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Who Is Responsible For The Clergy Housing Allowance: The Pastor Or The Church?

by Monday, January 18, 2021
Picture of a man in a suit with blog post title: Who is responsible for the clergy housing allowance: the pastor or the church?
Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

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

Pastor Housing Allowance Responsibilities

Pastor, when it comes to the housing allowance, you’re the man (or woman). If you want the tax savings that the clergy housing allowance provides, it’s on you. It’s not the church’s responsibility, it’s yours. You are the one who has to calculate your anticipated expenses for the year, submit them to your church, and make sure they approve it in time.

Also, it’s your job to track your expenses throughout the year to substantiate the housing allowance that you claim. Unlike an accountable reimbursement plan where you have to submit receipts to the church, hang onto your receipts. If you get audited by the IRS, you are the one that will have to answer to them, not your church. 

Church Housing Allowance Responsibilities

The church or denomination is responsible for officially designating the housing allowance before paying it. Until the official designation has been made, all payments count as taxable income. To make it official, the church must put it in writing as a part of an employment contract, in the church’s budget, in meeting minutes, in a church resolution, or “in any other appropriate instrument evidencing such official action.” (Treasury Regulation § 1.107-1(b)) The designation must simply identify a payment as a housing allowance as opposed to salary or other remuneration (pay).

Once the church has made the official designation, their only responsibility is to pay the housing allowance and record it properly. The allowance should be paid along with the minister’s regular wages, but the amount is not included with wages on Form W-2. In fact, the church does not report the housing allowance to the IRS at all. If it’s on the W-2 as wages, it’s taxable, so make sure your church does it right. That’s why you need to be extra nice to whoever does your church’s payroll. If you get on their bad side, it could cost you big time.

At the end of the year, the church needs to let the pastor know the total housing allowance for the year and it is the pastor’s responsibility to report that to the IRS on Schedule SE. If the pastor is exempt from self-employment taxes, then the housing allowance is never reported to the IRS at all. Isn’t that nice?

How To Report The Housing Allowance 

To inform the pastor of the housing allowance amount, the church may include it in an official letter or show it on Form W-2 in box 14. Box 14 is an informational box only, so employers have some flexibility in how they use it. The church can report the pastor’s housing allowance by writing something like “Housing: 20,000” in that box. The housing allowance should never be included with wages in Box 1. (If it is, have your church fix it and send you an amended Form W-2.)

Breakdown Of Responsibilities

Here is a breakdown of how the housing allowance works:

  1. Pastor calculates anticipated housing expenses for the coming year.
  2. Pastor requests housing allowance from the church.
  3. Church makes an official housing allowance designation.
  4. Church pays pastor housing allowance.
  5. Pastor tracks housing expenses throughout the year.
  6. Church informs pastor at the end of the year of how much was paid in housing allowance.
  7. Pastor files tax return, reporting housing allowance on Schedule SE (unless you have opted out, which is discussed later) and including excess housing allowance as taxable income on Form 1040.

This process should be repeated annually. If you have pretty steady housing expenses, you can request the church to designate your housing allowance in an open-ended manner. An example would be, “First Church designates a housing allowance of $25,000 a year for Pastor John. This designation shall be effective for the current year and all subsequent years unless otherwise provided.” That way, you don’t have to go through the process of requesting the housing allowance every year. Instead, you can skip steps 1-3 and only go back to them when your housing expenses change. Steps 4-7 must still be followed every single year, though. 

Even if you use open-ended wording, you should still calculate your housing allowance on a regular basis. Housing costs creep up gradually and if you’re not careful, you’ll end up paying taxes on a significant portion of your income unnecessarily. You can find sample housing allowance designations, worksheets to help you calculate your housing expenses, and an online calculator at pastorswallet.com/free-resources. 

If you want to learn more about the clergy housing allowance, pick up a copy of The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance on Amazon today!

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
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How The New Coronavirus Stimulus Bill Affects Pastors

by Monday, January 4, 2021
Picture with gifts and pine accents with blog post title: How The New Coronavirus Stimulus Bill Affects Pastors

After keeping the nation on its toes for a week, President Trump signed a new stimulus bill into law on December 27, 2020. The stimulus bill was actually only a small part of the 5,000+ page Consolidated Appropriations Act of 2021 that funds the government until September. In addition to the stimulus bill, there were also some tax law changes tacked on to it as well. While you probably already know about the stimulus checks it authorized (and the political battle being waged over their amount), there are also other aspects of the bill that might affect you and you should be aware of. While none of it is pastor-specific (your housing allowance is still safe!), these are the parts that may impact you:

Stimulus Checks

Everyone’s favorite part is a new round of stimulus checks to be mailed out immediately. Though similar to the checks sent out this spring, there are still some important differences. First of all, the checks are worth $600 per eligible person. Eligible people are individual taxpayers and children that are eligible for the Child Tax Credit, namely those under age 17. This time kids and adults are worth the same amount of money, though some teenage dependents are still left out. 

Again, there is a phaseout so that higher-earners don’t get anything. The phaseout starts at $75,000 for individual tax filers, $112,500 for heads of household, and $150,000 for married, joint filers. Once you hit that amount of adjusted gross income (AGI), you will lose $5 of stimulus money for each $100 of income you have. For example, a single person with an AGI of $80,000 is $5,000 over the limit. As such, their stimulus check is reduced by $250 ($5,000/$100 *$5) and they only get $350 ($600-$250). If that person had two qualifying children, their benefit would be $1,550 ($600*3 people – $250 reduction).

