Amy, Author at The Pastor's Wallet

Amy

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Should You Keep A Mortgage Just For The Housing Allowance & Mortgage Interest Deduction?

by Amy Monday, February 3, 2025

Keep your mortgage so you don’t lose your housing allowance and mortgage interest deduction!

How many times have you heard that advice? A reader recently asked me about it. Is that really good advice?

I know for most people, keeping a mortgage just for the mortgage interest deduction doesn’t make financial sense (though a lot of people do it). But you pastors have an amazing benefit in the ministerial housing allowance. It made me wonder, could the housing allowance be enough to turn the tables and make a mortgage worthwhile?

Example Mortgage

I decided to calculate it out to see for myself and to share with you. Here are my assumptions for this exercise:

Home Price: $200,000

Loan Amount: $160,000 (20% down payment avoids private mortgage insurance)

Mortgage Type: 30-year fixed rate

Mortgage Interest Rate: 5%

Income Tax Rate: 12%

Based on those assumptions, I calculated out the amount you would save in taxes with the housing allowance and mortgage interest deduction as well as the total amount of interest you would pay over the life of the loan.

I also looked at the opposite extreme, paying cash for the house, but that’s not a very realistic alternative for most people. Because of this, I figured out what the numbers would be if you made bi-weekly payments. The idea behind biweekly payments is that you make a mortgage payment every other week instead of monthly so by the end of the year you’ve made an extra payment, 13 instead of 12. Here are the numbers:

Calculations

Minimum Payments

Annual Principal & Interest Payments: $10,306.98

Total Interest Paid Over Life Of Loan: $149,209.25

Loan Paid Off In: 30 Years

Bi-Weekly Payments

Annual Principal & Interest Payments: $11,165.96

Total Interest Paid Over Life Of Loan: $121,723.99

Loan Paid Off In: 25.25 Years (I rounded it to 25 for my calculations)

No Mortgage

Annual Principal & Interest Payments: $0

Total Interest Paid Over Life Of Loan: $0

Loan Paid Off In: 0 Years

Now, there are a lot of other things that count towards the housing allowance besides just principal and interest payments. You have property taxes, homeowners insurance, utilities, furnishings, etc. However, those are all the same regardless of whether or not you have a mortgage. Here we are only looking at the effects of a mortgage, so those are the only numbers I included.

Here is how total loan costs compare between the three situations:

	30-Year Fixed Rate	Biweekly Payments	Pay Cash
Total Interest Paid	$149,209.25	$121,723.99	$0
Tax Benefit Of Housing Allowance*	$37,105.13	$33,497.88	$0
Mortgage Interest Deduction**	$17,905.11	$14,606.88	$0
Cost of Loan***	$94,199.01	$73,619.23	$0

*Tax Benefit Of HA calculated as 12% of annual principal and interest payment multiplied by the duration of the loan.

**Interest Deduction calculated as 12% of the total interest paid.

***Cost Of Loan is calculated as the total interest paid less the tax benefit of the housing allowance less the mortgage interest deduction.

Other Factors To Note

There are other factors that will affect how this would apply to you personally:

You have to itemize your deduction to receive a benefit for paying mortgage interest. Since the Tax Cuts & Jobs Act passed in 2017, most people do not itemize and receive this benefit.

Being in a lower tax bracket will decrease your tax savings and a higher tax bracket will increase them. For 2025, the 12% rate applies to singles with a taxable income of $11,925 – $48,475 and married couples with a taxable income of $23,850 – $96,950.

Having a lower interest rate will decrease the overall cost of the loan and a higher one will increase the cost.

Your housing allowance is limited by the fair market rental value of the house. If it is less than your biweekly payments then you will not save as much in taxes as in my calculations above.
What retirement income sources do you have? You don’t want your entire net worth tied up in your house, especially in retirement. It’s a lot easier to buy groceries and pay your bills with withdrawals from an IRA than it is to pull equity back out of your house. I have seen firsthand the pain and suffering it can cause to have a paid-for house but no cash in retirement.

What About Opportunity Costs?

So, if you took out this mortgage you would save $55,010.24 in taxes over the next 30 years. That’s great! Except that it will cost you $149,209.25 in interest. That’s essentially giving the bank $3 in order to avoid giving the government $1. Without a mortgage, you may pay more in taxes but you pay less overall.

