housing expenses just because I don’t have enough income to cover it. It is excluded from federal income tax and from state income tax, but it is subject to self-employment tax. So for your self-employment tax, and that’s your social security and your Medicare, you’re going to pay that on both salary and housing. You’re gonna pay that on both of those two. So who’s eligible? The ordained or licensed minister. Now they also say commissioned but that relates to missionaries. So you have to be ordained or licensed. Number one is a must. You’ve got to be ordained or licensed. You conduct a religious worship. You administer the ordinances. You have management responsibilities in the church and you’re considered to be a religious leader by the church. Number one is required. The others are balanced tests. Now, obviously a pastor’s gonna meet those. Let’s say a youth minister, would he meet those? Possibly, if he’s licensed but not ordained, he must do essentially all the others. And that’s the way the IRS says that they use the word, essentially. If he’s ordained doing most of those things, but then on the other hand, if he’s not licensed and not ordained that youth minister might be doing several of those but he doesn’t qualify for the IRS definition of who is a minister for tax purposes. What are the minister’s responsibilities about it? Determine if they’re eligible, understand the limits, present an estimate to the church, maintain records to substantiate every business, every housing expense, and report any excess as income. And then you must pay your self-employment tax on that amount, in addition to your salary amount. What are the church’s responsibilities? Designate the amount prior to paying. It cannot be retroactive. In fact, Richard Hammer in your Minister Tax Guide which is available at GuideStone says that designating a housing allowance retroactively could be a violation of federal law. And so you don’t want to do that, it must be prior to payment, not retroactively. You should review it annually but there is a safety net wording that you can use in the resolution or you can put it as a footnote to your budget or something like that. It needs to be in writing just so that it’s clear. This housing allowance is in effect for this and all future years until changed. And that way, if you ever forgot, if the church ever forgot, you would be able to still have a housing allowance. And then remember the housing allowance limits. And so we need to, we’ll look at those in just a moment. Now, this is in the Compensation Planning Guide, page 14. You can include your down payment although realize that you may not be able to count all the down payment, you can count it up to the limit. Your payment including principle and interest and taxes and insurance. Your utilities, your furnishings, repairs, and maintenance and remodeling, homeowners association dues. Anything to provide the home, you can count that as housing allowance. So the way they are, it says it is they say expenses which are not eligible, include food and domestic help. A second home is not included. And then you could even count cleaning supplies but they must be only for the home. So not shampoo and not a body soap and stuff like that. You cannot count a second home. You can count a home equity loan only if it’s used for repairs and remodeling improvements, things like that. Richard Hammer has suggested all that the IRS has not spoken specifically about it. He said that if you took out a home equity loan and you had a mixed purpose, let’s say half of it is to repair or remodel the home and half of it is to buy a new car, he suggests that you may want to prorate the home equity loan as housing expense but that’s his suggestion on that. How much can ministers exclude? And this is the lowest of three values. The housing allowance designated by the church. So the amount the church approved. Number two, the actual housing expenses. Number three, the fair market rental value of the home furnished plus utilities. Now that third one is if you’re buying your home. And so it’s those three numbers, and it is the lowest of those three numbers, the lowest of those three numbers. Now, let me say that this works the exact same way all throughout your ministry. It works the same way now, if you pay off your home, it works the same way. And if you retire, it works the exact same way. A lot of times a minister will say, well, I’m retired, now, can I claim the fair market value of the home furnished plus utilities? You might be able to ask for that, but what if I always spend a lower amount that is gonna be the lowest of those three values? Is there a percentage or dollar limit? And the answer to that is no, there’s no set limit. It’s set by the lowest of these three values. So if you’re in a parsonage or you’re renting a home then you will worry. You can have a housing allowance and you would look at the amount designated by the church. You, again, you requested and the church approves it and your actual expenses, that’s what you would compare. And if you’re in a parsonage, be sure to include the rental value of the parsonage in the calculation of self-employment tax. So always I’m going to pay self-employment tax on both salary and housing. And if that housing just happens to be a parsonage then I will count the rental value of that. And if the church pays some of my utilities, I would include that rental payment for having, that utility payment in my calculation for self-employment tax. Is the parsonage counted for SE tax? Absolutely yes. Are bivocational ministers eligible for housing lounge? Yes, but only on their church income. So if they work somewhere else, then that work is gonna be treated just like any other employee. But on their church income, they can’t. Can I deduct the mortgage interest in taxes. Yes, those are still deductible. As long as I have enough to itemize, which I may not these days. So mortgage interest and property taxes, and these two things are known as the double deduction. The double deduction, and you might be able to claim it if possible. But due to the doubled standard deductions, a lot of Americans can’t itemize anymore. Is the down payment eligible? Yes. Let’s talk about an example. So Reverend Black made a $50,000 down payment on buying a new home. The church designated 55,000 for housing allowance. He requested 55,000 and the church granted that and he has other other housing expenses of $10,000. So he’s actually spent 60,000. However, the rental value furnished of this home plus utilities is 25,000. So he can actually only exclude 25,000 from tax. Now, the down payment helped him. You can look at that and say he only spent $10,000 other than the down payment. So the down payment definitely helped him with that additional amount of money but it just didn’t help him to the full extent. It helped him to the extent that of the rental value furnished plus utilities. What about a debt-free home? So you can count everything else on the chart besides the mortgage payment, you know, and you can count taxes, insurance, utilities, furnishings maintenance, remodeling, home owner association dues. And so with no mortgage payment, the expenses are likely to be less than they used to be. And some people think they could exclude the fair market rental value, but this is not true. It is the smallest of those three numbers. When can the church designate? It should be before the beginning of the year. And the church should be in the habit of doing that each year, but it can be done at any time. It just cannot be retroactively. It can be looking forward, but not looking back. And so remember that the church not the minister must designate the housing allowance. I talked to a church secretary one time and I was asking about housing allowance and she said, oh, we don’t do anything with housing allowance. The minister does all that. Well, that’s not true. You can’t, the minister cannot. The minister can request it and the church must approve it, officially designating the housing allowance. What if the church forgets? Then the housing allowance is zero. And so the church should have that safety net wording that says, this housing allowance is in effect for this and all future years until changed. And let’s say that we forgot. And here we are, early in February, that minister could request housing allowance now, and that request could be approved at the earliest possible moment even if we had to call a special business meeting or perhaps the finance committee or somebody else has the authority to approve housing allowances. So you’d wanna get that approved immediately. Use the safety net wording for the current year and all future years until changed. Is there a limit? No, it can be even 100% of income. A