January 2020 - The Pastor's Wallet

The Best Tax Software For Clergy (& Your Other Filing Options)

by Amy Monday, January 27, 2020

Today is the big day! The IRS has officially opened the 2020 tax filing season for individual filers. We should throw a party!

Better yet, let’s talk about how to go about filing those tax returns that they are now accepting. As a pastor, you have unique tax issues like the housing allowance and being dual status, so it’s not as easy for you as it is for others. You can’t just use any old tax software and trust that your taxes will be prepared correctly.

Awhile back, I was asked which tax software is best for pastors. I didn’t actually know, so I turned the question over to my readers. This article is the result of my completely unscientific study with a small sample size. If you would like to contribute to our collective knowledge, please share your experience in the comments!

Tax Preparation Software Programs For Pastors

According to my readers, TurboTax wins as the best software for pastors. Tawn shared, “We use TurboTax. It has been very helpful to have it walk us through options step by step. They are aware of SECA and housing allowance for clergy.”

Joicy said, “TurboTax for home and small business has been my go-to method, and the program addresses pastoral needs pretty well. They walk you through it, and also identify any possible errors or ‘red flags’. I would definitely recommend it.”

Quickbooks online was mentioned but it probably isn’t a good choice for most pastors. Jeremiah told me, “There’s not a lot of help for clergy specific information so you have to do your own research outside of Quickbooks. If you’re looking for taxes done for you without much thinking involved this probably isn’t the best solution. If you have a relatively simple tax return, this should be good.”

Preparing Your Own Taxes

If you’re going to do as much work as Jeremiah had to with Quickbooks, then you might as well just prepare and file your taxes on your own. That’s what reader DeAnn does with the free fillable forms from the IRS website.

In a rural area with no CPAs who understand pastoral issues, she doesn’t have many other options. She said that the only issues she has had are making sure to claim all of the deductions they are eligible for as they missed the savers’ credit for a few years. It hasn’t been too much of a burden for her, though, as she says, “If you can follow all the steps and take your time, I would recommend doing it yourself.”

David doesn’t necessarily agree with her. He says, “Get help— you’re not as smart as you think and the IRS can hurt you.” He knows from personal experience, though he said he had a good experience with the IRS when he had to deal with them.

Hiring A Professional

General Tax Preparers

It’s true, the IRS can hurt you. But do you know what else can hurt you? A tax professional who doesn’t know what they are doing but charges as if they do. Joicy learned this, as she told me, “The first couple of years, I tried going to accountants and was greatly disappointed. Most know very little about pastors’ taxes and I was doing as much work (if not more) than if I just did them all myself. So that’s what I ended up doing (and saved some bucks).”

Pamela had a similar experience. She and her husband were working with a knowledgeable CPA through H&R Block who had to retire due to health reasons. She explained, “The guy last year just didn’t seem to know as much about our unique situation (minister plus self-employed income) and they raised their prices from $400 to $600…so we are going to try something else next year.” Smart move, Pam.

Specialized Tax Preparers

Not all tax preparers are expensive and clueless. As Pamela told me, when she worked with a CPA that understood her unique situation it was well worth the price. A tax professional that specializes in helping clergy is almost always worth the fees that they charge. As one reader said, “I won’t go anywhere else, they have saved me THOUSANDS over the years (and lots of grey hairs too!)”

All of my readers that work with professionals who understand ministerial issues have said that it is worth it. Scott said about his CPA of 15+ years that he has had, “very positive experiences on many issues he has advised me on and saved me money also. He serves many pastors and missionaries so he knows our issues with MHA, etc. I sleep much better by trusting his judgment and expertise to handle our taxes.”

How To Find A Tax Preparer Who Understands Pastoral Issues

I found that many pastors are “extremely happy” with their tax preparers. So, how do you find one of those and not the clueless guy from H&R Block that costs $600? Here are two questions to ask a potential tax preparer:

Are pastors employees or self-employed for Social Security tax purposes?
Is a pastor’s church salary subject to income tax withholding?

If they don’t answer these two questions correctly, run far, far away. You’ll be better off on your own. Here are the answers:

Pastors are always self-employed for Social Security tax purposes. Learn more.
Pastors are not subject to income tax withholding. Learn more.

Keep looking until you can find a tax professional that knows the answers to those questions off the top of their head. Here are some that were recommended by my readers. Now, I have not personally worked with any of these so I will not vouch for them and I don’t even know if they are taking on new clients. But, it doesn’t hurt to check them out, since other pastors are happy with their services.