The federal government wants to get these checks into people’s hands as quickly as possible, so they are calculating them based on the 2019 tax return income information that they already have. Nevertheless, these are technically tax credits for 2020 taxes. Thus, even if you don’t receive one because your 2019 income is too high, if it is lower in 2020 you can get the credit when you file your taxes. If things are the other way around, where you are eligible based on 2019 income but not 2020, you’ll still get the check in the mail and not be expected to pay it back. And, as before, these checks are not considered taxable income so nothing will be withheld (whether you tithe on it is between you and God!). 

Unemployment Benefits

What made this legislation so time-sensitive for many individuals is the fact that their unemployment benefits were set to run out this week. Under normal circumstances, you can only receive unemployment benefits for 26 weeks. The government wants to motivate you to find a job and get back into the workforce. However, that’s hard when the government itself has shut everything down and there are no jobs to be had. The CARES Act addressed that by extending unemployment benefits to 39 weeks. The current legislation tacks on another 11 weeks, pushing the expiration date out to mid-March for those whose benefits almost disappeared this week. 

Another 11-week extension of the CARES Act benefits relates to the Pandemic Unemployment Assistance program. That program allows those who normally would not be eligible for unemployment benefits—contract workers, part-time workers, self-employed individuals, etc.—to receive benefits. If that’s you, you’ll be able to keep receiving benefits from that program through the end of March.

Extra unemployment payments are going to continue for another 11 weeks as well. These are the weekly payments above and beyond the normal unemployment amounts. Usually, unemployment only covers half of a person’s lost income. They want to incentivize people to get back into the workforce as quickly as possible. Since 2020 was anything but normal, the federal government augmented regular benefits first with $600 a week and then only $300 a week. That $300 a week extra payment will continue for 11 more weeks.

The last CARES Act unemployment enhancement that is being extended is the elimination of the one-week waiting period. Customarily, when you lose a job you have to wait a week before you can collect benefits. Now, if you get laid off today you will be able to start receiving benefits tomorrow. This, too, will last 11 more weeks.  

Flexible Spending Accounts

If you don’t have a flexible spending account (FSA), go ahead and skip this section. If you do, you’re in luck. As you know, FSAs are use-it-or-lose-it accounts. All of the money in them needs to be spent by the end of the year (some offer a 2 ½ month grace period or allow a $500 rollover) or it is forfeited. You usually select a contribution amount at the beginning of the year based on your planned expenses for the year. But 2020 didn’t exactly go as planned, did it?

Many people planned for summer camps that never happened, non-urgent medical care that was postponed, or childcare that was no longer needed when one parent ended up unemployed at home. The money that was supposed to pay for those things is still sitting in FSAs. Congress thought it wouldn’t be fair for so many people to lose their money at year-end because the pandemic turned the world upside down. 

The new bill permits employers to allow people to roll over 2020 funds into 2021 and 2021 funds into 2022. They can also adopt a grace period of up to 12 months for using the funds in 2021 and 2022. The key to all of this, though, is that these changes are not automatic. The employer has to choose to enact these changes. So, if you have an FSA, ask your church or HR department of your secular employer if they are going to give you some grace. If they haven’t already decided to do so, go ahead and nag them until they do. Within reason, of course. 

Required Minimum Distributions

If you haven’t reached your 70s yet, go ahead and skip this section. If you have, you’re probably familiar with required minimum distributions (RMDs). They are the amount you are required to withdraw from your retirement accounts (except Roth IRAs) each year so the government doesn’t have to keep waiting on the related taxes. This spring’s CARES Act waived RMDs for 2020 so that no one was required to take withdrawals. That provision was NOT extended with this new bill, so you will have to take your RMD again in 2021.

Student Loan Relief

Another CARES Act benefit that is going away is the student loan relief. Federal student loan interest and payments and collections on defaulted student loans have been suspended since March. That is only going to last until the end of January 31, 2021. At that point, you will have to continue to make any student loan payments you owe. Interest will begin accruing again as well. 

Charitable Contribution Deductions

Not all of the CARES Act benefits are going away. The above-the-line charitable deduction for those who take the standard deduction will continue into 2021 and even get better. For the 2020 tax year, up to $300 of charitable donations (such as your tithe) can be deducted per tax return, whether you file as a single or couple. For 2021, singles will still be able to deduct $300 and married couples will be able to deduct $600. It isn’t huge, since a $300 deduction when you’re in the 12% tax bracket only amounts to $36 saved. Every little bit counts, though.

Tax Credit Eligibility

There are some refundable tax credits that are based on earned income (Earned Income Tax Credit & Additional Child Tax Credit). Pastors always have to pay particular attention to these because of the way that the housing allowance decreases your earned income. There are situations where it’s actually more beneficial to limit your housing allowance in order to maximize these credits. 

Because so many people were unable to earn income during 2020, the new stimulus bill allows taxpayers to use either 2019 or 2020 earned income numbers when calculating the tax credits on their 2020 tax return. This is a nice benefit. That way you can calculate it both ways and use whichever numbers maximize the tax credits for you. 