lot of our bivocaitonal pastors use 100% of their income as housing allowance. But you’ve got to remember those rules if let’s say that my income is $25,000 a year and I asked for $100,000, I mean and I asked for 100% of it as housing allowance but what if I’ve got my home paid off, I’m probably not gonna spend that much. So you’ve got to remember the rules. It is the smallest of those three numbers. Even if 100% is appropriate to me the minister should have some as taxable so that he can put some money in the church retirement plan through GuideStone, save for his retirement. And most of us as ministers and most of us as Americans are not really well-prepared for retirement. And so we could boost our retirement savings. We can do well with our money. We can also save on our taxes in putting money into the retirement plan. So let’s say a bivocaitonal minister that receives $19,000 a year. I would suggest that he put a 1,000 or 1500 into the church retirement plan, maybe even 1,900, which will be 10%, into the church retirement plan so that he would have the retirement and he would have those extra benefits as well. So even if you could have a 100% as housing allowance, I would suggest not to be able to do that. The minister is responsible to report the excess as taxable income if the designation exceeds your actual expenses. And so if I had a housing allowance of 19,000 and I only spent 18,000, then I would report that extra thousand dollars on my tax forms as additional income. Is it reported on the W-2? For many of us, it is, and including myself but actually the State Board of Missions does not for ordained ministers, but it, for many of you nowadays it is reported because your church software program does it but it doesn’t have to be, it’s not required by the IRS. The IRS language says it may be reported in box 14, labeled housing allowance and it should never ever be included in box one because if it’s included in box one, you can’t fix that. You cannot deduct it. Your church would have to issue a W-2C, which is a corrected W-2. What about retired ministers? The church retirement plans such as GuideStone can designate a housing allowance. GuideStone is our denominational provider for retirement. Our retirement plan is a unique plan. It’s called a 403 , a 403 . That’s the one that is a church plan that you can take a housing allowance during your retirement years. And a lot of other plans you would not be able to take retirement plans from most other providers. Now GuideStone is similar, other denominations have their own plan, but GuideStone is our plan. The rules are the same as when you’re working, when you’re retired. And so I would include the lowest of those three numbers and retirement income is not subject to self-employment tax. So let’s say that I have money coming from GuideStone. And part of it is taxable money. And part of it is housing allowance. Our big part of it is housing allowance. Then I would pay federal income tax on that taxable portion coming from GuideStone but I would not pay federal income tax on the housing allowance, and I would not pay self-employment tax on either. And so that’s a very wonderful tax benefit for retired ministers. Now, if I am retired but I also serve a church, on that church position I’m going to pay taxes, federal taxes, depending on what’s going on with housing allowance and I will pay self-employment tax because I’m working. And so when you’re working, you’re going to pay self-employment tax. Now some people get the idea that when you’re old there’s a magic number in which you quit paying taxes. I get to be 80. I don’t pay taxes anymore. I get to be 85. I’m not paying taxes anymore. Well, there is no such age. If I’m still working at 85, still serving a church, or whether I’m doing that, or whether I’m working at Walmart, I’m going to be paying taxes for social security, Medicare. Now, I’m working for Walmart. That would be FICA. If I’m working for a church as a minister that it would be self-employment tax. There is no age in which that stops. The reason that we have this misnomer is that for a lot of people who are 85 they don’t pay taxes and they’re not working. So they’re not going to pay taxes for Medicare and social security. And then they don’t make enough to pay taxes on their income from retirement or from social security. So let’s say that I’m a married couple. I make $30,000. All of it’s coming from, say, from social security. We each work and we each get about $15,000 from social security and we’re making 30,000 but that’s our only source of income, I would not be paying any taxes at that point. And that’s why people get the idea that there’s some kind of magic age in which you don’t pay taxes anymore. Do retired ministers pay SECA? Not on their retirement income. And they would pay self-employment tax or SECA if they were doing some work like supply preaching, interims, things like that. Can the surviving spouse receive housing? No. No, because they’re not the minister for tax purposes and have that definition. However, there are some IMB missionaries who are both commissioned and they do qualify. And so the spouse in that case would qualify. The housing allowance is not what it used to be. I think I’m gonna take, gonna stop right here. We’re gonna talk about this for just a moment but let’s look at some questions and then we’ll come back to that. So here’s the Q and A part. Steve Logan says the threshold still $600. Now, Steve I’m gonna kind of guess what you’re thinking about. First of all, if I’m not an employee, then it is $600. So let’s say that I pretty sure revival for another church. And I receive $600 or more. They would give me a 1099-NEC. If I received $599, they would not. However, it’s still taxable money and I should report it. But that threshold would not be mad and I would not receive a 1099-NEC. So that is true what I am self-employed. However, for employee, the threshold really is about $100. And so any income, I should receive a W-2. And our member, Joe Ellen Johnson who is our CPA at the State Board of Missions, she would say, if a person came to State Board of Missions and worked one day and decided, hey, this is not for me. And I quit. And they worked one day, she would give them a W-2. So that threshold for a W-2 is only about $100. But you are right concerning true self-employment income, not me serving as pastor, the true self-employment income, that threshold is $600 for them to give me a 1099. All right. Do we have to give a 1099 to contractors that do repairs on our church or will their receipt be enough? Mark, you have to give a 1099 if they receive $600 or more and they are not incorporated. So the big corporation contractor, you would not. But the way that you find out is the church would give them a W-9, W-9, and that’s the form that you find out a person’s social security number or if they are incorporated, and if they are incorporated, you would get their TIN number, Tax Identification Number. So assume, the best way to do this is assume that you’re going to provide a 1099. And then if you don’t have to provide the 1099, well, good, but use the W-9 to find out whether you’re going to have to provide a 1099 or not. And a lot of churches especially use individuals to do contract work. So for example, I know my church years ago, we used to use a guy to do our air conditioning work and he did it like on Saturday, and he was not, he worked for a company, but he was not on company time at that time, he was on his own time and we paid him direct. We didn’t pay the company. And so we would have to provide a 1099 in that instance. Okay. David says, who can license the youth Pastor? Can the senior pastor just say he is licensed? No action by the church. Or does the church need to license the youth pastor in some kind of action? Can the elders license the minister? David, you’re dealing with a subject that, you know, it’s really funny since the local church is the highest level of authority. We don’t have exact methods to do that. It is church tradition and you know, one church can differ from another church in the way that they do it. Typically, let me speak to you about typical ways this happens. So typically, well, at least, back in the old days, I’ll say it that way. When a minister was licensed, usually was when they went off to college. And if they’re going to a Baptist school and go into a Baptist school, call to ministry, they feel called, then that license was typically done in order for them to get the ministerial discount at a Baptist school. And so typically a minister was licensed about that time. Now you can license a minister anytime. And just from my own perspective and my own opinion, I would suggest licensing them first and then ordaining at a later time. But