Year-end tax & portfolio planning for pastorsFEATURE STORIES, FINANCE, Financial Services, Human Resources, IRS Compliance, Latest News, LEADERSHIP, LEGAL Sunday, November 15th, 2015
By Brian Doughney, CFA, CFP®
November and December are a busy time of year for most pastors. Following the Thanksgiving holiday, the liturgical calendar begins anew with the season of Advent. As preparations are made to celebrate the coming of the Christ child, extra services need to be planned, multiple sermons need to be written, rehearsals are in full swing for the Christmas pageant, and pastors are also ministering to those for whom the holidays are not such a joyous time.
Amidst all these preparations, pastors need to set aside some time to focus on year-end financial details that have tax implications for 2015 and 2016. Don’t let the following items slip past you.
The housing allowance
This important tax benefit must be designated prior to the year in which it will apply. Be sure your church or trustee board officially designates a housing allowance for 2016 before the year ends. Ordained ministers who own or rent their home are entitled to receive the housing allowance. The federal tax code provides clergy with a tax exemption on the portion of their compensation that’s designated as a housing allowance. However, it’s considered taxable income for Social Security and Medicare.
The housing allowance must be the lesser of the amount spent on housing-related expenses, the fair rental value of the home (furnished, plus utilities), or the amount designated by the church. Therefore, it’s important to calculate ahead of time expected expenses for the coming year, such as mortgage payments, property taxes, insurance, maintenance, utilities and all expenses related to your home or apartment. Consider contacting a real estate broker for current estimates of your home’s rental value.
For more on the housing allowance, see “The clergy housing allowance: get the facts” in the March / April 2015 issue of Church Executive.
Maximize itemized deductions
Although it’s easier to take the standard deduction, experts at Intuit Inc. — producer of the popular tax and financial software TurboTax and Quicken — say one in four taxpayers can lower their tax bill by itemizing deductions. To determine whether this benefit applies to you, review the allowable expenses you’ve paid so far in 2015. These include, but are not limited to: home mortgage interest and property taxes, state income or sales taxes, medical expenses, charitable donations, work-related magazine subscriptions and uniforms and tuition for classes related to job improvement.
Ministers who own their homes and itemize their deductions are eligible to deduct mortgage interest and property taxes on Schedule A, even though such items were excluded as part of the housing allowance exclusion. This is the so-called “double-deduction.”
Remember that medical expenses can only be deducted to the extent that unreimbursed expenses exceed 10 percent of your Adjusted Gross Income (AGI). For those who turned 65 during the tax year — or are 65 years or older — the percentage is reduced to 7.5 percent of AGI.
TIP: The Special Church Election allows churches to contribute to the retirement plan of their employees when either the employee has a very low compensation or a very high housing allowance. Under the rule, the church can contribute up to $10,000 per year, even though the pastor doesn’t have that much in cash compensation. The lifetime maximum is $40,000.
Increase contributions to your retirement account
If you’re like most Americans, you could save much more towards retirement. If you haven’t maximized your contribution to your retirement account, consider doing so to lower your taxable income. For the 2015 tax year, the IRS allows employees to contribute up to $18,000 to their 401K and 403(b) retirement plans. Those over 50 can make an additional “catch-up” contribution of $6,000. Keep in mind that any contributions you make within IRS allowable amounts are tax-deferred until after you retire or begin taking withdrawals.
Accountable and Non-accountable Plan expenses
If you have an Accountable Plan, be sure to hand in all receipts to be reimbursed before year-end. With an Accountable Plan, the church arranges to reimburse clergy for business-related expenses. Typically, an Accountable Plan requires clergy to substantiate the expense, and submit expenses within a designated period of time. Under an Accountable Plan, reimbursements are excluded from the employee’s income. If your church hasn’t established an Accountable Plan, or your reimbursable expenses exceed the limits allocated by the church, reimbursements are treated as taxable wages. In both cases, keeping track of receipts is critical to insure accurate repayments or additional income.
Review your asset allocation
Take a look at how your portfolio assets are currently allocated. Are your asset allocations in line with your investment strategy, goals and risk tolerance?
Market changes will cause assets to shift, and you want to insure that assets are placed into accounts that will maximize your investment strategy and benefit your overall portfolio.
Meet with your financial advisor
A year-end meeting with your financial advisor provides an opportunity to review spending, savings and investment goals and determine which ones have been met and which ones might need adjustment. Take advantage of this time to ask questions, review year-end tax strategies, and set goals that allow you to bring in the New Year with a clear financial direction.
Brian Doughney, CFA, CFP® is a Senior Manager in the Wealth Management Division at MMBB Financial Services. He works with members who need help in determining whether they are on track to meet their financial goals.