This is only a small piece of the 5,593 pages of legislation that the President signed. It represents the provisions most likely to affect you as an individual. The bill also extended the Paycheck Protection Program, which you should look up if you think your church could benefit from it. For more information on the new stimulus bill from a financial planning perspective, this is a really good article to read.

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The Top 10 Personal Finance Blog Posts For Pastors Of 2020

by Monday, December 28, 2020
Picture of rocks with blog post title: The Top 10 Personal Finance Blog Posts For Pastors Of 2020

We’ve made it to the end of 2020. For the last blog post of every year, I provide a list of the top ten posts that have received the most views during the year. It gives you a chance to catch up on anything important that you may have missed during the year and it gives me the chance to slack off and write an easy post over the holidays. It’s a win-win, don’t you think?

Combined, these posts have been viewed around 60,000 times this year. What is everyone so interested in? Here they are in order of popularity: (Each title is linked to the article, so you can read them.)

1. Secular Jobs For Pastors: 9 In-Demand Skills You Already Have

This article was in the top spot last year as well and ranked #3 in 2018. I think it has become even more important this year as high unemployment rates and decreased giving have caused many pastors to look outside the church for income.

The post describes the different skills that most pastors have and how they can be communicated in a way that the secular world will understand (and appreciate!). The truth is that you already have a lot of highly-marketable skills, you just need to know how to translate them into secular vernacular. This is particularly helpful if you are looking to create a resume for a secular position. If that’s you, make sure to check out our article on writing a relevant resume as well.

2. Clergy Housing Allowance Calculator

This isn’t actually a blog post, but it’s the second most popular page on Pastor’s Wallet so I thought I should include it. It is a simple, interactive calculator that you can use to calculate your housing costs. It’s not overly sophisticated because I built it myself (contact me if you have skills in this area and want to make the site better!), but it provides you with an estimate of your annual eligible housing costs and a recommended amount to request based on adding a 10% buffer for unexpected expenses. If you haven’t checked it out, go ahead and try it for 2021!

3. How Much Housing Allowance Can A Pastor Claim?

This is a big question and I get a lot of emails asking me different versions of it. The housing allowance is one of the greatest financial benefits available to pastors, so it makes sense that you would want to maximize it. This article goes through the legal limitations on the housing allowance, how to apply the law to your particular situation, and some things to consider before actually requesting your housing allowance. If you aren’t already a housing allowance pro, this one is a must-read.

4. How To Calculate Fair Market Rental Value For The Clergy Housing Allowance

It isn’t any wonder that this article comes in right after the last since many people probably click over and read it from the last article. One thing you would read about how much housing allowance you can claim is that it is limited to the fair market rental value of the furnished home. That, of course, begs the question, How do you calculate fair market rental value? I wrote this article to answer that for you. 

5. 2020 Housing Allowance For Pastors: What You Need To Know

By now you’ve probably noticed a theme… housing allowance. It’s a popular topic on this blog. This article covers some important things for you to know about the housing allowance, including how it could affect your eligibility for the child tax credit, how it is affected by a home-based business, how to change it mid-year, and even how to claim one in retirement. The article also includes a free downloadable housing allowance worksheet in both .pdf and .xlsx formats. 

6. Do Pastors Pay Social Security And Medicare?

Now we move away from the housing allowance to another important topic, Social Security and Medicare taxes. This is a really important one for pastors because many don’t realize that their employer doesn’t withhold these taxes for them. Pastors are supposed to pay them themselves. If you don’t know that, though, you don’t pay them and if you don’t pay your taxes you can get into big trouble. Thus, this is an important article if you don’t already know how Social Security and Medicare taxes work for pastors (and that it’s different than for everyone else). 

7. Business Ideas For Pastors That Want To Make Extra Money

Back to making more money. Because we all know that the ministry doesn’t always pay the bills. This article goes through 15 different side gigs that you could use to supplement your income (or even turn into a full-time job or business). The best part is that they are all flexible enough to work around your ministry instead of competing with it. 

8. Why Don’t Churches Pay Payroll Taxes For Ministers?

This is another important topic, closely related to #6. It may not be the most exciting, but it is crucial for you to understand if you’re a pastor. Churches don’t pay payroll taxes for ministers. They can’t. This article explains how payroll taxes work and, most importantly, what happens if a church does try to help a pastor out with their payroll taxes. This is the kind of stuff that you really need to know.

9. Health Insurance For Pastors: What Are Your Options?

Despite all of the attention it has gotten over the last decade, health insurance is still a problem for many pastors. Most larger denominations offer group health insurance, but there are still a lot of pastors and churches left trying to figure everything out on their own. This article goes through all of the different options available for individuals, from the Obamacare marketplace to health sharing ministries to Medicaid and more. It also discusses options for churches that want to help out, even if they can’t afford to offer traditional group health insurance. There are a lot of options out there and this article walks you through each one.

10. Are Pastors Eligible For The 20% Qualified Business Income Deduction?

Rounding out the top ten for 2020 is the 20% qualified business income deduction. This is new to the tax code, created with the Tax Cuts & Jobs Act of 2017. It allows for a 20% deduction for Schedule C income to effectively lower tax rates for non-corporate businesses. They did this to make things more fair after slashing the corporate tax rate. Most pastors don’t see themselves as businesses, but some still have Schedule C income that is eligible for the deduction. The article explains what pastoral income is eligible and how to claim the deduction.

