All Posts By Amy

Should I Invest My 403(b) (Or IRA) In A Target Date Fund?

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This post mentions some specific investments. They are only examples and not an endorsement of those investments.

Perhaps the most difficult, or at least most intimidating, thing about saving for retirement isn’t finding money to set aside, but rather choosing how to invest that money. After all, 1 in 5 Americans who aren’t invested in the stock market says it’s because they “don’t know enough.”

What Is A Target Date Fund?

Because of this, in 1994, a new kind of mutual fund was created: the target date fund (TDF). It is a kind of investment designed so that you can just put your money in and forget about it until it’s time to take your money out. You will recognize them because they have a future date in their name, like LifePath Index 2040 Fund or T Rowe Price Retirement 2040 Fund.

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How Pastors Can Find Free Getaway Lodging for Sabbaticals or Vacations

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This is a guest post by Jon Neal, Executive Pastor of Hope Community Church in Minneapolis, MN. He has nothing to sell or promote, he just spent a lot of time researching this and thought he would share his efforts to be a blessing to you. 

There is something very powerful in getting outside your normal context. Maybe you have an upcoming sabbatical. Or maybe you are looking for a place to take a quiet/planning retreat. Or maybe you’re just looking for a place to take the family for a few days. There’s just one problem – lots of those options cost a lot of money!

While you could still scour Airbnb or VRBOs, there are many “off-market” properties available to pastors, some completely free of charge! The difficulty is that they often take a bit more effort than a simple Google search, so many rarely do it. However, these simple strategies don’t take you much time, and could save you hundreds if not thousands of dollars over the years.

Ask Other Pastors

Profound, huh? However, almost every single pastor has asked the same question, “Where can I find free lodging for retreats or getaways?” Why do all the research yourself when someone may have already done so? Asking fellow pastors or ministry leaders in your area could be a huge resource for free getaway options.

Ask Denomination or Affiliation Leaders

Again, you’re not the only person to ask this question. Those who oversee churches or church leaders are often some of the first to hear or learn about getaway options. See this curated list by Ed Stetzer some years ago. Many locations that have space available reach out to them, assuming that they would be the best positioned to share with other pastors.

Ask People in Your Congregation

Many people have, or know someone who has, a second home or vacation home. It never hurts to ask people in your church who may have connections to options you would never find otherwise. You’ll be shocked by the joy people get from their generosity. 

Reach out to Camps or Retreat Centers

Give a call or email to local camps or retreat centers in your area. This is literally their industry! They are in the business of lodging and getaways! Many Christian camps even have separate facilities specifically for pastors going on a retreat or on sabbatical.

Google Can Still Work

Imagine you have a heart for hospitality and you invest a lot of time and money into a property for the purpose of providing a place of retreat. If you want to get the word out, what will you likely do? Make a website. SEO will still pick up on keywords, so it never hurts to try “Free lodging for pastors” or other variants in your search bar.

Other Creative Options

Beyond that, there are a handful of creative ideas that you could employ. Some have done house swapping with others in different areas. Some have leveraged camping and national parks as a money-saving alternative for lodging. If you’re looking for a vacation, there are websites where people sell their nonrefundable or unwanted vacation/travel packages for fractions of the original price. The sky is the limit!

If you’ve made it this far, you are likely underwhelmed by the profoundness here. But here’s the thing – people RARELY do this. There are many people who invested a lot of time and money into places to offer them to pastors and their families free of charge, yet sometimes they rarely get used because no one takes the time to ask and find them. Don’t be one of those people!

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Why Don’t Churches Pay Payroll Taxes For Ministers?

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Tax season has just come to an end and most of us are either eagerly awaiting a return or bemoaning how much we had to pay. The rest of you filed an extension and are still trying to get your papers together or get your tax preparer to answer your calls. Isn’t tax season fun?

If you haven’t opted out of Social Security, then you would have filed Schedule SE to calculate your Social Security and Medicare taxes, also called payroll taxes. Front and center, in the biggest, boldest print is the title for Schedule SE: Self-Employment Tax. But if you’re a church employee and not self-employed, why are you filling out a form for self-employment taxes? Allow me to enlighten you.