that’s up to your church. So the form that we use for license and for ordination is one that we’ve typically bought from Lifeway. And so for license, it says that this person has experienced a calling to ministry. Although ordination form, it says this person has proven themselves. And oftentimes they really don’t have a whole lot of experience, but they’ve proven themselves in that they have been examined by an ordination council. They’ve been asked questions and that ordination council approves them. So to license, my recommendation would be that it was some group in the church. It could be the whole church votes on that person to be licensed. In fact, kind of one tradition that has gone on through the years is that when I say youth minister and he’s not even a minister yet but the church plans to licensing that might be the opportunity that he shares his call to ministry with the church, and then the church licensing. So oftentimes it was a vote of the church. I think if, personally, I think that if it’s not a vote of the church, it should be some kind of group, maybe the deacons, maybe the church leadership council, and, you know, depending on how your church operates and what would be appropriate for your church, you mentioned, can the elders license the minister? I would think so, but typically it would be at the recommendation of the pastor. And so the pastor is usually the first involved in that process of recommending that. But I do believe that somebody, deacons, elders, a committee, somebody should be involved in that process. Okay. Can a senior pastor just say he’s licensed? I don’t think that that, I mean, a church could give him that authority but I don’t think that’s typical of our churches. I don’t think it’s typical but some of you might ride back and maybe it’s more typical than I realize. Typically a minister is licensed first. Oftentimes, like I said, that’s when they’re going off to college to pursue their calling. And then when they come back and they are serving it at your church and they want to be ordained, then they’re typically ordained when actually serving in ministry. It’s what typically happens. But again, I’m talking about traditions and churches can do things the way that the church wants to do. I say that this session is recorded. How am I able to watch it again? It will be, and those of you who registered, you will receive an announcement when it’s ready. It will be about a week or a week and a half that it will be, the recording will be ready. And all of you who’ve registered, you will receive an announcement of that that you can go back and watch it. Okay. Safety net wording. If the housing is in the budget and not in a resolution then they’re not, might not be a way to have a housing if the budget is voted on time are forgotten. You’re exactly right. That I have known some churches. In fact, with COVID, there were some churches that in fact there were some churches meeting in the fall and they were having business meetings. And then right after Christmas, some churches don’t vote on their budget until either midway through December or maybe even the first part of January. And due to COVID, there were a few churches that could not vote and they were asking about their vote for their budget. And some of them had to wait a few weeks before they could actually vote. So you’re right. It cannot be retroactive. So if we’re voting on a housing allowance every year and we are delayed some way then there would not be a housing allowance. So we need to have that safety net wording. We could have it in church policy that the church sets a housing allowance for all eligible administers. And once that is set, it remains in effect for all future years until changed. So that could be a good way to do it. You wanna make sure that no matter what happened, I mean, who ever dreamed about COVID, you wanna make sure that whatever happens, you will have a housing allowance. Okay. Mark says, can I sell stocks and use the proceeds to make an IRA contribution and not have to pay capital gains on the stocks? Yes. You could sell stocks… No, no, no, no. No, I’m sorry. The answer is no. You don’t wanna sell stocks. You want to give the stocks to the church, give the stocks to the church. And the church would need to have a brokerage account. That’s easy to do. There are some low cost brokerages available like Schwab and some like that. And so here’s what you wanna do. If you give the stock, let’s say that I bought stocks 20 years ago. Bought it for $100. I’ve got a hundred shares of XYZ stock. I bought it for $100 and now it’s worth $1,000. So I have two choices, one choice. I could sell the stock and give that money to the church. I sell stock for 1,0000 and I give that thousand dollars to the church. Great, I’ve given the church $1,000. However, I’ve got capital gains because I experienced the gain on the stock and I’ve gotta pay that capital gains tax. The other choice is I could give that stock to the church, give that stock to the church, not sell it. And then the church sells it. And so I give the stock to the church and I don’t have the tax on the capital gain for the stock. So that’s a wonderful way to give. And we in church world, we would be surprised that many people in Alabama do have stock. Sometimes they just have an interest in stock and they like doing that. Some, you know, of course it can be a way to invest. And then some people get company stock who might be in our churches. Giving stock can be a wonderful way to give. Now, you also, Mark, you also use the word, make an IRA contribution. Now, if it’s in a capital, if it’s in an IRA, you would not want to sell it unless you’re retired. You want to hang onto and let it grow because the problem is, you know, you’re limited as to how much money you can put into an IRA. And once you’ve taken that money out, you can’t put it back. Let’s say that I can contribute 6,000 a year. And I took out $5,000 one year. I cannot put that money back. There is a window at which you can put money back, but once that window is short window, once that window’s gone, I can’t put that money back. And if I take money out before 59.5 out of an IRA, if I take that money out before 59.5, I’m going to not only be taxed, but I will be penalized. And so I wouldn’t wanna use an IRA for that purpose. The thing that I was talking about, about giving stocks to the church that is best done when that is just at a simple investment account. And by the way, GuideStone does have that. But it’s just a simple investment account, not in a retirement account or an IRA is the best way to do that. So Mark, if you’ve got further questions about that feel free to send me an email or call me. And now I’m not an expert in that but I can give you some general kinds of information. But giving stock can be a wonderful way to give to your church. Okay. Another question, do we have, do we have to request GuideStone to approve the housing allowance if retired. And Steve, the way that you do that is when you sign up to start your retirement money coming to you, one of the questions it’s going to be on that form is do you want to have a housing allowance? And then you could request it either as a dollar amount or a percentage amount. A lot of people don’t have a gigantic GuideStone account. And so they’ll ask for 100% and you may do that but you can do it that way or a dollar, either one. You’ll have that opportunity when you first sign up with GuideStone to receive retirement money but you can change it at any time. And there’s a different form to change your housing allowance. Or say, for example, let’s say that I’m still serving a church so I should take my housing allowance from that church. And so I’m gonna start my GuideStone retirement money coming to me, but right now I should not take any of it as housing allowance. And then later on, when I do retire from this church, I could begin to take my GuideStone money as housing allowance, and I could send in that form to change that. So that’s the way you do it. You will have the opportunity when you first sign up to receive your retirement money. Okay. Mark says our budget runs September 1 to August 31. Do you see a negative or positive side to that? There’s both, there’s a positive and a negative. Some churches won’t have a church year that everything works on a church year. And so they elect new people to serve and new committees, for example, and the church year begins and the Sunday School year begins and all those kinds of things begin all at the same time and they want their finances to align with that. And you’re welcome to do that. It works good in many ways. The only thing that you need to do is you would probably want to request your housing allowance that this housing allowance