That’s it, the top ten for 2020. I know this has been a challenging year for most, so I want to thank you for your ministry and plagiarize the Apostle Paul with this prayer for you:

May the God of hope fill you with all joy and peace as you trust in him, so that you may overflow with hope by the power of the Holy Spirit. 

Romans 15:13 (NIV)

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Aggressive Saving: Wisdom Or Lack Of Faith?

by Monday, December 21, 2020
Picture of a box of $100 bills with blog post title Aggressive Saving: Wisdom Or Lack Of Trust?

Back when people were still allowed to get together, I was at an event for professionals and business owners where we discussed generosity. We watched a video testimony of a woman who God had asked to make some specific changes in her life to set her free. She was a doctor, and she felt led to “work like a doctor and live like a nurse” to free up her income to be more generous. She also felt that God was telling her not to save so much for the future.

In discussing the video at our table, a lot of people were impacted by the very last part, about not working so hard to save. Common knowledge says you should save as much as you can for your future and retirement. Could it be that this isn’t what God wants?

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Does The Down Payment On A House Qualify For The Minister’s Housing Allowance?

by Monday, December 14, 2020
Picture of a house with a Sold sign with blog post title: Does The Down Payment On A House Qualify For The Minister’s Housing Allowance?
Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

I don’t know about your neighborhood, but in mine, real estate is on fire. Houses that usually take several months to sell are now under contract within a matter of days. This sudden housing boom has caught a lot of people by surprise, especially since everywhere else you look the economy is struggling under the weight of COVID-19. However, with interest rates at record lows and people spending a lot more time at home with their families, it does make sense.

In addition to the houses on my street selling quickly, I have also been getting questions from readers who are jumping into the fray and buying homes. The big question for pastors is, Does a down payment qualify for the housing allowance? The answer is yes, but with a few caveats. 

A Housing Allowance Must Always Be Pre-Designated

First of all, the minister’s housing allowance is always proactive, never retroactive. It must be designated in advance for expenses to qualify. You cannot buy a home and then adjust your housing allowance to cover the purchase. Once you’ve spent the money, you can’t go back and call it a housing allowance. 

If you’re planning to buy a home, you need to have your housing allowance changed BEFORE you make the purchase. It must be officially designated by your church or employing organization, so you need to make a request in advance. How far in advance depends upon how quickly they work. 

Remember, it is easy to adjust for excess housing allowance at the end of the year, but there’s no second chance if you do not claim enough. Thus, it’s usually better to cover your bases and ask for an increased allowance even if you are not 100% sure that your purchase will go through. 

There Are Limitations To The Amount Of Housing Allowance You Can Claim

Even though it is an eligible expense, your entire down payment may not qualify for the clergy housing allowance. That is because the government has placed limits on how much you can claim. The allowed housing exemption is limited to the LESSER of:

  • Your actual housing expenses
  • The fair market rental value of the furnished home, including utilities
  • 100% of ministerial compensation

The one that gets most pastors is the second point, the fair market rental value of the home. In most cases, a down payment will push your actual housing expenses above the fair market rental value of the home because it is such a large chunk of money. Want to see how it works?

Example

Let’s say you buy a home on January 1. Your regular monthly expenses will total $2,500 (use this calculator to figure regular expenses). However, if you were to rent out the home with everything in it and cover the utilities, you could get $3,500 a month. The fair market rental value of the home for the year is $42,000 ($3,500*12). You can’t claim any more than that.

Your normal expenses will cost $30,000 for the year ($2,500*12), so you can claim $12,000 ($42,000-$30,000) of your down payment as well. Any down payment that you pay in excess of $12,000 will have to come from taxable income. If you purchase a home mid-year, you will do all of the calculations on a prorated basis, just as you would if you simply changed homes mid-year without buying.

Other Considerations

I know that some people try to work around this by having a smaller down payment and higher monthly payments. That could make sense in some situations, but it isn’t a sure thing. You need to look at how much more you are paying in interest over the life of the loan, how much your interest rate is affected by the size of your down payment (which could lead to paying more in interest), and things like whether or not you will have to pay private mortgage insurance (PMI). All of those things could make it more financially beneficial to have a big down payment, even if it does not qualify for tax exemption as a housing allowance. 

Remember, the housing allowance is just one tool (albeit a powerful one) in your financial toolbox whose purpose is to assist you in being a wise steward of that which God has entrusted to you. You must balance your use of the housing allowance, and the effort that you put into squeezing every last cent out of it, with the overall health of your finances and your relationship with money.

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
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5 CARES Act Benefits That Expire In 4 Weeks

by Monday, December 7, 2020
Picture of an hour glass with blog post title: 5 CARES Act Benefits That Expire In 4 Weeks

If you pay any attention to the news (and I don’t blame you if you don’t), you’ve probably heard that Congress is suddenly eager to pass another coronavirus stimulus bill after months without progress. Why the sudden rush? I doubt it’s to get on Santa’s good list this year. It’s much more likely that they’re feeling pressure because a number of key provisions of the original CARES Act are set to expire at the end of this month. 