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4 Simple Ways To Make Budgeting Easy And Effective

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A lot of people treat budgets like New Year’s resolutions. They are lofty and unrealistic goals with only an 8% chance of becoming reality. But that’s not how it’s supposed to be.

Budgets are supposed to be personalized money management tools that help you take control of your finances. If you don’t have a greater sense of control and empowerment, then your budget isn’t working.

If you don’t have the kind of budget I’m talking about, then you really need one. Follow this link to learn how to make a budget that serves as a GPS and not a jail cell. Once you’ve got your GPS budget going, here are a few simple ways to make budgeting easy and effective:



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How The Housing Allowance Can Hurt Pastors With Families

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The clergy housing allowance is touted as the greatest tax benefit available to pastors. And it really is a great benefit. I learned back in 2019, though, that it can have a dark side. Not a Darth Vader using the Force to crush you kind of a dark side, more like a “If I hadn’t claimed so much, I’d be $1,000 richer” kind of dark side. The problem is how it can affect the Additional Child Tax Credit, which is a major benefit for pastors with children.


How The Clergy Housing Allowance Affects The Child Tax Credit

One of the provisions of the tax reform that passed 5 or so years ago, one of the few points that everyone liked, was the doubling of the Child Tax Credit (CTC). Kids used to be worth $1,000 each and now they are worth $2,000. That still doesn’t feel like enough when your child is laying on the floor screaming, but hey, it’s something, so let’s be thankful for it.

The CTC is credited against your federal income taxes. On your Form 1040, you add up all your income, subtract the standard or itemized deduction, and end up with your taxable income. That taxable income determines your federal income tax. The CTC is then subtracted from the tax so that you won’t have to pay as much.   

Income

-Standard/Itemized Deduction

=Taxable Income

Income Tax

-Child Tax Credit (and other credits)

=Taxes Due

The housing allowance lowers your taxable income, which lowers your federal income tax. In fact, I know a lot of pastors are able to completely erase their taxable income between the housing allowance and deductions. No income means no tax due, which means you don’t get to take advantage of the CTC.

But why does that matter if you’ve eliminated your tax bill anyway?

How Income Affects The Additional Child Tax Credit

It doesn’t, really. What matters is the Additional Child Tax Credit (ACTC). The ACTC is the refundable portion of the CTC. That means that it isn’t simply used to cancel out part of your tax bill. The government will actually give you the money, even if you didn’t owe any income taxes in the first place.

On your 2022 tax return, up to 75% of the CTC qualifies for the refundable ACTC. That means the government is willing to pay you up to $1,500 per child. If you have a big family, that is a big deal.

Where the housing allowance comes into play is that your ACTC is limited by your income. It is limited to 15% of your income over $2,500. So, if you use the housing allowance to reduce your income, you also reduce your eligibility for this refund.

Taxable Income

-$2,500

x15%

=Limit on Additional Child Tax Credit

How It Plays Out In Real Life

(This is for illustrative purposes only and does not include things that are immaterial to the subject at hand, such as self-employment taxes and the deductible part of them.)

Let’s say you’re married, you have three children, and you earn $50,000 a year. You take half of that as taxable income and half as a tax-exempt housing allowance. Your tax return would show $25,0000 as income that would be completely eliminated by subtracting the $25,900 standard deduction. So, after the deduction you show no income and, therefore, no income taxes are due.

If you don’t owe income taxes then you can’t take the CTC. However, the ACTC is still available to you. The maximum that you could be eligible for is $4,500 (3 kids x $1,500). But there is still that income limitation.

To calculate your ACTC, you first take your earned income, which was $25,000 in this example. Then subtract $2,500 and you end up with $22,500. You then calculate 15% of that amount, which is $3,375. That is your ACTC. In this example, your housing allowance cost you $1,125 in ACTC ($4,500-$3,375).

$25,000

-$2,500

x0.15

=$3,375 maximum ACTC allowed

What would happen if you had only taken $15,000 as a housing allowance instead of $25,000? On Form 1040 you would have ended up with $9,100 of taxable income ($35,000 income – $25,900 standard deduction). The income tax on that is $908. However, the CTC would have canceled that out and you would not have ended up owing any more than before.

How does the lower housing allowance affect the ACTC?