In conclusion, if you want to prepare your own taxes using prepackaged software, TurboTax is the best bet for pastors. Doing it on your own without software is tedious and time-consuming but not impossible, especially if you’re a detail-oriented person or can’t find a CPA that understands pastoral issues. However, thanks to the internet, you should be able to find a professional to help you that understands your situation. When it comes to tax professionals, those that don’t understand clergy taxes are a huge waste of time and money and those that do are worth their weight in gold.

Happy tax filing! And please share your tax preparation experiences— either good or bad— with us in the comments so that we can all learn from you, too.

26Comments

How To Determine If A Pastor Is An Employee Or Self-Employed For Federal Tax Purposes

by Amy Monday, January 20, 2020

Tax season is just around the corner and that means I’m about to be inundated with tax-related questions. Today, I’m going to try to get ahead of the game and start answering the questions before you ask them. Up first, when is a pastor an employee or self-employed?

Pastors Are Always Self-Employed For Social Security Taxes

We’ll start with the easy part. When it comes to Social Security and Medicare taxes, also known as payroll taxes, you are always considered self-employed. Pastors are always self-employed for Social Security taxes and pay under the SECA system. You have no choice in the matter and there is no debate. You’re always considered self-employed. You can read more about why and what that looks like here.

When A Pastor Is Self-Employed For Federal Income Taxes

Because pastors are always taxed as if they are self-employed for Social Security purposes, that brings a lot of confusion into the income tax side of things. If I work at a church but pay payroll taxes as if I’m self-employed, does that mean I’m considered self-employed for everything else? What’s the difference? Why is this so confusing?

Most pastors, though self-employed for Social Security, are still common law employees for income tax purposes. If you work for a church that tells you what to do and how to do it, you are an employee. I know, it’s confusing to be told you’re two different things, but that’s the way it works. It’s called dual-status taxation.

Some pastors truly are self-employed, though. Think of a traveling evangelist or someone else whose ministry is not tied to nor directed by a specific church. You see, for the IRS, employment status all comes down to control. Is someone else controlling your methods and your results? Then you’re an employee.

The US Tax Court has developed a 7-factor test to determine when a pastor really is self-employed for federal income tax purposes. Here are the seven factors that they look at:

How much control the employer exercises over the details of the work
Who invests in the work facilities
The pastor’s opportunity for profit or loss
Whether or not the employer has the right to fire the pastor
Whether the work is part of the employer’s regular business
How permanent the relationship is
The relationship that both parties believe they are creating

This is what they look at to see who is in control of the relationship. Based on these seven factors, most pastors are employees. At least for the work they do for their churches.

Can A Pastor Be Both An Employee And Self-Employed?

Even if you’re a common-law employee of your church, you may still be self-employed at times. What about when you perform a wedding for a friend and they give you $100? Your church didn’t give you the money. They didn’t tell you to perform the wedding. They might not even know you did it!

Clearly, in that case, you were not acting as an employee of your church. You were acting as a self-employed person. Just like a lot of workers have self-employment side-gigs outside of their normal jobs, when you perform ministerial services outside of your church you are acting as a self-employed person. These could be things like performing weddings or funerals or guest speaking engagements. They are services performed outside of your church where others are paying you for them.

Let me summarize it for you:

All of your income is taxed as a self-employed person for Social Security and Medicare taxes.

Your church income is taxed as employee income for income taxes.

Your side income from outside of the church is taxed as self-employed income for income taxes.

Employee income is reported to you on Form W-2 and self-employment income is reported to you on Form 1099. If it’s something like $100 that an individual gave you for a wedding, they aren’t going to report it at all and it’s your responsibility to track it. To learn more about how these different types of income are taxed, read this article.

I hope that helps clarify things for you at least a little bit. Let me know if you have any other questions!

2Comments

Free Resources To Help You Master Your Personal Finances In 2020

by Amy Monday, January 13, 2020

It’s a new year, a new calendar, and many are hoping, a new beginning, too. The sense of a fresh start with the new year leads a lot of people to make new year’s resolutions. How about you?

Since 51% of 2019 new year’s resolutions were to save money, I figure some of you are looking to tackle your finances this year and I want to help. Below, I’ve listed 15 different free resources ranging from budgeting systems and high-yield savings accounts to Social Security estimators and housing allowance tools. There’s quite a variety, so there’s something for everyone.