The CARES Act is the $2 trillion stimulus that was passed in March, back when everyone thought life would be back to normal by fall. Boy, were we wrong! Because they didn’t realize things would drag on as long as they have, Congress set a number of key benefits for individuals to expire on December 31, which is less than 4 weeks away. If nothing changes between now and then, these benefits will end along with 2020:

Protections Against Evictions

It’s hard to pay rent when you lose your job or your income gets cut. Not paying your rent usually gets you evicted. With so many people losing jobs and income, Congress didn’t want a housing crisis on top of the health crisis and employment crisis so they included protections against evictions in their bill. (It’s also hard to stay at home to avoid spreading germs when you no longer have a home.)

Right now, landlords are not allowed to evict “covered” people from residential property just because they cannot pay rent. However, that all changes on January 1, 2021, unless Congress takes action sooner.

Student Loan Deferment

A lot of people already believe that we have a student loan crisis in this country, and Congress didn’t want the pandemic to make things worse. So, they added student loan deferment to their stimulus bill. Since March, no one has had to make payments on their federal student loans, interest rates were dropped to 0%, and collections were halted on defaulted loans. 

This benefit was originally set to end on September 30, but then President Trump extended it until December 31. It was just announced that loan repayment will actually begin on January 31, 2021.  

Pandemic Unemployment Assistance

Under normal circumstances, unemployment benefits are not available to everyone. They are for full-time employees and not self-employed individuals, independent contractors, or gig workers. The ranks of the exempt have been growing quickly in our modern digital economy and they now make up a significant portion of the labor force. 

Thankfully, the CARES Act gave states the right to expand unemployment benefits to cover those who are not traditional employees. Many have benefited from this provision in the law but unless something changes, it will be gone in a matter of weeks.

Extra Unemployment Benefit

When the CARES Act first passed, it provided an additional $600 weekly benefit paid for by the federal government. As a result, many low-income workers actually ended up earning more on unemployment than they had when they were working. It didn’t last too long and was eventually halved. Right now, the extra unemployment benefit is $300 a week and that will also expire on December 31, 2020. 

Extended Unemployment Benefit Period

Normal law allows for 26 weeks of federal unemployment benefits. But nothing is normal in 2020, is it? Because of the nature of the shutdowns and the resulting mass unemployment, the CARES Act extended the amount of time unemployment benefits could be provided to 39 weeks. These additional 3 months of unemployment benefits will soon expire with the coming of the new year.

What You Should Do About It

A lot of people may find themselves in a tough spot come January 1 if those benefits expire as planned. If you are one of them, now is the time to be planning out your response. What will you do without those benefits? Things could change, but it’s always better to have a plan that you don’t need than need a plan that you don’t have.

Finally, whether or not these changes affect you at all, I would encourage you to pray. Pray for our government leaders (whether or not you like them), that God would give them wisdom and help them work together. Pray for those who have lost jobs and income, that God would meet their needs and give them strategies for managing their finances with less. Most importantly, pray that God would use all the craziness of 2020 and whatever 2021 has in store to draw people to him so that they could experience a true savior and His peace and joy.

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How Will A Biden Presidency Affect Taxes For Pastors?

by Monday, November 23, 2020
Picture of Joe Biden with blog post title: How Will A Biden Presidency Affect Taxes for Pastors?

Whether or not you believe that Joe Biden won the election, let’s set aside politics and talk about taxes. Because there’s no way I’m going to go there. I don’t care who you voted for or who you think will be president next year, today we are going to talk about Biden’s tax proposals. I should also remind you that US Presidents are not dictators and it is Congress that has to make the laws, so just because this is what Biden wants to do doesn’t mean it will actually happen.

Now that I have all of those disclaimers out of the way, let’s get to the fun part. Taxes. How does Joe Biden want to tweak the US tax code?

Changes That Might Affect You

The good news is that most of Biden’s tax increases will not affect the average American, at least directly. Of course, raising taxes on business can lead to increased prices, slower economic growth, lower wages, lower tithes, lower pay for pastors, etc. It’s all connected. However, most of the changes that would affect you directly would probably benefit you. 

Child Tax Credit

The one that I think I would benefit the most from is the proposed increase in the child tax credit. Trump doubled it with the Tax Cuts & Jobs Act and Biden must have liked the response. He would like to increase it from $2,000 per child to $3,000 per child and also include a $600 bonus for children under 6. The tax credit would also be fully refundable, which would help pastors who have had their Child Tax Credit limited because of their housing allowance exemption.

Child & Dependent Care Tax Credit

Biden would also like to expand the Child and Dependent Care Tax Credit. The maximum would increase from $3,000 to $8,000 ($16,000 for multiple dependents) and the reimbursable amount would increase from 35% to 50%. 

First Time Homebuyers’ Tax Credit

Another one for those earlier on in their adult lives (or pastors of any age moving out of a parsonage!) is the reinstatement of the First Time Homebuyers’ Tax Credit. This tax credit was born during the Great Recession in an attempt to combat the bursting of the housing bubble and help people buy homes, but it was only temporary. Not only does Biden want to bring it back, but he wants to increase it to $15,000. If this comes to pass, though, remember that there is no double-dipping. You can’t claim both a tax credit and a housing allowance for the same expenses!