$35,000

-$2,500

x0.15

=$4,875 new maximum ACTC allowed

Your new limit is $4,875, which is more than the $4,500 you are eligible for. So, lowering your housing allowance increases your ACTC to $4,500. That’s $1,125 more that you get back without increasing your tax bill at all. What could you do with an extra $1,125?

What Should A Pastor Do?

Remember, the clergy housing allowance is a benefit available to you. There is no requirement that you take it. The IRS isn’t going to come after you, mortgage statement in hand. You don’t have to claim a housing allowance and you shouldn’t if it is costing you money.

If you have kids and a lower income, you really need to look into this. Check your 2022 tax return to see if you got the full Additional Child Tax Credit. If not, play around with the numbers. Calculate your tax bill with different housing allowance amounts to see how the final results are affected. Now is a great time to do it since you can use your 2022 return numbers to determine how much of a housing allowance you should be taking in 2023.

Remember, the Bible says that children are a blessing. So let’s make sure you get all of the financial blessings you’re entitled to!

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Your Top 10 Clergy Housing Allowance Questions Answered

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The clergy housing allowance is by far the most common topic that I receive questions about. Here are 10 or the most common questions answered to help you get the most value out of your housing allowance:

How does a housing allowance work?

  1. You, the pastor, calculate what your housing costs will be for the year and submit it to your church.
  2. Your church approves the housing allowance and does not include it as taxable income in box 1 of your W-2.
  3. You track your housing expenses throughout the year. Add any excess housing allowance to your taxable income on your tax return when you file.
  4. If you have not opted out of Social Security you need to include the housing allowance amount as income when calculating your self-employment taxes.

What expenses can be included in the housing allowance?

A housing allowance can cover:

  • Down payment on a home purchase
  • Mortgage principal and interest payments
  • Property taxes
  • Homeowner’s insurance
  • Structural maintenance and repair
  • Landscaping, gardening and pest control
  • Furnishings (purchase, repair, replacement)
  • Utilities (gas, electricity, water, internet) and trash collection
  • Land telephone line
  • Cable TV expenses
  • Homeowner’s association dues/condo fees

Is the housing allowance the church’s or the pastor’s responsibility?

It is the pastor’s responsibility. The church’s only role is designating and paying the allowance. The pastor must calculate the allowance, document expenses and include the proper housing allowance amounts when filing his or her tax return.

Is a housing allowance considered income for tax purposes?

Not for income tax, but for self-employment taxes. If you have opted out of Social Security you do not pay self-employment taxes so your allowance does not affect your taxes. Housing allowances are exempt from most state income taxes, but you should double check with your particular state.

How much is exempt from federal income taxes?

The IRS specifies that only the lesser of the following can be excluded from your gross income:

  • the amount actually used to provide or rent a home;
  • the fair market rental value of the home (including furnishings, utilities, garage, etc.);
  • the amount officially designated (in advance of payment) as a housing allowance; or
  • an amount which represents reasonable pay for your services.

When should I request my housing allowance?

You should get your housing allowance approved prior to the beginning of the year or at the beginning of the year so that you don’t miss out on any of the benefits. An allowance can be approved at any time during the year, but only expenses incurred after the approval will be eligible for the housing allowance.

Is it better to overestimate or underestimate my housing allowance?

Overestimate. If you underestimate your expenses you cannot go back and increase your housing allowance. However, if you overestimate, you can make a correction by including the excess amount as taxable income when you file your taxes.

Can I change my housing allowance from year to year?

Most definitely. If your housing expenses change from year to year so should the allowance you request. When you plan on making a large purchase, such as a bed, deck or house, your requested allowance should include that amount. If you end up not making the purchase, you will simply adjust down the allowance when you file your taxes. If you don’t include the large expense, you will unnecessarily pay taxes on that amount.

Can I still take the mortgage interest deduction?

Yes. Receiving a housing allowance does not preclude you from deducting your home mortgage interest and real estate taxes if you itemize deductions.

Do I need to document my housing expenses?

Yes! Keep all receipts, bills, etc. that apply to your housing allowance. The IRS loves paper trails and if you get audited without one it could get ugly.

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How Much Housing Allowance Can A Pastor Claim?

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One of the benefits of being a pastor is getting to claim an income tax-free housing allowance. Not having to pay income taxes on part of your income can be a great benefit, so it’s one I always recommend that pastors maximize. But how do you maximize it?