Basic Financial Management

Easy-To-Use Budget Template

The same study I referenced above found that 35% of new year’s resolutions were to stick to a budget. That’s a lot. Budgeting is the foundation of any successful financial life. It looks like people realize the importance of budgeting but they struggle to do it.

One of the reasons budgeting is hard is because you’re often trying to track 20+ different spending categories. I don’t know about you, but I can’t track that many things at once. That’s why I only have 2 kids.

Ben Wacek, CFP™, of Guide Financial Planning uses an innovative way of budgeting where you don’t have to do that. Instead of burning out attempting to track a bunch of different spending categories, you only focus on the handful that you really have control over. If you’ve ever struggled with budgeting, then you’ll love his system. You can download it in exchange for your email address here and he even made a video that will explain the whole process to you.

High-Yield Savings

Do you have your emergency fund sitting in a savings account earning 0.03% interest? You can do much better than that! If you transfer your money to an online high-yield savings account you can earn 60 times as much in interest. (No, that is not a typo. It is sixty.) The best part is that those accounts are FDIC-insured just like your current bank account, so you’re earning higher interest without taking on any additional risk.

Ally Bank is an online bank that offers high-yield accounts. If you click that link, they also have a great savings comparison tool that shows you the difference in interest earned among the most popular savings accounts. I moved my emergency fund from Bank of America to a CapitalOne 360 account and am now earning hundreds of dollars instead of just dollars in interest. It’s pretty cool.

Online Financial Management Tool

If organization is your priority this year, then Flourish Financial Planning has a great tool for you here. It’s a free online financial management tool where you can input all of your information to see your whole financial picture in one place. It also includes software that can help you visualize the effects of different financial situations and decisions you may be facing using your own personal numbers.

Unclaimed Property

Did you know that you may have money that you’re not even aware of? There are billions of dollars of unclaimed property out there. It could be anything from forgotten bank accounts and 401(k)s to unclaimed refunds or lawsuit settlements.

Each state has a database that you can search and you can access them all at Unclaimed.org. In addition to the 50 US states, that site also links to searches for Washington, DC, Alberta, British Columbia, Kenya, New Brunswick, Puerto Rico, Quebec, and the US Virgin Islands. Sadly, I don’t have any unclaimed property, but I found that my aunt has $40 in “misc unclaimed checks.”

Clergy Issues

Pastor’s Wallet Resource Page

A lot of you find your way to this website because you have questions about clergy-specific financial issues. There aren’t a lot of resources for pastors like you online, which is why I’m here. I just put together a brand new page chock full of free resources, including housing allowance and net worth calculators, downloadable housing allowance worksheets, a checklist for getting your finances in order, and several other housing allowance-related tools. You can check out the new page here.

Pocket Guide To The Clergy Housing Allowance

Another new resource I just created is the Pastor’s Wallet Pocket Guide To The Clergy Housing Allowance. The housing allowance is one of the most misunderstood and under-utilized financial opportunities for pastors. This is not a comprehensive guide (that would take a book, which I’m working on right now), but more of the Cliff Notes for the housing allowance. All of the most important information is presented in simple bullet points and easy-to-reference facts. It’s a special treat for those who sign up for my updates, so even if you’re already on my mailing list, go ahead and use the bar at the top of the page to get access.

Clergy Tax Withholding Calculator

One thing that gets more complicated when you become a pastor is your taxes. Because pastors are dual-status taxpayers, traditional tax calculators that you find online don’t always work. The people over at StartCHURCH had compassion on you and developed a tax withholding calculator designed for clergy and your unique issues. It’s even state-specific and you can check it out here.

Tax Resources For Pastors And Churches

Taxes are a big deal and it’s hard to find a CPA or tax professional who actually understands the intricacies of how they apply to pastors. Wayne Vinson, CPA of Vingroup, however, is well versed in taxes and how they apply to both pastors and churches. They have a resource page with helpful tax forms and a good Request for Housing Allowance that you can personalize.

Church Accounting Help

The fact that clergy taxes are complex and confusing is a thorn in the side of most church bookkeepers. Also, IRS rules regarding churches are different than for other organizations and there isn’t a lot of reliable information out there. Freechurchaccounting.com is a wonderful resource for anyone involved in church finance. The site has an amazing amount of information and, best of all, it is actually accurate!

Debt

Debt Repayment Calculator

When it comes to your financial life, debt is like a giant millstone that you have to drag around with you everywhere you go. It affects the calls you can answer and how you make financial decisions. Most people just pay their minimum payments and dream of the day that their debt will go away.