Earned Income Tax Credit

For those on the other end of the spectrum, entering your golden years, Biden’s got something for you as well. The Earned Income Tax Credit is a reimbursable (they’ll refund you the money) tax credit for workers with low incomes. It’s the government’s way of trying to make up for the payroll taxes that lower-income earners pay. Right now, you can only claim the tax credit if you are under age 65 unless you have qualifying children. Biden’s proposal would open up the tax credit to those over age 65. I’ve heard from readers that this would definitely benefit and I’m sure they’re not the only ones. 

Capital Gains Taxes

Up until this point, everything we’ve talked about would be beneficial to you. Not anymore. This one could affect your inheritance or your legacy. As you know, when you earn money, whether through work or investments, the government taxes it. When it comes to investments, you don’t pay the taxes until you sell them, even if they are growing every year. 

Right now, if you have investments that have grown but you haven’t paid the taxes on them and you die, the tax liability dies with you. Your heirs do not have to pay the taxes on the growth from your lifetime. They only have to pay taxes on the gains the investment has earned since you died (the technical term is step-up in basis). Biden would like to eliminate that provision of the tax code so that heirs (or estates) would have to pay the taxes on all earnings. That means that if you receive an inheritance, some of it might end up going to the government and there would no longer be a tax benefit for you to hang on to your investments until you die.

Other Proposed Changes

There are a few other proposed changes that could affect you. He would like to expand the Obamacare premium tax credit. Biden would also like to create a refundable renter’s tax credit in an attempt to keep rent and utility payments at 30% of monthly income. 

Changes To Retirement Contributions

This proposal is going to take a little bit more explanation, so I’m giving it its own section. Right now, if you make a contribution to a retirement plan that isn’t a Roth, you get a tax deduction for it. The amount of your contribution is subtracted from your income before you calculate your taxes due. That’s why it’s called a pre-tax retirement account. You don’t have to pay taxes on the money that you contribute (though you have to pay taxes when you take it out). 

Biden would like to make some changes to the tax benefits of these retirement contributions that favor lower-income earners. Instead of allowing a tax deduction, he would like to have a matching refundable tax credit at a flat rate of 26%. The tax credit would be deposited into your retirement account instead of being issued directly to you.

Does that make any sense? I didn’t think so. Let’s see if an example will help.

Example

Let’s say you contribute $1,000 to a traditional IRA today. When you file your tax return, you can subtract that $1,000 from your taxable income. If you’re in the 12% tax bracket, that will save you $120 in taxes. If you’re in the 37% tax bracket, that will save you $370.

Under Biden’s plan, what would happen when you contribute that $1,000 to your traditional IRA? Instead of lowering your taxable income and therefore your tax bill, the government would make a contribution to your retirement account for you of $260 (26%). There are two things happening here. First of all, the benefit goes directly into your retirement account and not your hands, as it currently does. Second, it benefits those in lower income tax brackets more. The person in the 12% tax bracket now gets $260 instead of just saving $120. The person in the 37% tax bracket also only gets $260 instead of saving $370. 

This proposal accomplishes two goals. First, it puts more money into retirement accounts, which is why the government offers these tax incentives in the first place. Second, it shifts the tax benefits more heavily towards low- and middle-income savers, which is their stated goal. 

Changes For High-Income Earners

Most of Biden’s tax increases for individuals are aimed at those who earn over $400,000. If that’s you, congratulations on having a high income, and I’m sorry to say that you might have to share more of it with the government soon. 

Right now, Social Security taxes are only paid on wages up to $137,700 (the cap adjusts annually with inflation). Any income above that amount is not subject to the Social Security tax of 6.2% for employees and 12.4% for self-employed individuals and pastors. (The Medicare tax, which brings a pastor’s total SECA tax to 15.3%, does not have a cap and is levied on all income.) Biden would like to reinstate that tax on income over $400,000. Under his plan, only income between $137,700 and $400,000 would escape Social Security taxation. 

Biden would also like to raise the current top tax bracket. The Tax Cuts & Jobs Act lowered the top bracket from 39.6% to 37% and Biden would like to reverse that so that those with incomes over $400,000 are paying 39.6% again. It is important to remember that the Tax Cuts & Jobs Act individual tax bracket changes are temporary and due to expire after 2025. That means even if Biden makes no changes, the tax brackets will revert back to pre-Tax Cuts & Jobs Act levels for the 2026 tax year. 

Other changes aimed at those who earn more than $400,000 are limiting itemized deductions and phasing out the qualified small business income deduction. 

When you invest money for the long-term, you usually receive preferential tax rates on any gains that you achieve. The government does this to encourage investment and also help mitigate the diminishing purchasing power of money over time. One of Biden’s proposals is to eliminate the preferential tax rates for those earning $1 million or more.

Other Changes

Hang in there, we’re almost done here. Another Tax Cuts & Jobs Act change that Biden would like to undo is related to estate and gift taxes. Actually, he’d like to go even further back and restore those taxes and exemptions to the level they were at in 2009. This will only affect you if you have several million dollars when you die or are the beneficiary of someone that does. 

Finally, Biden wants to raise taxes on businesses. I won’t go into it here, but for businesses, most of the proposed changes are not in their favor except for some select tax credits, such as those to encourage small businesses to sponsor retirement plans or bring manufacturing back to the US. 

In conclusion, those are Biden’s tax proposals in a nutshell. For most of you, you’re probably happy because you mostly stand to benefit from them. I would like to issue a word of warning, though. Do you know how much money the government has spent fighting the coronavirus and the economic effects of the lockdowns this year? A lot. More than a lot. And I’m afraid we will be suffering the effects of it for years to come. Before doing a celebration dance, just remember that we will have to pay for it all one way or another, regardless of who is President.