What Is The Maximum Allowed Housing Allowance?

The first step in maximizing your housing allowance is knowing how much you’re allowed to claim in the first place. There are limits and some people have ended up in tax court for disregarding them. 

Your maximum allowed housing allowance is the least of:

  • the amount actually used to provide or rent a home;
  • the fair market rental value of the home (including furnishings, utilities, garage, etc.);
  • the amount officially designated (in advance of payment) as a housing allowance; or
  • an amount that represents reasonable pay for your ministerial services.

How To Calculate Your Housing Allowance Limit

Therefore, to figure out what size of housing allowance you’re eligible for, simply calculate each of the above amounts and go with the lowest. If your mortgage payment is $2,000 a month but you could only rent the home for $1,500, then your housing allowance is limited to $1,500 a month. But, if your church has only designated $1,450 a month for your housing allowance, then that’s the most you can claim. 

If you find that the lowest number is your designated housing allowance, that’s an easy fix. Ask your church to designate a higher housing allowance for you. You can start claiming it the moment they have made the designation official. 

Your housing allowance is also limited to an amount that represents reasonable pay for your ministerial services. That means that if you only work ten hours a week at the church, then you cannot claim a $75,000 housing allowance. I don’t think the IRS would consider $150 an hour “reasonable” compensation for your service.

Remember, also, that those services only include ministerial services. If you are a bi-vocational minister, you can only claim a housing allowance from your ministerial income. If your expenses can justify it, though, you could claim your entire ministerial income as a housing allowance and use your secular income for all of your other expenses. Also, it doesn’t matter how you are paid for your ministerial services. Whether it’s by W-2 or 1099 does not matter.

How Much Housing Allowance Should You Request?

To determine your housing allowance, you should calculate both your anticipated expenses and the fair market rental value of your home. Then request the lesser amount. When calculating anticipated expenses, it is wise to include an extra 10% or so to cover things that come up unexpectedly, like a new crib or repairing termite damage. 

Some pastors regularly request the fair market rental value of their home even when it is higher than their anticipated expenses. They do this to ensure that they maximize the exclusion. The risk with this is that if your expenses are significantly lower, you will have to add the excess to your taxable income when you file your return and could end up owing a lot of taxes. 

Also, retirement account contribution limits are often tied to income. Claiming a higher housing allowance reduces your taxable income. That could unnecessarily limit the amount you can save for retirement in a tax-advantaged account. Usually, by the time you realize your taxable income will be higher (because you didn’t use the whole allowance), it’s too late to put more into retirement. 

Try out the Pastor’s Wallet Housing Allowance Calculator. Just make sure to include any large purchases that you have planned for the year, such as a new refrigerator or deck. If you live in a parsonage or other church-provided housing, only calculate those expenses that you, yourself, pay for. You can also learn about calculating the fair market rental value of your home here.

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Tax Preparation for Ministers: Reader Referrals

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Clergy taxes are incredibly unique in a complex tax system, so it can be hard to find a tax preparer who actually understands how they work. I’m always getting requests for referrals, so I turned to my readers for help. These are the tax preparers that my readers have recommended. I have not personally worked with any of them and have done no research or due diligence, but they each have at least one happy pastor client.

The only way to get on this list is to be referred by a client. If you are a tax preparer that wants to be on this list, have one of your clients reach out to me. Also, if you reach out to someone on the list and find that they are no longer serving pastors, please let me know and I will update it. 

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8 Tips For Maximizing Your Homeowners Insurance

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Insurance is one of those things that no one gets excited about. It’s like brushing and flossing your teeth; the few people who are really into it make a career out of it and the rest of us just go along with it because it’s the adult thing to do. But no matter how you feel about it, insurance is important to protect you from financial ruin, just like good dental care can save you from gum disease. 

Today we’re going to talk about homeowners insurance specifically. This is a must for anyone who owns a home. Even if you don’t have a mortgage company telling you to buy it, you need it. I’m telling you to buy it. All it takes is one broken pipe to sink your finances and I don’t want that to happen to you. You can even use your housing allowance to pay the premiums, which makes it even more affordable.