Those calculations make paying off the mortgage as fast as possible the clear winner. But, as with most things financial, it’s not quite as simple as that. There are opportunity costs involved. An opportunity cost is basically what you miss out on by not making another choice.

You see, ditching your mortgage is obviously best if you’re just going to be spending or sitting on your money. But, what if you invest it? What if you put $160,000 into the stock market when you got your mortgage? Would you still end up worse off financially 30 years later?

Not necessarily. If you invest your money rather than pay off your mortgage you may end out ahead. It’s a possibility, though, not a guarantee. The end results will depend upon your discipline, the investment decisions you make, and the way the market behaves.

What Should You Do, Then?

Wouldn’t life be easy if the internet could just tell you the best decisions to make about everything?

I’m sorry, but I’m not God, so I can’t tell you what’s best in your situation. I can only suggest things to think through as you make your decision:

Consider your priorities; how does your desire to be debt free compare with your desire to maximize your finances?
Consider your habits; would you have the discipline to invest your extra money instead of spending it?
Consider your risk tolerance; do you have the guts to keep your money invested even if the market tanked?
Consider various scenarios; what rate of return do you need in order to make investing instead of paying down the mortgage worthwhile for you? 5%? 8%? 12%? Is your required rate of return realistic?

Remember, the math clearly shows that giving $3 to the bank to keep $1 from the government is unwise. However, you may have other opportunities that make giving $3 to the bank worthwhile. Talk to your spouse, pray through it, do the math, and I wish you the best of luck!

If you would like professional help, I offer financial planning services through Guide Financial Planning. You can learn more about the services we offer here or schedule a free introductory phone call here.

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Tax Preparation for Ministers: Reader Referrals

by Amy Tuesday, January 28, 2025

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.

Bret Willoughby, CPA
Yahr Income Tax
Vingroup
Stewardship Services Foundation
StartChurch
Clergy Advantage
Witmer Wood Tax Consultants
Master Plan Tax Services
Clergy Financial Resources
Connie Buskhol, CPA
Keller & Owens
Wooten CPA
Leeanne Stilley, Senior Tax Specialist, Small Business Certified (H&R Block), leeannepstilley@gmail.com
CrossTribe Advisory
Clergy Tax Team
Laurie Rust, CPA
For Missionaries: Wacek & Associates

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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How To Calculate The Clergy Housing Allowance

by Amy Monday, November 11, 2024

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

The following is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance:

Calculating

By now you understand who is allowed to take a clergy housing allowance and the process by which you can do so. But here’s the big question everyone has: how do you know how much of a housing allowance to request?

First of all, there are limits to the amount of housing allowance that the IRS will allow you to claim. 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 services.

That means that even if your mortgage payment is $2,000 a month, if you could only rent the home (furnished, with utilities) for $1,500 your housing allowance has to be the lesser amount.

Remember 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 hourly or salary or by W-2 or 1099 does not affect the housing allowance.

To determine your housing allowance, you should calculate both your anticipated expenses and the fair market rental value of your home and 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 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 and 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.

For families with children, the housing allowance can affect your child tax credit. Part of the child tax credit is refundable, which means the government will give you the money even if you don’t owe any taxes. However, the refundable portion is limited to a percentage of your income. If you erase too much income with the housing allowance, you could eliminate your refundable child tax credit and miss out on thousands of dollars. You’ll have to play with the numbers to find the right amount of housing allowance to claim to maximize all of the tax benefits available to you.

When calculating your expenses, 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’t claim an exemption for something that the church is paying for. That’s lying, and we all know who the father of lies is. For a worksheet or online calculator to determine your housing expenses, visit https://pastorswallet.com/free-resources/.

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Two Things That Every Young Pastor Needs To Know About Finances

by Amy Monday, September 30, 2024

Because I specialize in working with pastors, I’m always on a quest to get inside pastors’ heads. In order to serve you effectively, I need to understand your world, your needs, your wants, and your struggles. I do this in many ways, such as discussions with my financial planning clients, emails I receive from my readers, and the comments in our Pastor’s Wallet Online Community.