is for 2021 and 2022 and somehow specify that. Or it could be, this is the 2021, 2022 budget, and includes housing allowance. So you want to clarify that that this housing allowance is gonna cover spans over a calendar year plus. And I think that’s the one thing that’s a little bit negative. It’s a little bit negative for the financial secretary or treasurer because they got to do the W-2’s well for most cases that they still wanna do the W-2’s on a annual basis of calendar year basis. And so that’s a little bit confusing for them but I don’t think it’s anything to overcome really. It’s not too terribly hard. So I think that most churches are on a calendar year for their budgets even if they’re on a, you know, September 1st year for the rest of their church stuff, but that’s up to you and your church, you can do it either way. And you’re welcome to do that. All right, we’re gonna think we’ve dealt with those. Let’s go back to where we were. Okay. This is an area that I wanted to talk about because I want you to understand how things have changed. The housing allowance itself has not changed but some of our tax situations have changed. So the housing allowance is not what it used to be. It’s not what it used to be. And the reason I’m saying this is that if you are to talk to, if you’re to talk to a banker you know, a mortgage lender, they’re gonna say, oh man the mortgage is the most wonderful tax advantage. You, you know, it’s just this mortgage is just the best thing ever. And you talk to a real estate person and they’ll say, hey you buy this house, and I know this house is a little bit much for you, and you’re kind of worried about the payments but it will be wonderful because you’ll have the best tax advantage in that mortgage payment. And the interest will be tax deductible. And many people will say gosh the mortgage interest is wonderful for a minister because you’ll be able to, in a sense, deduct it twice. But it’s not quite what it used to be. So the double standard deduction means that most ministers are just like most Americans they can’t itemize anymore. And so, so you can’t, for most of us we won’t be able to have that double deduction. We’ll only be able to count the mortgage interest once typically. And the one time that we will count it will be the housing allowance. Now, in a sense you’re still getting it because the standard deduction has doubled, but you would get it that standard deduction doubled anyway. And so we typically don’t get that. Now, what I’m saying is, okay let’s take a person who’s not a minister. And the mortgage person and the real estate person says oh your itemized deductions, you’ll be able to deduct this interest on your mortgage. It’ll be wonderful. It will be great. You know, you still wanna do it. However, 95% of Americans can’t itemize their deductions. So it’s not gonna work. It’s not gonna help you on your taxes, not like it used to. So what I’m saying here is there’s, I’ve known ministers to think, okay now I’ve paid off my house. Do I wanna take out another mortgage, a home equity loan, something like that in order to be able to count it as housing and deduct the interest? Well, maybe not. It might not be as advantageous as it used to be. Now, of course while you’re paying for your house, of course you want to take advantage of every possible deduction at every possible way that you can take advantage of the housing allowance that you can. But I’m just saying, don’t necessarily think about paying off one mortgage and immediately taking out another. That’s gonna take some thought and looking at your specific situation. These days we’ve got extremely low interest rates. And I can remember when we bought our first house and the interest rate, standard interest rates were like 18%. We got it for 11% and thought, man this is the best deal imaginable. And then they went down to nine, how wonderful. Went down to seven, how marvelous. Went down to five, hey, this is great. And so now, if, you know if the interest rates went up to 5% the economy would collapse because people have gotten used to these extremely, extremely low interest rates. And even around 5% has been more historical as being a good rate, but now we’re seeing extremely low rate. So there’s, there’s less to exclude and less to deduct if you could deduct on your itemized deductions. And then the advantage of the housing allowances often overshadowed by the self-employment tax. And of course, while you’re serving and while you’re paying off your house and do all those things you wanna take advantage of it to the best that you can but it’s not quite as good as what it used to be. Let me give you an example. And this is a question that I get a lot. I get this question a whole lot. So I hear from a church and they say we want to ordain our youth minister so that he can get the tax advantage. And so we want to ordain our youth minister. And so that he’ll have the housing allowance. Well, that’s not always the best. Ordination, and now I want to this very strongly down at the bottom, all right, or at the top ordain for not for tax reasons, but ordain when it’s about calling, when it’s about calling. Do not ordain a youth minister, for example, if you’re just thinking about taxes. So here’s an example of used same amount of money. A non ordained youth ministers married makes $45,000 compared to an ordained youth minister married making 45,000. So let’s take the non ordained. Less the $25,000 standard deduction. So that gets down to 20,000. So as federal tax on $20,000 is gonna be 10% tax rate is gonna be two, $2,000. And then his now I do wanna say that I’m using rounded numbers here, but this is very, very, very close to actual. So his federal tax is gonna be 2000 and then his portion of FICA tax, because he’s not ordained is gonna be 3442. And you take his $45,000 times 7.65%. And it’s 3442. So his total tax is 5,442. The total of the two. Now of course the FICA tax comes out of his check and he never sees it. And he also never calculates it. The church calculates it for him. So it’s not something that he does when he fills out his form, 1040’s gonna only look at the $2,000 federal tax. Now let’s say these ordained youth minister married making 45,000 and he requests 15,000 as housing allowance. So that gets it down to $30,000 and then less the $25,000 standard deduction. So that gets it down to $5,000, federal tax, taxable income. And the federal tax on 5,000 is 500. And then, but he’s gonna pay self-employment tax. And the amount of $6,358 and his total tax is 6858. So the ordained youth minister is paying about $1,400 more in total tax than the not ordained. Now I’m only talking about about federal income tax and social security taxes. I’m not talking about state, but, so do not ordain somebody for tax reasons. It needs to be about calling. And for the rest of us, the housing allowance is wonderful but it’s not quite as wonderful as it used to be. Because of the doubled standard deduction and extremely, extremely, extremely low interest rates and some other factors. So don’t jump out of a mortgage and get it paid off and jump right back into a mortgage necessarily unless there’s some kind of need for it, or a reason. And I’ll tell you, when you pay off your house, don’t worry about your housing expenses being reduced so much. Your spouse is gonna think of all kinds of things they can do to the house now and spend some money. And you’ll be able to use that and count that in your housing allowance. All right. Another thing that I wanted to show you is this is what your W-2 should look like. This is what your W-2 should look like. This particular minister made $25,000. In addition to that the church put money into his retirement account. In addition to that, they provided health insurance and they provided some life insurance that was an excess of $50,000. So 25,000, he asked for 15,000 as housing allowance. So 25 minus 15 is 10. He had $10,000 taxable income. Then he wanted to put 2000 and I’ll show you it down here in box 12. He wanted to put $2,000 into his own retirement account in addition to what the church did. So that gave his taxable income as $8,000. And then the taxable amount of the life insurance when it exceeds 50,000, there is a taxable amount. And that goes, that taxable amount goes here in box one. It also goes in box 16, state wages in our case in our case is a church state wages and federal wages are the same. And so then he’s got $2,000 that he put into his retirement account here with code letter E which is the right code letter for 403 which is what GuideStone is. And then the amount for his life insurance is here. I put in for the health insurance although that is not required. It is optional for employers, less than 250 employees. And so almost