Now that I’ve convinced you of the importance of having homeowners insurance, here are a few tips:

Review Your Policy Annually

When you first buy your homeowners insurance, your coverage is based on your home value. Did you know that home values go up over time? According to Zillow, which I swear must be wrong, my house has gone up in value almost 90% since I bought it just over 7 years ago. If I were to have a house fire today and only had the coverage I purchased 7 years ago, then the insurance company would only cover about half of the damage. Wouldn’t that be an unpleasant surprise? 

It’s important to check your policy every year to make sure that it still accurately meets your needs. Perhaps your home has gone up in value or you build a deck or garage and you want to make sure it is covered. Or, you may have had extra insurance specifically for a valuable possession that you no longer own. You could save money by dropping that coverage.

Only Insure Your House

If my house burns down and I have to replace it, will it cost the same as my Zillow home value? No! Zillow tries to show how much I could get if I sold the home, which includes the land and the building I live in. If my house burns down, I only need a new house, the land itself is just fine. As such, you only need to insure the value of the structures on the land and not the land itself. A good insurance agent can help you figure out how much coverage you need, just don’t be surprised if it is less than you could sell for. 

Bundle Your Insurance Policies

I’m a fan of buying your auto, homeowners, and other liability insurance policies all from the same company. Why? Two reasons. First of all, they usually give multi-line discounts if you have more than one policy in place. The discounts can be pretty significant, too. Second, you’re less likely to have gaps in coverage when one company is handling all of your policies. If they see a gap, they will bring it to your attention (I hope!). 

Raise Your Deductible

Whether it’s home or auto insurance, raising your deductible usually lowers your premium. If you have a healthy emergency fund in place, you can afford to take on a little more risk by raising your deductible. However, if you’re broke and can barely scratch two pennies together, you’re likely better off with a lower deductible. You don’t want $5,000 of carpenter ant damage to throw you into the vicious cycle of high-interest rate credit card debt.  

Keep Your Credit Up

Most insurance companies nowadays use credit reports to determine premiums. While that may not sound fair or logical, there is a very strong correlation between a person’s credit score and the number of claims they file. I was really surprised at how strong the evidence is when I was studying for my Master’s. So, pay your bills on top and keep your credit score up and you will end up paying lower insurance premiums. This applies to auto insurance as well. 

Keep Your Claims Down

Speaking of filing claims, this is one area where you can have too much of a good thing. Insurers don’t like it when you file claims because it costs them time and money, so they raise rates on those who do so frequently. They sometimes even drop policies of overactive claim filers. Most of the time, you are better off raising your deductible and paying for smaller repairs instead of filing claims for them. 

Enhance Your Safety & Security

If you take on the responsibility of protecting against risks, your insurance company will often reward you for it. You can earn discounts by installing things like deadbolt locks, burglar alarms, and smoke detectors. A home security system could even get you a discount of up to 20% with some insurance companies. Before pouring a bunch of money into this, check with your insurance company to make sure you get the most bang for your buck. 

Know What You Own

Three years ago, my home was broken into while I was volunteering in my daughter’s preschool. They stole my laptop, two jewelry boxes, and my husband’s brand new watch. My insurance company was great to work with and I was financially restored, but first I had to provide them with a list of everything that was stolen. One of those jewelry boxes I had had since I was 13 and it contained items that I had accumulated over several decades. Do you know how hard it was to try to remember what was in it? 

If anything ever happens to your stuff, whether a fire or a burglary, it’s INCREDIBLY helpful to already have a list of what it is that you owned. And yet how many of us have that? Ideally, you would keep a detailed list of all of your valuables with information such as the date of purchase and receipts. Realistically, though, I would encourage you to pull out your phone, start recording, and walk through your house aiming it at everything you own. Save the video online somewhere that you’ll remember where to find it. Then, if anything ever does happen, you can at least watch the video to see what it was that you had that needs replacing. 

Homeowners insurance is a very important defensive mechanism for your financial life, but it is easily ignored. Don’t treat it like the sound guy at church and only pay attention when something is wrong. Pay attention to your policy now, follow these tips, and if something does go wrong, hopefully, it won’t be as bad as it would have been. 

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Are You Eligible To Make Extra 403(b) Contributions?

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People over 50 are eligible to make extra contributions to their 403(b) plans. However, some plans even let younger people make extra contributions. Here is everything you need to know regarding eligibility, limits, etc. for making extra contributions to your 403(b).

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