How Pastors Can Save Money on 2010 Taxes by Mark Helland, CPA

How Pastors Can Save Money on 2010 Taxes
Mark Helland, CPA

Mark Helland, CPA is a partner with the accounting firm of Elliott, Dozier and Helland, PC which is located in Tulsa, Oklahoma. Mark can be contacted via email at mark@edandhcpa.com or by phone at (918) 627-2286.

We are only weeks away from the end of 2010 which means that Christmas will be here before we know it. While shopping for Christmas presents is at the top of everyone’s mind during this time frame, it is also a great time to take some proactive steps to reduce your income tax liability. Pastors especially have some key areas that allow for income tax saving opportunities which need to be carefully considered. Following is a list of some key tax-saving steps that could make filing your income tax return a whole lot less painful this year.

Housing allowances for 2011 must be board designated
While this is not a tax saving idea for 2010, per se, this is a critically important IRS compliance issue. Compensation that is intended to be considered to be a housing allowance must be designated by the Church board, in writing, before the end of the calendar year for the upcoming year. Failure to do so could result in the IRS reclassifying such amounts as wages if you were ever to be audited.

Have you used the full value of the housing allowances for housing expenses?
A common misconception is that the housing allowance is completely free of any form of income tax. Here is how taxation on the housing allowance works – for pastors who have not opted out of social security, the full value of the housing allowance is subject to self-employment tax (FICA and Medicare, both the employee and employer’s portion). For pastors who have opted out of social security, the housing allowance is not subject to self-employment tax. In either case the housing allowance is not subject to federal and state income taxes unless the housing allowance has not been used in full to pay for qualified housing related expenses. In other words, any portion of the housing allowance that has not been spent for qualified housing expenses will be subject to income taxes. So, now is the time to compare your total housing allowance with your qualified housing expenses for 2010 and make any additional housing expenditures prior to year end.  

Locate your IRS form 4361 and approval documentation
If you have previously made the election to opt out of social security, this is important documentation that you and your tax advisor should have on file in your permanent records. The IRS will not provide you with a copy of this documentation, so the only way to prove your election is to make sure that you have the documentation on hand. In our office, we retain both a hard copy and a scanned image of all Form 4361 documentation for our clients in order to prove the election that has been made.

Have you had enough tax withheld or paid via estimated tax payments?
Even though there is not a lot of time left in the year to rectify the situation if you haven’t had enough tax withheld, now is the time to make sure that you are on track. The key things that you want to accomplish here are to make sure that; (A) you won’t receive an unwelcome surprise at April 15th by having too little tax paid in and (B) you won’t be subject to any underpayment of tax penalties. Without getting into all of the detailed rules on underpayment penalties, as a general rule you need to make sure that your current year withholdings and/or estimated tax payments are equal to or greater than your previous year’s tax liability. It is not too late to boost your federal and/or state withholdings for the month of December or make a federal and/or state estimated tax payment if need be.

Retirement plan contributions
Even if your Church sponsors a retirement plan, you might still be able to contribute to other qualified retirement plans such as an IRA or SEP. If you are married and your spouse has earned income, there are many opportunities for additional retirement plan contributions to be made. The rules in this area are complex and will vary tremendously based upon individual situations. The key here is to be aware that you may be able to make additional tax qualified retirement plan contributions based on your situation.

Maximize your tax deductions before year end
Most pastors who own their own homes are able to itemize their income tax deductions. Here are some additional ways to maximize those deductions and lower your taxes in the process:

– Pay your January 2011 mortgage payment before the end of December 2010. To err on the side of caution, I would advise not just relying on a postmark and I would instead advise mailing the payment at least a week before the end of the year. This step serves to move an extra month of mortgage interest into 2010, thus increasing your itemized deductions. This is also a great way to pay more qualified housing expenses if you have not utilized your full housing allowance, as mentioned previously.

– Consider whether or not you had any unreimbursed business expenses for 2010. Potential unreimbursed expenses for pastors could include mileage, dues, license fees, publications, etc. As long as such items were entirely for business purposes and were not reimbursed by your Church, they are valid itemized deductions.

– State tax withholdings and estimated tax payments are deductible for federal income tax purposes if you are able to itemize deductions. So, if you do need to make a state estimated tax payment for the fourth quarter, make sure to make the payment before the end of the year so that you can deduct the payment for 2010.

The previous items are by no means a comprehensive list but they are some key items that pastors need to consider before the end of the year. If you would like to receive an expanded list of tax saving ideas, feel free to email me at mark@edandhcpa.com. Also, my firm specializes in working with pastors, churches and non-profit organizations as well as preparing income tax returns for pastors. We would be honored to have the opportunity to work with you this tax season on your personal income tax needs.

 

This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It is shared with the understanding that neither the author nor Tony Cooke Ministries is engaged in rendering legal, accounting, psychological, medical or other professional services. Laws and regulations are continually changing, and can vary according to location and time. No representation is made that the information herein is applicable for all locations and times. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

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