every church will not do that. I just put it in there as an example. So this is what a W-2 should look like. You may put housing allowance in box 14 which is right here if the church wants to do it. Now, we recommend not to, you don’t have to, the IRS only says you may put it in there. It does not say that you’re required to put it in there. So this is what your W-2 should look like. And note that boxes three, four, five and six are always blank on an ordained minister. They’re always blank. If you’ve got 8,000, I had this quiet question just recently a couple of weeks ago, if you put $8,000 here and here and here, what’s that minister to do? He’s got to get a W-2, corrected a W-2c. So that’s the only thing he can do. Housing is excluded from income. It’s excluded from income but it is included in social security income. So this is what your W-2 should look like. A minister serving a church should always receive a W-2 unless he asked for 100% of his income as housing allowance. Then he would not receive a W-2. He would receive a statement on church letterhead saying for 2020, you received $25,000 100% of which was housing allowance. All right. What about having a home office? What about having a home office? I actually saw an article lately and it was advocating ways to save money for administer. And it advocated three things. It advocated maximizing the housing allowance, it advocated having a home office, and it advocated opting out of social security. Now, first of all, I’ll just deal with the social security. We don’t recommend that you opt out of social security. Now I know many Baptist ministers have and if you’ve already opted out social security, it’s done, but opting out of social security, you’re opting out because you consciously object to receiving government insurance is the reason the IRS gives you. And if you’ll look at Richard Hammer’s book he says, his tax guide, he says in there that most ministers do not qualify to opt out. And GuideStone, if you wanna look it up GuideStone has a very well-written paper. It’s about four pages long on why ministers should not opt out of social security, but let’s just deal with this article that I saw not too long ago. It advocated maximizing the housing allowance, having a home office and opting out of social security. And it showed you that you could, and yes you could save on taxes if you did that. But actually a home office is not permitted except for the truly self-employed such as an evangelist. And so this article was advocating having it. There were perceived advantages that you could deduct that portion of the home but also if you have a home office then you could deduct mileage going from home to church and virtually from home to anywhereو that would be business miles. But this article was incorrect. Not for a minister serving a church. Now it might be correct for an evangelist and the article might be correct for somebody who’s truly self-employed but not for a pastor. Many years ago it was possible that if the church provided no office that you could claim an office, a home office deduction. But that’s changed also. And so the Tax Cuts and Jobs Act eliminated the home office deduction for anybody who is an employee. Anybody. Now we’re not talking about just ministers but anybody who’s an employee. So ministers, and here’s what the IRS says: “Ministers are employees who receive a paycheck or W-2 are not eligible for the deduction.” And even during this time of COVID I know many people have worked from home most of the year. And they wanted to know, hey, can I deduct my expenses for my computer and my internet service and the expenses that I have for a home office and the things that I needed to buy to be able to work from home. And actually, if you receive a W-2 whether you’re an employee of a church or somewhere else you cannot deduct the home office. You can deduct the home office if you are truly self-employed. So this is all changed. And the article that I read would only be in effect for a truly self-employed minister, like an evangelist. So that, that was interesting, it’s interesting to see these articles and see some things that are out there and you’ve got to you’ve got to look at it and you can read it but you need to then examine it. And is it truly true first of all, and is it true for you? It might be true for somebody but it might not be true for you. Okay, before we go into maximizing benefits I’m gonna take a look and see if we have any other questions. Yes. David says, “In your example about the ordained or non ordained youth minister, the church will have to pay out an extra 3442 for social security.” Yes, that is exactly true. And so the church would have to pay that other part of the social security taxes. But we’re just talking about, but still I don’t think it’s the right decision for a church to ordain a youth minister only for tax purposes. And, and as you can see, David you’re shifting part of the burden on to the youth minister that for a regular employee, the church would have and every other employee, other than ministers the church would have to pay. So David you’re exactly right. And there is some extra money paid out in taxes. Now, the answer to that, David is that the church would provide a social security offset. And so the church would provide more money to the youth minister. If that youth minister truly did feel call to ministry to be ordained. And so that’s a wonderful thing for the church to do to provide a social security offset. And that would be great, but I was just comparing the 45,000 to the 45,000, good point that you made David. I appreciate you do that. Okay. Mark says, “Is internet phone considered part of housing allowance?” Okay. good question Mark. Internet, in fact, Hammer, who is the nation’s leading authority, Richard Hammer, is the nation’s leading authority on tax. And he writes our tax guide for ministers that you can get free from GuideStone. And there was a court case about internet service. And the court case determined that yes you could count internet as housing allowance. But one thing that Hammer says is that, that court case applied to that occasion. And the IRS has not directly dealt with that with internet service and housing allowance. So the real answer is yes and no. It’s yes and most ministers are using internet as their housing allowance expense, talking about home internet. And the no part is it’s not official, but you know the things that we count as housing allowance, a lot of those have never been officially determined by, you know, by tax court. And so we’re going on the traditions, the IRS just says the housing allowance includes the payment including the four things that I mentioned interest in principal, and taxes, and insurance. And the housing allows includes utilities but it doesn’t really define what those utilities are. One that is definitely not is the cell phone. It’s not housing allowance. Now your church should reimburse you for your cell phone. And they can reimburse the cell phone tax-free, but you should be doing that, the church should be doing that but that part is not housing allowance. Now the phone that would be part of the housing allowance would be a local landline telephone and a few people still have that. So that would be the one that would be included in housing allowance. Hammer did say that. And what he was saying is that he acknowledges that many ministers do count home internet as housing allowance and basic cable TV service counted as a utility, but the IRS has not directly dealt with those two issues, and most will be counting those two, and most denominational lists that talk about this will include the two. All right. All right. Thank you, David, about agreeing for not ordaining for tax purposes. You know, a lot of churches don’t think about the social security offset and if they’re not thinking about the social security offset, then that minister is actually going to be harmed financially. So a minister should be ordained for calling reasons not for tax reasons. All right, so we wanna maximize benefits. And while we stop right here, y’all might wanna take a little quick break, stand up break. If you need to stand up for just a moment. We’ve got a little bit more to do and we will get you out before 12. But if you wanna take a stand-up break if you need to leave the room for just a second, and then we will come back to getting going again. I do wanna mention that thank you for being here. You’ve got my numbers and my email feel free, to contact me at any time. And I’ll be glad to answer your questions and in about a week and a half or so this will be out recorded and you’ll be able to see it, but the notes are already there. The notes are already at Al’s bom.org/ccs and then click on