I have noticed a common theme among the struggles that pastors face and the regrets that they have regarding their finances. There are two things that I hear over and over again that pastors wish they had known or paid attention to. So, young pastors, if you can only do two things, these are the ones you should do. Forget all my blog posts about maximizing the housing allowance and doing your taxes. These two things will be the foundation of your success in every other area of your financial life:

1. Stay Out Of Debt

As Proverbs 22:7 says, the borrower is slave to the lender. Jesus said in Matthew that you cannot serve two masters. Can you really do all that God has called you to when you are under obligation to your creditors? What if he calls you to something that doesn’t provide enough money to make your monthly payments? When you’re in debt, you’re working to serve your creditors. You gave them your word that you would.

And I don’t think God will free you from your creditors supernaturally just so you can do what he had planned for you. God believes in keeping his word and he expects us to do the same, even if it enslaves us. I think he is more concerned with your character and your keeping your word than the work that he has prepared for you. That can wait. He has all of eternity; he’s in no hurry.

I’m sorry to preach at you like that, but this is serious business. Debt can handicap you for a lifetime. Let’s say you put $2,000 on a credit card because you had to go to your best friend’s wedding. Or your computer died and you needed a new laptop to write your sermons. Or you finally got your own place and needed a couch. It could be anything, everyone seems to find a way to put $2,000 on a credit card.

Credit cards usually have a minimum payment of 2%-5%. Right now, the average interest rate for a new card is 23.18%, so we’ll use that with a 2% minimum payment for our calculations. If you pay $40 a month (2% of $2,000), do you know how long it will take you to pay off that little $2,000 credit card balance? One hundred seventy-seven months. That’s over 14 years! On top of that, you’ll end up paying over 3 ½ times as much with over $5,000 in interest. If you don’t believe me, have at it with this calculator.

Remember, that’s only a $2,000 credit card balance. Most people carry a lot more debt. How about $50,000 in student loans? Or an $18,000 debt on a car worth $8,000? Like I said, debt can handicap you for a lifetime. It’s really hard to get ahead when you start out so far behind.

2. Save For Retirement

And your goal is to get ahead. Get ahead of your monthly expenses so that you can put some aside for retirement, when you cannot work any longer. This is the second major area where pastors struggle and fail.

Retirement saving is important for everyone, but no one more so than pastors who opt out of Social Security. At least I can depend on the government to give me a couple thousand dollars a month when I can’t work anymore. I won’t be living in extreme poverty even if I don’t save anything. But if you’ve opted out of Social Security? You don’t even have that to fall back on.

What I see a lot is young people who put off saving for retirement because they think they will have plenty of time and money to take care of it later. After all, they are just starting out in their career, saving up to buy their first house, about to have a baby. They think that it will be easy to start saving once they get past that stage.

But it isn’t. Kids eat more the bigger they get. And then they want to do soccer lessons. And then they break an arm. And then they want to go to summer camp. But you’re still a pastor, so you haven’t gotten a raise in ten years, in spite of inflation.

There is no easier time to start saving for retirement than when you are young. When you’re young and fresh out of college, at least you still think ramen is a full meal. Keep living like a college student so that you can avoid debt and start saving for retirement.

Otherwise you’ll wake up one day in your mid fifties and realize that you have nothing saved for retirement. You’ve worked for decades and have nothing to show for it financially and you worry that you’ll never be able to retire, even if you get sick. That is depressing and overwhelming, which is why I’m telling you this now.

Avoid debt.

Save for retirement.

These are the big rocks of your financial life. The things that you should prioritize. Make sure to do these two things and everything else will fall into place around them. No financial trick like a tax-exempt housing allowance or extreme couponing is going to make much of a difference if you’re $50,000 in debt and have nothing saved for retirement.

Now is the time to take action to avoid future regrets.

What do you think? What are one or two pieces of advice do you wish someone had given you when you were first starting out in the ministry? Let us know in the comments.

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A Pastor’s Guide to Navigating a Salary Conversation

by Amy Monday, August 26, 2024

This is a guest blog post by Ted Miller of Guardian Wealth Management. Ted was a pastor for 25 years and now operates a 403(b)(9) retirement plan for churches.

Salary discussions can be sensitive, particularly for pastors who must balance financial needs with spiritual and communal responsibilities. Engaging in these conversations with a church board requires a thoughtful and strategic approach to ensure that both parties feel heard and respected.