It doesn’t have to be that way, though. If you have specific goals in mind, then you can adjust your payments to allow you to reach those goals. This debt repayment calculator lets you look at debt repayment based on payment amount or desired payoff date. It also shows you how much interest is paid over time and how increasing or decreasing your balance would affect things. The calculator works for everything from credit cards to student loans.

Student Loan Income-Driven Repayment Calculator

When it comes to student loans, you often have various options for repaying them. The government has several different income-driven repayment plans that base your monthly payment on your income. This calculator, built by a family-focused financial planning firm, will show you what your payment would be under each program so that you can decide the best program for you and your family.

Investing & Retirement

Investment Calculator

Once you free yourself from the burden of debt, it is important to focus on saving for the future. This investment calculator, brought to us by the famous Dave Ramsey and crew, will show you what to expect of your investments based on your time horizon and expected returns. There are a lot of investment calculators out there, but I like this one because of the way it is laid out and the graphs it provides that show the power of compounding interest.

Dave likes to use a 12% rate of return for his calculations, but if you invest in anything other than stocks or use a target date fund, there’s a slim chance that you’ll get such high returns. It’s safer to be conservative in your estimates. Also, it’s important to remember the effects of taxes when looking at your final expected returns.

Social Security Retirement Estimator

In addition to your personal investments, Social Security benefits will be an important part of your retirement planning if you didn’t opt out or are eligible for spousal benefits. For planning purposes, you can use this estimator from the Social Security Administration to get an idea of what to expect. You should also review your Social Security earnings history regularly by setting up an account at ssa.gov to make sure they have the right numbers for your estimates.

Retirement Savings Calculator

If you want to calculate how much you need to be saving for retirement, then here is a calculator for you. You can input your age, your current income and savings, when you plan to retire, and how much you expect to receive in Social Security benefits. It will tell you how much you should be saving to reach your goals, in dollars and as a percentage of your current income. It shows a graph of how your money will grow and then be spent down in retirement and tells you how much more you’ll need to save if you put it off.

Retirement Withdrawal Calculator

There is a lot of focus on saving for retirement, but what happens when you actually retire? You have to switch things around and start spending down your accounts instead of saving into them. That can be really scary.

If you want to know how long your money will last you in retirement, then this calculator can help you. Enter the balance you will be starting retirement with, the interest you’ll be earning on the money, and how much you’ll be taking out each year. Then the calculator will tell you how long your savings will last. It’s a great calculator to play around with because you can look at the effects of increasing your savings or decreasing your retirement spending.

Professional Help

Sometimes things are beyond your DIY abilities and you need to consult with a professional to master your personal finances. Professional help is not free, but it can be more than worth it. If you’re at the point where you need to talk to a professional, you can find one here:

XY Planning Network– These advisors are highly-trained Certified Financial Planner™ professionals who swear to work in their clients’ best interests and also offer virtual services so that your location doesn’t matter.
Fee-Only Network– These are advisors who do not accept commissions, so their advice is less conflicted and more likely to be in your best interest.
Garrett Planning Network– These are fee-only (no commission) advisors who are willing to work on an hourly basis.
Kingdom Advisors– These are Christian financial professionals who have received in-depth training on the integration of the Bible with finance.

0Comment

How The SECURE Act Affects Pastors

by Amy Monday, January 6, 2020

Back in 2017, the president timed things just right so that I spent the first day of my family’s Christmas vacation researching the tax reform bill and how it affects pastors. Now, almost two years to the day, he signed into law another sweeping financial reform just in time for me to fly down to visit my family for Christmas. Thanks, Congress, I really appreciate your timing.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019, as part of a year-end appropriations bill to keep the government running. It makes significant changes to retirement plan rules that affect most Americans. Also included in the 1,770-page bill was the Taxpayer Certainty and Disaster Relief Act of 2019, which could affect how you file your tax return in the coming months. While there are no changes to the laws as they relate to pastors specifically, there are a number of other changes that might affect you.

Changes That Affect Your 2019 Taxes

Tuition And Fees Deduction

The above-the-line deduction for tuition and fees that had expired has been reinstated for 2019 and 2020. Up to $4,000 of qualified tuition and fees can be deducted. For 2019, you will need to choose between taking the deduction and the American Opportunity Credit or Lifetime Learning Credit.