administrator resources. At that administrator resources site, you can find the notes, You can find the 2021 estimate of taxes for a minister. You can find the financial issues book. There’s just a lot of resources there that you can find. All right. So medical, is it taxable? And this is, I based this, this webinar on primarily on the questions that I receive every day. And one of the questions that I get almost more so than almost anything is is the way that the church is doing medical. Is that tax free or not? And so we’ve gone through several changes. They used to, whatever church did to provide medical insurance was counted as being tax-free but it all changed with the 2010 Affordable Care Act. And it didn’t change until it’s supposed to change in 2014 but actually did not change until 2015. So the basic principle in 2015, that payment for a group health care plan is non-taxable benefit. But the payment for our reimbursement of individual insurance was not allowed anymore. And any money would be taxable income if that, if that happens. So that’s, what’s happened in 2015. Now, since then some more things have changed. So if you are the only employed, only employed, whatever, I’ll move down to this third box, and really it mentions it. A group healthcare plan of fewer than two. That’s an exception. And I’ve mentioned that elsewhere here, but, okay. So let’s look at the chart. Group health care plan is non-taxable benefit. GuideStone insurance is a non-taxable benefit even if there’s only one employee on it, because GuideStone is a group plan, group plan. They don’t refer to their plans as being, well they do use the term group but they don’t use the term individual. They call it a personal plan is what they call it. Because even their personal plans are a group plan. And it’s that it is a church plan and it’s a different kind of plan than you would normally buy. So it’s a church plan and you and I can think of it as this is the group provider for Southern Baptist workers. But so GuideStone insurance is a group plan Medicare parts, B D, and supplement. It could be not taxable. If it’s part of a group health care plan you need a written plan and an expert is needed. Normally, normally it would be taxable because those are individual plans. Payment of an individual plan is normally taxable but payment of individual plan with only one full-time employee is not taxable. And the IRS notes, exceptions of groups fewer than two, fewer than two. So let’s say the church has only a pastor. Pastor’s full time. Nobody else works 30 hours a week or more. The church could provide an individual plan for that pastor and count it like it was a group plan and count it as a benefit. Now here’s, what’s changed since 2015. In 2017 there came an HRA, health reimbursement. Now health reimbursements have been around for a long time. And normally health reimbursements were associated with the group health care plan. But in 2017, that changed. So a qualified small employer, health reimbursement. It came about in 2017 and it could purchase an individual plan, you know is to reimburse the employee for that individual plan or for a portion of that individual plan. It could be up to 5300 for an individual, or 10,700 for a family. And if done correctly, that could be a non-taxable benefit. There are some rules to follow. We’re gonna talk about those in a minute. Then reimbursement of individual plan through the government exchange, it’s likely taxable and there is a possibility it might be non-taxable but it does reduce the premium subsidy. That’s the amount that you receive from the government to help you with your health insurance. And so that one you really need, if you’re gonna claim that to not be taxable you would need some help from a tax expert. A couple of the HRAs is definitely taxable, but you look at at how it’s done. Health reimbursement arrangement is not taxable. If it’s part of a group health care plan, let’s say they have a $3,000 deductible and they’re going to give you a reimbursement of up to $3,000 if you should need it. Then that would be done through a group health care plan. The other exception to that is a QSEHRA, qualified small employer HRA. And then there’s a brand new one as of 2020. That is the individual coverage HRA. So let’s look at those. Qualified small employer HRA is funded solely by the employer. You cannot have any salary deduction to it. So now they can decide how much they want to reimburse. They could reimburse 3,000, 4,000, 5,000. You know they could reimburse what they wanna up to those limits, but there could be no salary reduction. It’s got to be a benefit. Number two, the arrangement provides after the employee provides proof of coverage for the payment or reimbursement, an eligible employee for medical care expenses. Number three, the amount of payments cannot exceed the annual limit. So those limits change. This year it’s 5,300 or 10,000 for a family. The arrangement is provided on the same basis to all eligible employees. So the easy way to do that is everybody who works 30 hours a week or more. And then number five, it can’t be a large employer. And then number six, you’ve got to have a written plan and you’ve got to notify your employees within 90 days notice that you’re gonna do this. There’s another new HRA called the individual coverage HRA. And it is similar, but it has more flexibility. It may cover individual insurance and out-of-pocket costs. The QSEHRA is only for the insurance premium. It may cover different classes of people in different ways such as salaried and hourly and full-time and part-time. It’s generally tax-free except to pay for a Christian sharing ministry plan. In fact, if you have a Christian sharing ministry type plan whatever the church pays you towards that that’s gonna be taxable money. Those can be really great ideas and, and worked well for many people, but the money would be taxable money. Here’s a little bit of a chart to compare. The qualified small employer HRA versus the individual coverage HRA. Can it be offered with a group plan? The first one no, the second one yes. But not both the group policy and the HRA. Is there a maximum contribution? The QSEHRA do have a maximum. Can amounts vary per employee? Under the QSEHRA, they can vary the allowance by family status and age and family size but not based on classes. And under the individual coverage they can adjust the allowance according to different classes of employees. Who is eligible? All employees full-time are eligible. Now that means 30 hours a week or more for health purposes. And it may include part-time but it must be on the same terms. And then the individual coverage, it would be the same to all employees in each class. Does it work with the premium tax credits? And that’s where a person is on the government plan and they receive a premium tax credit to help pay for their insurance. The QSEHRA, the person could still receive the premium tax credit, but the HRA is reduced. And under the other plan employees participating in the individual coverage plan aren’t eligible for premium tax credits. That’s the way that that works. And so under the QSEHRA does it require individual health insurance. Yes and the health insurance has to meet. And what that is is minimum essential coverage requirements. You know, today there are some cheaper insurances out there. Many of them are termed to be temporary insurance like 90 day insurance and things like that, that they don’t meet those coverages. They’re cheaper but they don’t meet those recoveries, those coverages. They have limits of what they’re gonna pay out and things like that. So under the QSEHRA does have to meet those requirements and under the individual coverage HRA does not. So this is a difference between the qualified small employer. These days, fewer now, although when you get to a size of say 150 in attendance most pastors are provided health insurance by their church. And as you get larger in attendance it’s more common and more common. And by the time you get to above two 50 in attendance it’s often that a church has a group healthcare plan. But for many churches and especially many small churches that are saying we can’t provide you health insurance is just too expensive. Well, this is one thing the church can do. They could provide you a reimbursement up to a certain amount and they can decide the amount that they’re within limits. They can decide the amount that they want to reimburse for. So is it taxable? I wanted to go over a few of these. We’re not gonna go over all of them, but a few of them. I do want to say that love offerings and bonus. Those are taxable. I get calls from churches, especially November, December. Can we make our love offering tax-free to our pastor? And the answer’s no. It’s