The very first concern is for a pastor to evaluate and address their own insecurities. Without pride it is good to recognize one’s strengths and without shame to clearly see one’s weaknesses. In this evaluation, I have found it to be very helpful to engage the help of a friend or trusted advisor. For many years I had another successful pastor that would come to my church and provide coaching for our staff and board. This friend would help all of us to dream bigger and would inevitably help the board to think about the need for a regular salary evaluation. In the spirit of confident humility, I offer these guidelines for an effective salary conversation.

1. Prepare Thoroughly

Before approaching the board, gather all necessary information to support your case. This includes:

Market Research: Understand the standard salary range for pastors in similar-sized churches or geographical areas. Resources like the National Association of Church Business Administration (NACBA) or similar organizations can provide valuable benchmarks.
Church Finances: Review the church’s financial status, including income, expenditures, and budget forecasts. Be prepared to discuss how your salary fits within the overall financial health of the church.
Personal Contributions: Reflect on your accomplishments and contributions. Document specific achievements, such as growth in membership, successful programs, or community outreach initiatives, to illustrate the impact of your work.

2. Choose the Right Time

Timing is crucial in salary discussions. Ideally, bring up the topic during the board’s budget planning sessions or during annual review periods. Avoid times of financial difficulty or when the board is focused on urgent issues.

3. Frame the Conversation Positively

Approach the discussion with a positive and collaborative mindset. Instead of framing it as a demand, present it as a mutual benefit. For example:

Express Appreciation: Start by acknowledging the board’s support and the church’s mission. Highlight your commitment to the church and its vision.
Share Your Perspective: Explain how your role has evolved and how it aligns with the church’s goals. Emphasize your dedication to the church’s growth and community impact.

4. Present a Well-Reasoned Case

When discussing salary, be clear and specific:

Justify Your Request: Use the information you’ve gathered to explain why an adjustment is warranted. Present comparisons with similar positions and demonstrate how your salary aligns with your responsibilities and contributions.
Be Transparent: Discuss the current financial situation openly. If the church is facing budget constraints, suggest a phased approach or alternative compensation options, such as additional benefits or professional development opportunities.

5. Listen and Engage

Engage in a two-way dialogue:

Seek Feedback: Invite board members to share their perspectives and concerns. Understanding their point of view can help you address any objections and find common ground.
Be Flexible: Be prepared to negotiate and consider alternative solutions. If the board cannot meet your salary request immediately, discuss potential future adjustments or other forms of compensation.

6. Follow Up

After the discussion, summarize the key points and any agreements reached in writing. This ensures clarity and provides a reference for future conversations. If a decision is deferred, request a timeline for when it will be revisited.

7. Maintain Professionalism

Regardless of the outcome, maintain professionalism and gratitude. Salary discussions can be challenging, but handling them with respect and understanding strengthens your relationship with the board and reinforces your commitment to the church’s mission.

Conclusion

Discussing salary with a church board requires preparation, clear communication, and empathy. By presenting a well-reasoned case, choosing the right time, and engaging in constructive dialogue, pastors can navigate these discussions effectively. The goal is to reach a mutually agreeable solution that supports both the pastor’s needs and the church’s well-being, fostering a positive and productive working relationship.

If I can be of service to you and/or your board, please feel free to connect at Ted.miller at guardianwm.com, or (214) 501-1400 (Office).

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Don’t Let Your Kids’ Activities Kill Your Budget This Fall

by Amy Monday, August 5, 2024

Marketers are going crazy with their back-to-school ads right now and they all have one goal: to get you to spend more money on your kids. There’s nothing wrong with spending money on your kids, I do it on a regular basis, but I believe that our culture takes it to an extreme.

It’s amazing how much kids activities cost and how quickly they add up. With school starting again, parents have to prepare to be nickel and dimed to death. It’s not just the gymnastics classes you were already paying for over the summer, it’s the $25 snack fee, the fundraiser that you have to participate in, the dozens of brand new #2 pencils you have to buy, and the extra cost to be in the school band. What can you do to survive the back-to-school tidal wave?