To learn more about Biden’s proposals or help fight insomnia, read this article from the Tax Foundation.

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How To Teach Your Kids About Money (No Matter Their Age)

by Monday, November 16, 2020
Picture of boy reading with blog post title: How To Teach Your Kids About Money (No Matter Their Age)

I am officially a homeschool mom. While my kids have been home since March, I decided to officially cut ties with the local elementary school and go out on my own this fall. And I can honestly say that I have had no regrets whatsoever.

So far in third grade math, my daughter has learned how to count coins and different kinds of bills. This week, my daughter is going to be learning how to write a check. It is all very helpful (her older brother never learned to write a check in school!), but it isn’t enough. Kids learn in school the difference between a dime and a nickel, but they don’t learn what to do with them. That’s our job as parents. Some schools now offer financial classes, which you really should encourage your kids to take, but learning about compounding interest is still only a piece of personal financial management.

It would be easy if the schools would just teach our kids everything, but there are some things that must be learned at home. Like table manners. Or brushing teeth. Or money management.

Now, you may be thinking, “I can teach my kid to brush her teeth, but money management? Why can’t the schools teach that again?”

Teaching Kids About Money Is A Parent’s Responsibility

It’s scary and intimidating for most parents to think about teaching their kids about money. Money is a taboo subject in our culture, so it can be hard to talk about. And a lot of parents simply aren’t confident enough in their own money management skills.


You may need to brush up on your skills a bit (you’re in luck, you’re reading just the blog for that!), but if you really want the best for your kids, you need to teach them about money. Do you really want your kids learning about paying taxes from people like Willie Nelson (owed the IRS $16.7 million in 1990) or learning about debt from Kanye West (who a couple of years ago revealed he owed $53 million)? I sure don’t!

How To Teach Your Kids About Money

So how do you teach your kids about money? And is it too late if they’re already teenagers?

Here are three keys to teaching your kids about money. And you’re in luck! They work at any age, though the younger you start, the better.

1. Set A Good Example

We’ve all caught ourselves telling our kids not to talk with food in their mouths while we’re still chewing our last bite. But that just won’t cut it when it comes to money management. Our kids don’t really care what we say, but they watch what we do. And whether we want them to or not, they will mirror our behavior.

If you want your kids to have a strong foundation in their finances, you need to model to them how to do it. I know, it’s much easier said than done. But it’s true. The first step in teaching your kids about money is to simply show them.

2. Talk To Your Kids About Money

In our American culture, there are certain things we don’t talk about. That list is getting smaller and smaller, but it still exists. Sex lives seem to have escaped the list, but money still hasn’t. Can you believe that a 2013 study found that 63% of Americans would rather share their body weight with co-workers than their bank account balance?

That same avoidance carries over into the home as well. Many parents say they would rather discuss drugs or sex with their kids than money.

Some things can be learned by observation. Your kids can probably learn how to load a dishwasher just by watching you, though I’m sure you’ve nagged them about silverware placement once or twice. But finances aren’t very visible. The only way your kids will learn about proper money management is if you actually open your mouth and talk about it.

Many parents don’t want to worry their kids or don’t want to admit their mistakes. If you’re stressed about money, they will pick up on it whether you are open about it or not. Talking about it will probably make them feel better, even if things aren’t going well. The only way to prevent them from the same pitfalls is by talking about them. Give them the chance to learn from your mistakes so they don’t have to repeat them.

Silence about money will only cause your kids problems. Most parents don’t expect their kids to understand the dangers of drugs just because they have never seen their parents shoot up. Some things require more in-depth discussion and openness, and finances are one of them.

3. Get Your Kids Involved

Learning theory and research have consistently shown that the more active a learning experience is, the greater the learning gains and retention. How do you teach your kids about money? Let them do it!

How this plays out will differ by age. If you are buying your preschooler a toy, have him hand the money to the cashier himself. In this transaction, he will learn that he has to give up something (the money) in order to gain what he wants (the toy). He will learn that everything costs something.

If your 10-year-old has been begging you for a new video game, don’t just refer her to grandma. Have her figure out the cost of the new video game, plus tax (don’t want her to end up like Willie Nelson), and help her save up for it.

Let your teenager buy her back-to-school clothes (yes, some day they will go back to school) on her own with a set amount of money. She will either be more frugal than if you were with her or learn the hard way the value of budgeting.

Nowadays, a lot of kids are going off to college only to realize that they have no clue how to use money. Don’t let your kid be one of them. Take the time now and make a conscious effort to teach them about money. Otherwise, their bank’s overdraft fees will (we hope).

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Are You Wasting Money Without A Health Savings Account?

by Monday, November 9, 2020
Picture of piggy bank with blog post title: are you wasting money without a health savings account?

Despite being a hot topic over the last couple of decades, the cost of health care is still a major problem for American families. Healthcare costs tripled between 2001 and 2016, and the average non-elderly family now pays $8,200, or 11% of their income, each year.

That is a national average where many people have employer-provided health insurance. Many churches cannot afford to pay as much of their pastors’ premiums or even offer health insurance at all. If you are without health insurance, it is open enrollment right now for the Affordable Care Act and you can sign up right now on the national exchange. You can also read about your other health insurance options here.