included on his wages. And so it is taxable. Severance is taxable. Social security offset is wonderful thing to do but it is taxable. Payment of personal expenses is taxable money. I know of a few churches that they pay for the pastors a whole life insurance plan. They pay for his car insurance or things like that. That payment for personal expenses would be taxable income. Forgiveness of debt is taxable income. And then if the church makes a loan that’s more than 10,000 and does that loan at no interest. Now, first of all, the notes to the right, Alabama law forbids loans to officers. But if they did, we’ll say for the youth minister if they did loan that $10,000 or more and they didn’t charge any interest, then there would be some additional taxable money that the IRS says you should have charged interest. And we’re going to tell you how much you should have charged, and so then therefore that becomes taxable income. Club dues are taxable but professional organization dues are not. So for example, I’m a member of the, of the Parliamentarian’s Association the NAP, National Association of Parliamentarians. I’m a member of the National Association of Church Business Administrators. Although that one’s changed names to The Church Network, those would be professional organizations that could be paid by my word. Pastor discretionary funds. That’s taxable, unless it is used for ministry purposes 100% and is completely accountable that you’ve got documentation on how you use the money. And then of course, housing allowance is not taxable but it is taxable for self-employment tax. A non-accountable car allowance is taxable. Reimbursements for business expense, from salary reduction that is taxable. But if you have a truly accountable reimbursement plan done properly, like we talked about earlier, that is not taxable. Spouse travel is taxable and it’s taxable unless the spouse has a business reason to go. So for example, going to the Southern Baptist Convention and there is a taxable reason for that spouse to go. That spouse is gonna go and be a messenger and vote and participate and things like that. That would be a business reason to go. But if the spouse just goes along for the ride and does sightseeing instead, then the spouse’s portion of the expenses would be taxable. Like for example, the travel, and in car and the hotel room you’d have to do that anyway, but you would have to count as taxable the spouse meals. If you’re going on an airplane somewhere, then it would be the spouse’s airplane ticket, too. Cell phone is not taxable. Your church can reimburse it as a basis expanse as long as it’s primarily for business use. And it doesn’t even have to have documentation anymore. You just got to know that the employee’s using the cell phone primarily for business purpose. You do need to know how much the bill is. So let’s say we allowed $50 a month, and now that minister has gotten on a $35 a month plan then we would only reimburse $35. For tuition and continuing education. You can do, this can be done two ways tax-free. One is to have a tuition assistance plan and that would be equally available to all employees and you’d have a written documentation in how it works, how it operates, who qualifies, things like that. And so qualification might be that you’re 40 hours a week, your full-time. Qualification might be that it is for a, you know, a college bachelor’s or above. Qualification could be that you’ve been here 90 days already in order to participate, things like that. So you have a written document about that. Another way for tuition to be tax-free is if it’s graduate level and it’s being reimbursed as an accountable business expense, like a seminary course done in that way. Moving expenses are no longer tax-free, whether I’m trying to deduct it or my employer is paying for it. If the employer pays for it, it is income and it goes on the W-2. The only exception to that is the military. And so their moves are tax-free, but I think they might move more often than we do, but they’re the only ones that get it tax-free. Benefits generally are tax-free. And that’s why you want to have benefits. And these days when health insurance might be $15,000 a year, $18,000 a year, as you get older, it might be trying to buy your own, might be $24,000 a year for, you know, for a couple. Then you want that to be tax-free. And so the best way to do that is by a group health care plan. And GuideStone does some wonderful work with small groups, small group insurance and you would want to do that. However, I know that a lot of churches are saying these days they cannot provide insurance. It’s just too expensive. And so if not, then you want to look at one of those two health reimbursement plans. Group term life insurance is not taxable up to $50,000. Then there’s a taxable amount above that. But it’d be wonderful if your church provided two times income or four times income in life insurance for full-time employees. Disability insurance is a tax-free benefit provided by the employer. So there’s some wonderful ways that you can have some benefits that will help you on your taxes. Retirement from the employer contributions. That is not taxable and it cannot exceed 58,000 this year. But that amount varies each year. Now, that’s your total contribution, including what goes in out of your money. But the employer contributions, those are tax-free. Employee contributions to a retirement plan, such as GuideStone are tax-free. And for most of us as ministers that’s the way that we should do it tax-free until we’re a excellent, outstanding saver or we’ve got quite a bit of, you know, we’re headed down a road that we will have quite a bit in our retirement account. Then you might want to, if you’re an excellent saver, even if you’re young, you might want to do half of it perhaps or certain portion of it in a Roth account. And if you’re putting it in, and GuideStone does have a Roth account for the church retirement plan. And so those amounts would be fully taxable going into the Roth. The reason that I’m saying that ministers don’t want to automatically do the Roth account is they should be putting away enough money that eventually that money will be used for housing allowance during my retirement years. And that money, you would put it in saving money now on taxes and it would grow. And then in retirement, when you would normally be taxed on it, you would not be taxed on whatever amount would be housing allowance. So that’s a wonderful tax advantage. And then if you’re a great saver then you might wanna put some into the Roth. If there’s an IRA that would be taxable money because that’s an individual account. It’s taxable first, then the employee that debts it on their IRS 1040. And they would do that. Other benefits. And the church could provide some other benefits on a tax-free basis, like dependent care. I know one church, they’ve got all young employees and ministers and they’ve got lots of children involved. And so they provide dependent care assistance. Adoption assistance. And there was one church that wanted to do adoption assistance because they felt that it was very very important and that the needs were great. Tuition reduction at a church school can be tax-free benefit but only available to church school employees. And that might include, say the pastor if the pastor is included as say the headmaster and he does chapel and has some responsibility over the school, things like that. But it probably would not include the youth minister who doesn’t have a thing to do with the school. Of course, if the youth minister always did chapel and has some responsibility, it could apply to him, but it depends on how your church operates. Now, this is an important thing that I need to share with you is concept of cash instead of benefits, cash in lieu of benefits. If an employee may elect to receive cash or benefits that it’s taxable either way. And that’s exactly what the lump sum or package approach does, and it applies to any benefit. And so you want to make sure that you have benefits and that it’s not just the package approach, hey, here’s your money. You divide it up any way you want to. You don’t wanna do that. These days especially health insurance is so very expensive that you want to try your best to not have that be taxable. And so it’s got to truly be a benefit provided by the church, not just carved out of your pile of money. And also reimbursement of business expenses from salary reduction is not an accountable plan. It’s got to be done correctly for that money to come to you tax-free. And so the church needs some written policies about the benefits, and if the church operates under the package approach, the only thing the minister can do is request housing allowance and a salary reduction agreement for the church retirement plan. Everything else would be taxable money. Okay. One more thing. Don’t fear the tax bracket. Now, I don’t know why this happens but I’ve had some people turn down a raise because, hey, that’s gonna put me in a new tax bracket and I don’t want, you know, it won’t help me. I’ve known of people that turned down a raise for that reason. I’ve known of perhaps a spouse that, I’m all for spouses who want to stay home for a reason, and stay home for the kids and stay home for, or stay home because that’s just, you know, I’m gonna get involved in ministry as a volunteer. I’m gonna do community service. I’m gonna do all these things. I don’t wanna work. Well, I’m all for you. But I’ve heard from people who would say, you know, my spouse didn’t go to work because it put us in a higher tax bracket and it wouldn’t worth it. Well, that’s just not a good way to think of this. So for 2021, and I didn’t start with the top rates, the actual top rate is 37%. I think it’s incomes over 500,000 something. I didn’t really even bother with that, but rates that might be typical in most of our world would be the 24% rate for incomes over 86,000 or 172 for couples filing jointly. 