Ask For A Discount

If you really cannot afford something, don’t be afraid to ask for a discount. Not only do schools offer free or reduced priced meals to families who meet the income requirements, but they can also help you with or waive all of the other little fees, like for snacks and yearbooks.

Sports and classes also offer discounts, especially if you have more than one child participating. If you have three kids who want to do karate, the dojo is more likely to let all three attend for the price of two than to lose you as a paying customer completely. Usually, deals and discounts are not advertised, so you’ll have to suck up your pride and ask. Just say, “Do you offer any scholarships or discounts?” The worst thing that can happen is that they say no.

Have Them Pay

If your son wants to play flag football and you can’t fit it into your budget, have him help out. Even if they aren’t old enough for a regular job, teens and tweens can earn money babysitting, doing yard work, teaching older people how to use their electronics, and the like.

I remember when my older brother wanted $100 basketball shoes growing up, my parents made him pay for half. I’m sure he valued them and took better care of them than he would have if they had just been given to him. Not only can it help your budget, but it will teach your teen to work and give him the opportunity to practice the adult skill of weighing opportunity costs and making decisions.

Create Teachable Moments

Money is a finite resource, and the sooner we teach that to our kids, the better off they will be. When my daughter wanted to do swimming, karate, gymnastics, and play soccer, I could have just told her no. But what would that teach her?

Instead of simply saying no, I explained that each activity costs a lot of money. We don’t have enough money to do everything. So, she needed to pick the one thing that she wanted to do most. It taught her that money is finite and also gave her the opportunity to practice making decisions for herself.

When my son was selling coupon books for a fundraiser, he wanted to sell enough to win a big prize. He was disappointed that I wouldn’t just buy 10, but I wanted him to get more than just a cheap toy from it. I explained that if he really wanted the prize, he could go door to door in the neighborhood to sell the coupon books. I would go with him, but he would have to ring the doorbell and do all of the talking. It was a great learning experience for him.

Maintain Your Priorities

It’s easy to get caught up in all of the “needs” that kids have. Especially, when all of the other kids have the same thing, are doing the same thing, or if your child is a persistent whiner. (Remember, the Bible promotes that!) However, it’s important to keep the big picture in mind and stand your ground.

Eating a family meal together is very important to me, for both nutritional and relational reasons. Even if my kids show talent, I’m not going to sign them up for activities during dinner time. I’m willing to move dinner a half hour earlier or later once a week, but feeding my kids granola bars in the car while we run from one activity to the next just isn’t going to cut it with me. Family dinners are more important to me than kids’ sports.

It works the same way with financial priorities. If missions giving or saving for college is a priority for you, don’t give it up so that your daughter can be on a traveling soccer team. If soccer is a priority, though, by all means, put her on the team! Just know your values and establish your priorities, and make everything else submit to them. Remember, the most common regrets that parents of grown kids have are about not spending enough quality time with their kids, not that their kids missed out on certain classes or activities.

While back-to-school is a time of mixed emotions, don’t let anxiety over your budget be one of them. These are my suggestions, how about you? Do you have any of your own? Let us learn from you too; please share in the comments your own wisdom and experiences. Thanks!

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3 Things You Need To Know Before Taking Out Student Loans

by Amy Monday, July 22, 2024

Even though to me it seems like summer is just getting started, some colleges are starting up again in only a month. This is the season when thousands of families are signing up for student loans. Personally, I don’t think loans are necessary to earn a college degree, but they definitely are the norm.

If you or your child are planning on attending college this fall and using loans to do so, you need to know what you’re getting into. Here are three very important things for you to understand before taking out student loans:

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Retirement Savings Options For Ministers

by Amy Monday, June 24, 2024

Whether or not you ever want to stop working, it is important to plan and prepare for retirement just in case your health or your spouse force you to slow down at some point. A lot of people say that their retirement plan is to simply not retire, but real life has shown us that that isn’t always an option.

Knowing that, it is irresponsible not to plan for being unable to work someday. The biggest part of a retirement plan is saving money now, while you are still working, so you will have something to live off of when you stop working. Just creating margin in your budget to be able to save for the future is the biggest battle. If you can start to actually save, then it’s all fairly easy after that.

While stock-piling cash in a can under your bed is better than what a lot of Americans are doing (which is nothing), there are smarter ways to save for retirement. There are ways that will allow your money to grow and earn interest and ways that your money can legally avoid taxation. Here are the top four ways for ministers and pastors to save for retirement.