Mortgage Insurance Premium Deduction

Mortgage insurance premiums may once again be included as an itemized deduction for 2019 and 2020. If your mortgage bank requires insurance on your loan and the loan qualifies, you can include it on Schedule A.

Medical Expense Deduction Threshold

The percentage of your income that medical expenses have to exceed to be deductible was supposed to increase to 10%, but that has changed. The threshold will remain at 7.5% for 2019 and 2020. Any expenses above 7.5% of adjusted gross income can be deducted.

Mortgage Forgiveness

Usually, when a debt is forgiven, the amount forgiven is counted as income and you have to pay taxes on it. The new law makes it so that qualified primary residence indebtedness that is forgiven can be excluded from income so that no taxes will be due on it.

Federally Declared Disaster Areas

Taxpayers living in federally declared disaster areas have been allowed to take penalty-free money out of their retirement accounts for 2018 and 2019. In addition, the new law gives taxpayers living in those areas an automatic 60-day filing extension. This applies to all current and future disaster areas.

Changes That Affect Retirement Accounts

Traditional IRA Contribution Age Limit

Starting in the 2020 tax year, there is no longer an age limit for traditional IRA contributions. Previously, you had to stop making contributions at age 70 ½. Now, you can continue making contributions as long as you have earned income, regardless of your age. You still cannot make contributions for 2019 if you are over 70 ½.

Graduate & Post-Doctoral Student IRA Contributions

Previously, graduate and post-doctoral students could receive taxable stipends and non-tuition fellowships that were included in gross income but didn’t count to allow them to contribute to an IRA. (You or your spouse must have income to be able to contribute to an IRA.) Thanks to the SECURE Act, that taxable income now makes them eligible to contribute to an IRA.

Required Minimum Distributions

Up until December 31, 2019, once a person turned 70 ½ they were required to start taking withdrawals from their retirement accounts (except for Roth IRAs). These are called required minimum distributions (RMDs) and a 50% penalty is imposed on any amounts not withdrawn in time.

The new law changes the age at which RMDs must be taken to 72. It only applies to those turning 70 ½ after December 31, 2019, though. If you turned 70 ½ before then, you must start taking withdrawals already.

Birth And Adoption Withdrawals

You can now take up to $5,000 out of your IRA to cover qualified birth and adoption expenses penalty-free. The distribution must be made after the actual birth of the child or the adoption is finalized. However, you can use it to pay yourself back for your initial adoption expenses or money you spent preparing for your new child.

The $5,000 is a per-person, per-child limit. That means that both parents are eligible to take $5,000 withdrawals and they can take them for each of their children. There is also a provision in the law where you can repay your retirement account the amount that you removed in relation to a birth or adoption, but regulations have not yet been issued to clarify how or when that must be done.

Inherited Retirement Account Distributions

Previously, when someone inherited an IRA or another retirement account, they were required to start taking distributions calculated so that they would last over the heir’s lifetime. Many people with money to spare would leave their retirement accounts to grandchildren because of this so that the money could continue to grow over the 60-80 year life of the youth.

Under the new law, those inherited retirement accounts must be emptied within 10 years (though there is no requirement for how much must be taken each year). The only exceptions are spouses, disabled individuals, and individuals not more than 10 years younger than the account owner, who can still stretch out the distributions for their lifetime. Minor children of the original account owner have a special exception, but only until they reach the age of majority, at which point they have to empty the account within 10 years.

Changes That Affect Educational Savings

529 Plan Usage

The new law allows up to $10,000 from a 529 plan to be used to pay down student debt without taxes or penalties. This is a per-person limit and in addition to the 529 plan beneficiary, the siblings (of any age) of the beneficiary are also eligible for up to $10,000 to pay down their loans. Also, apprenticeship programs have been added to the list of institutions where 529 plan funds can be used, as long as they are registered with the Department of Labor. This part of the law is effective January 1, 2019, so you can use it retroactively for expenses incurred last year.

In earlier versions of the SECURE Act, there was a provision to allow 529 plan funds to pay for homeschooling expenses. However, that did not make it into the final version of the bill which has become law.

There are a number of other provisions in this law that became effective January 1, 2020, but most of them do not relate to you as an individual. The above changes are the most important parts of the law as they affect individual taxpayers.

0Comment

Monthly Archives January 2020

The Best Tax Software For Clergy (& Your Other Filing Options)

Tax Preparation Software Programs For Pastors

Preparing Your Own Taxes