Even with insurance, most of us don’t have an extra $8,000+ just laying around for medical costs. It’s something we should be saving for on a regular basis so we can be prepared when something does come up. It can be hard to find the room in your budget to save for medical costs, but the government has provided something that makes saving towards health care costs a little bit easier and more cost-effective: Health Savings Accounts (HSAs).

What Is A Health Savings Account?

Back in 2003, the government established HSAs as a way for people covered under high-deductible health plans (HDHPs) to get special tax treatment for saving money for out-of-pocket medical expenses. By saving in an HSA, they received a tax benefit for planning ahead. As HDHPs gained in popularity, the government wanted to incentivize saving to cover the higher deductibles, so that medical events would not be financially devastating even with insurance in place.

What’s So Great About Health Savings Accounts?

There are two aspects of an HSA that make it especially attractive:

No Taxes On The Front End

First of all, you can contribute money to your HSA pre-tax. Because tax hasn’t been taken out, you end up with more to contribute. Many people have their HSA money withheld directly from their paycheck so that they never even see it or have to pay taxes on it. You don’t have to have it automatically withheld, though, you can just take a deduction when you file your taxes for the same result. Either way – save now or save later – you still save on taxes by contributing to an HSA.

No Taxes On The Back End

Not only do you save on taxes when you put money into an HSA, you save when you take it out as well. Distributions from an HSA are tax-free when used for qualified medical expenses.

This makes an HSA very unique among tax-advantaged government savings plans, like IRAs. Usually, you either contribute pre-tax but have to pay taxes on withdrawals, or you pay your taxes upfront before contributing and don’t get taxed on the withdrawals. Health Savings Accounts take the best of both kinds of plans to make a superiorly tax-advantaged savings vehicle.

Example Of Tax Savings

Let’s look at an example with real numbers. Ben and Dan each have $1,000 to save towards medical expenses. Ben saves in a regular savings account and Dan opens an HSA.

Before he can start saving, Ben has to pay his taxes, 20%, so he only has $800 to put into his account. His savings account earns him 0.1% a year. If he leaves it in there for 5 years, it will grow to an amazing $804.

Since Dan is using an HSA, he doesn’t pay taxes on his $1,000 and it all goes into the account. Because of this, even if he earns the same interest rate as Ben he’ll end up with $201 more than him, or $1,005 total. However, if he isn’t planning on using the money any time soon, he can likely earn a much better rate of return. Most HSAs offer a wide variety of investment options, from money market to stock mutual funds. And the best part is that you don’t have to pay any taxes on the interest you earn when used for qualified expenses.

Are You Eligible For A Health Savings Account?

These are the requirements to be eligible to open an HSA:

  • You must be covered by an HDHP 
  • You cannot be enrolled in Medicare or other health coverage
  • You cannot be claimed as a dependent on someone else’s tax return

HSAs cannot be joint accounts, they are individual accounts. If you are married, only one of you owns the account while the other can be an authorized user. When the account owner dies, the spouse gets to take over the account. The surviving spouse gets to use it as his or her own without paying any taxes (for qualified expenses) or penalties.

What Are The Contribution Rules?

As long as you are covered by an HDHP, anyone may make contributions to your HSA. This includes you, the account owner, your employer, any family member, or another third party, like a church or church member.

The 2020 contribution limits are $3,550 for singles and $7,100 for families, with a $1,000 catch-up contribution available to those over 55. Contributions for 2020 can be made all the way up to the tax filing deadline for the year, April 15, 2021. The limit will go up $50 for singles and $100 for families in 2021.

Once you are no longer covered by an HDHP, you can’t make anymore contributions. You can still use the funds in the account for eligible expenses, though.

What Can You Spend The Money On?

HSA money can be used for many things that aren’t usually covered by health insurance plans. A few examples are deductibles, co-insurance, prescriptions, dental care and vision care. Most things that would typically qualify for the medical expense deduction on your tax return qualify for an HSA.

For people over 65, qualified expenses include:

  • Premiums for Medicare parts A, B, D and Medicare HMA
  • The portion an employee pays for employer-sponsored health insurance
  • The employee portion of employer-sponsored retiree health insurance

Supplemental policies like Medigap are not IRS qualified expenses.

It’s Not A Use-It-Or-Lose-It Account

It’s easy to confuse HSAs with FSAs (Flexible Savings Accounts) and all of the other acronyms the government uses. If you’re familiar with an FSA, you know that any unused funds in excess of $500 are forfeited at the end of the year.

Luckily, HSAs are different. Account balances simply roll over from year to year, allowing for incredible growth and accumulation of savings. As long as you are eligible, you can continue to contribute to your account tax-free and let the money grow tax-free for use at any time in the future, whether near or distant.

How Do I Open A Health Savings Account?

Now that you’ve seen how great they are, how do you get one? It’s as easy as opening a bank account, once you’ve chosen who you want to open it with. Just fill out the application and start depositing.

You can start HSAs with banks, brokers, credit unions and insurance companies. If you just Google “Open HSA,” you’ll see plenty of good options. Here is a good article with tips for choosing an HSA custodian, and this blog post lists some of the most popular ones along with their fees and investment options.

Good luck and happy savings!

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