Church-Sponsored 403(b)

Most denominations and some independent churches sponsor their own retirement plans. Most of these are 403(b) plans, though some are now starting to use 401(k)s. (You can read about the difference here.) Both kinds of plans are tax-advantaged, which is a big help when saving for retirement.

These plans are great because they allow you to set aside up to $23,000 (more if you’re over 50) before paying taxes on it (and you never have to pay Social Security and Medicare taxes on contributions!). That means you have more money to invest and start earning compound interest. Some even offer Roth options, where you invest after paying taxes but don’t have to pay taxes on the gains (this isn’t recommended if you’ll use the funds for housing because…).

One of the best things about saving for retirement in your church’s 403(b) is that it qualifies for the housing allowance in retirement. (There is debate over whether a 401(k) qualifies for the housing allowance in retirement.) That means withdrawals from your 403(b) can be tax-free in retirement if you use them for qualified housing expenses. You can read all about that here.

Traditional Or Roth IRA

If you don’t have access to a 403(b) or 401(k), your best option is likely to save in an IRA. Like with the church-sponsored plans, there are tax advantages to utilizing one. Traditional IRAs allow you to invest your money before paying taxes on it, which leaves you with more to invest. Roth IRAs allow you to pay taxes first and avoid paying taxes on any of the money that your account earns. You can learn more about the differences here.

You can’t put quite as much into an IRA, only $7,000 for 2024 (or $8,000 if you’re over age 50). However, they do hold some advantages over the workplace retirement plans. They offer more flexibility in investment options and you have more control over the account. However, if you plan on claiming a housing allowance in retirement, the 403(b) is often a better option even if the fees are higher.

Taxable Brokerage Account

If you don’t have access to a workplace retirement plan, saving $7,000 a year into an IRA may not be enough to prepare you for retirement. Once you’ve maxed out your IRA, you may need to start saving into a taxable brokerage account.

As the name implies, you receive no tax benefits for saving in a taxable brokerage account. You have to pay taxes on your money before you put it in and you have to pay taxes on all of the gains that your account generates.

Even without tax advantages, a brokerage account is likely better than just saving in a traditional savings account. Savings accounts only pay interest, often not even enough to keep up with inflation. Brokerage accounts allow you to invest your money in the stock market, which means your money has a chance to grow and multiply. If you don’t have a lot of money to save for retirement, then having your accounts grow in this way is key to your ability to retire one day.

Health Savings Account

A health savings account (HSA) has the best tax advantages out of all of your options covered in this article (unless you claim a housing allowance from your 403(b), then they’re equal). However, I listed it last because it is probably available to fewer of my readers. You see, you have to have a qualifying high-deductible health insurance plan in order to be eligible to open an HSA. Check with your insurance provider, though, because if you are eligible, it’s more than worth it to open one.

An HSA is a savings account that is used for health care expenses. Why is it listed as a way to save for retirement? Because just about everyone has health care expenses in retirement, usually more than at any other time in their life. If you pay for your current health care needs out of your cash flow, an HSA can be an incredibly powerful retirement savings vehicle.

What makes an HSA so special is that it has double tax benefits. Like a traditional retirement account, you get to put your money into it before paying any taxes, so you have more to put in. Then it also has the benefits of a Roth account, where you get to take all of the money out tax-free when used for medical expenses. You don’t pay taxes when you put the money in or when you take it out. That’s why an HSA provides more tax savings than any other retirement account out there. And, you can invest it in the stock market just like any other retirement account. If you decide not to use the money for medical expenses, you can take it out after age 59 1/2 penalty-free, you’ll just have to pay income taxes as you would with a traditional IRA.

While you may not want to retire, it’s important to prepare just in case you are forced to. What I have listed here are not the only ways that you can save, you could invest in real estate or save cash in a can under your bed, but they are the easiest and most beneficial ways to save.

Saving for retirement is always a good idea. Even if you don’t end up using all of your savings, you can always use it to bless your kids, your church, or your favorite missionary. And who wouldn’t want to do that?