22% rate, the 12% rate, and the 10% rate. So your 10% rate is for, for a married couple is basically 20,000 above the standard deduction. The 12% is the, 12% rate is for people making more than that up to, a married couple making up to 81,000 above the standard deduction. So a little bit over a hundred thousand dollars. So let’s look at it now. This is why the IRS says it.؟؟ Let’s look at it and say it another way. By married filing jointly, I’ve got a 0% tax bracket up to the first 25,000 plus housing allowance. Now there, we’re talking about federal tax and state tax. Of course the state standard deduction is very small but it’s my housing allowance and my standard deduction would not be taxed at all. Then it’s, for federal, it is a 10% tax bracket for the next 20,000. So let’s say, I asked for a $15,000 housing allowance plus the $25,000 standard deduction. So that would be $40,000 before I would have, as a married couple 40,000, before I would have any taxable income in terms of federal income tax. And maybe even a little bit more if my housing allowance was say $20,000, it’d be 45,000. Then beyond that, it would be a 10% bracket for the next 20,000. Then 12% tax bracket for the next 60,000. And then I would get into the 22% tax bracket. But don’t fear these brackets. Just because I get into the 22% tax bracket between the two of us, that doesn’t mean that I pay 22% on all my income. It just means that I pay 22% above that certain level. So let’s say that I make $1,000 over the bracket level. So my taxes before that were at a 12% rate and of course not all of it was at 12% tax rate. And some of it was at a 0% tax bracket but if I made a thousand dollars that put me over that putting me into the 22% tax bracket for that thousand dollars, I would pay $220 rather than $120 for that particular thousand. But for the money before that I might pay a 12% tax bracket. Accountants talk about this in terms of what is your effective tax rate, what is your effective tax rate? And so don’t fear going over and turn down a raise or, you know, do something like that when it’s only gonna affect the amount over, not amounts under. And so we need to all understand that. And I’ve heard some comments out there that make me think that people don’t really have that, they feel like when you get into 22% tax bracket, you’ve got 22% on all of it. And that’s just not the case. Couple of final tips that I wanna say. First of all, as you’re maximizing your retirement, doing the best that you can there look at the saver’s credit, be sure and look at the saver’s credit. It is a tax credit for saving for your retirement. Now the income is limited. You can get to the point where you don’t receive that anymore, but look at it, see if you qualify for the saver’s tax credit, that is, and the the IRS and Richard Hammer says, that is the most neglected tax advantage that’s out there, the saver’s tax credit. And so be sure to do that. Also, I do wanna mention that if you, we said it in the example of the W-4, if you have children under age 17, under age 17, you’re going to get a $2,000 tax credit for each child under age 17. And so for some ministers, they might have a number of children and not a huge income, and with all housing allowance things like that, they could even get where they don’t owe any federal tax. And then some of that child tax credit is refundable. Meaning you would get it back even if you don’t owe any tax. So those are two areas, the saver’s tax credit which is about retirement and the child tax credit which is about having children under age 17. All right, I’m going to stop sharing and we’ll see if there’s any further questions and wrap it up. Okay. All right. Mark says, my insurance is provided through my spouse. Can the church give me a non-taxable supplement to offset copays and prescriptions. And the church could do a health reimbursement. In that case, it would be an individual coverage HRA, individual coverage HRA, which is the new one which came out in 2020. And they could do that. They would need to do so where every classification of employee receives that, and they need an expert to help them to write a written plan that can be done, but yes it can be done. You need a written plan. It needs to be equal to all employees in that classification and you need an expert to do it. So, and it’s worth it. I mean, it’s tremendously worth it because it’s only gonna cost you a few hundred dollars to get an expert to write it for you. And then your church can do it. And these days when health insurance is so tremendously expensive, it really is important. All right, David says, can church members give money to the church designated for church scholarship plan and get a contribution deduction. when the church scholarship plan is set up, that is only for one person that church that qualifies such as the minister? No, you’re not gonna be able to do that. A church can have a church scholarship plan. If members gave to the plan that was set up at a written fashion and properly done then those church members would be giving to the church to the scholarship plan. And it would be a tax deductible contribution. But a scholarship plan has to have written qualifications, has to have an application. It has to have a means that people can apply for the scholarship. And then the the key to go forward is a church scholarship plan has to have a large class of people who could qualify for the plan. So it cannot be just for one person or only one person would qualify for the plan. Now, if your, the church could provide a benefit to all church employees for any schooling that they’re going to. And so we are all full-time employees and they have a tuition reimbursement plan, and it’s a benefit that that church could do that. That would be another way. And then if that minister is going to seminary for a master’s degree or above then the church could pay for that as a business expense. And that would be tax-free. And so then if you’re doing it that way, a scholarship is a wonderful thing to do. And to set up a scholarship with a written plan and a committee to decide who qualifies, who’s met the qualifications and things like that. That’s a wonderful thing to do, but if you’re talking about just one person, it’s not gonna be possible. So look at it. And really even if we pay for schooling that might not be tax-free, that’s still a wonderful thing for a church to do. But be careful on the contribution side that the person is giving. If they care about their contributions being tax deductible, be sure to do that correctly, but if they don’t care, then they could just give that money to the minister directly. It would not be tax deductible for them but that would be another way that it’d be wonderful to help that minister with their schooling. All right. That is all the questions that I see right now. And we are exactly on time. So I’m gonna dismiss this in prayer. Thank you for being with us. And I hope this has been helpful to you. And so anyway, I can help just give me a call and I’ll be glad to. Let’s pray. Father, thank you so much for today. Thank you for everything that has happened today, and I hope and pray that this has been beneficial. And I pray that we might all be wise. and wise concerning our taxes so that in another method we may be good stewards of what you’ve entitled us and given us to. Father, we just ask your blessings on it. Every person who’s participated. Thank you for each one in Jesus name. Amen. All right. Thank you all so much.

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