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How The Clergy Housing Allowance Affects The FAFSA

by Amy Monday, May 27, 2024

The Department of Education recently revamped the Free Application for Federal Student Aid (FAFSA) in order to make it easier to submit, and therefore, make student aid more accessible. They say, “The Better FAFSA is simplified, redesigned, and streamlined. It is faster and easier to fill out, with most students and families completing it in less than 15 minutes.”

With its rocky rollout, I’m not sure if their claims are true, but what matters is that the FAFSA is completely different, especially for pastors. As soon as it came out, I started getting people asking me, “Does the new FAFSA include the clergy housing allowance as income?”

What Is The FAFSA?

If you’re new to this, let me give you a little bit of background. The FAFSA is the form that college students use to apply for government student aid, such as grants, loans, or work study programs. In addition to federal aid, many states and colleges use the FAFSA to award student aid as well. The general rule is that if you want any help at all with school, fill out the FAFSA.

Since a lot of student aid is needs-based, the FAFSA collects financial information. The student has to provide information from their own personal tax returns. If under the age of 24, then the parents’ financial information must be included as well. That information is used to calculate the Student Aid Index (SAI), which was formerly known as the Expected Family Contribution (EFC). The SIA in turn affects how much aid a student can get.

Changes To The New FAFSA

This is the new FAFSA form. On the old FAFSA, there was a place to enter your taxable income and then later a place to enter untaxed income, which includes the housing allowance. If you look through the new form, you won’t see anywhere to add untaxed income.

However, that wasn’t enough to convince me that the housing allowance isn’t included in the FAFSA anymore. You see, there is a new feature where the IRS automatically provides information to the Department of Education when you file the FAFSA. To know for sure if the housing allowance is included, you need to know what information the IRS provides.

Does The Clergy Housing Allowance Count As Income For The FAFSA?

This article lists the information that the IRS is allowed to provide. Good news, nothing on this list includes the clergy housing allowance! That means the clergy housing allowance is not included as income on the FAFSA anymore.

To be even more sure, I checked in with the pastors in the Pastor’s Wallet Facebook Community. Those who had submitted the FAFSA this year confirmed that it’s true. The housing allowance no longer counts towards income on the FAFSA. Now, not only do you get to save on income taxes with the housing allowance, but your kids are likely to be eligible for more student aid as well!

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Can You Use A HELOC To Extend Your Housing Allowance?

by Amy Monday, April 29, 2024

Lately, I’ve seen people recommend that pastors who have paid off their mortgages should take out home equity lines of credit (HELOCs) to extend their housing allowance. The idea is that without a mortgage you cannot claim as much in housing allowance so taking on new debt related to your home will allow you to increase your housing allowance and save on taxes.

That is not a good idea. First of all, depending on the interest rate on your HELOC, you may not save any money. Secondly, debt reduces your flexibility and adds greater risk to your financial situation.

HELOC Eligibility For Clergy Housing Allowance

Finally, and most importantly, debt is only eligible for the clergy housing allowance if it is used for eligible home expenses. Just because a HELOC is tied to your home equity does not mean it automatically qualifies for the housing allowance. As with a cash-out refinance, the debt payments are only eligible for the housing allowance in as much as the funds were used for the home.

If you open a HELOC and use the money for a vacation, college, to pay off debt, or to invest, your HELOC payments are not eligible for the clergy housing allowance. If you use the money to pay for a new roof or build a deck or swimming pool, then it is eligible for the housing allowance.

Keeping Taxes In Their Rightful Place

One important principle in financial planning is to never let taxes take the lead on your decisions. Once you’ve made a decision, by all means, optimize for taxes and do tax planning. But never lead with taxes. For example, if you’re moving, instead of finding the lowest tax county in the lowest tax state and moving there, decide where you want to live based on your family, job, and lifestyle preferences and only then take taxes into consideration as you choose your house.

There are more important things in life than just saving money on taxes, so you should optimize for your specific life before optimizing for taxes. Because of this, I would never recommend that someone take on debt just to save on taxes. If you have a goal in mind that requires a HELOC then it might make sense to take one on, but don’t do it just for tax savings.

In summary, HELOC payments are only eligible for the minister’s housing allowance if the money was actually used for eligible home-related expenses. And don’t make decisions based on the tax consequences. Make your financial decisions based on what is best for you and your family and only then think about taxes.

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