We, here at your State Board of Missions, seek to provide helpful assistance to each and every pastor/planter in Alabama. Lee Wright, one of your fellow state missionaries, and I were discussing the new tax laws for 2018 recently. We thought you might benefit from knowing about some of the less published nuances of the new tax code.
Lamar Duke
Hello, this is Lee Wright from the Alabama Baptist State Board of Missions.
Today I wanted to share the most important tax news in a generation, and specifically for church planters. Some of your situations is a little bit different than other ministers.
First of all, I wanna say and reassure you that most ministers should save on their taxes in 2018. Some, however, might not. This presentation is just for basic information to help you to know. It’s not intended to be tax advice, of course. Consult your tax advisor for your situation.
Now, in December in preparation for this, we saw really long lines, especially in places like New Jersey with people lined up to prepay their property taxes. But what are the applications for Alabama? Did we have any long lines? No, of course not. Our property taxes are very low. But because of those kinds of headline-grabbers, some of the important points were missed in the headline news. Let’s look at some things that are important to us.
First of all, the very first consideration is, is the pastor self-employed? Most churches treat the pastor as perhaps being self-employed, and that’s just not true. It’s a mistake. However, a minister serving a church as pastor, for example, is self-employed concerning their Social Security/Medicare, but they’re an employee in every other way. Minister tax experts call this the dual tax status. An employee for federal purposes, self-employed for Social Security purposes. This fact has always been important, but never more so than in 2018, and we’ll see that in just a few minutes. However, as a church planter, you might have a time that you are truly self-employed, that you’re self-employed for your federal and self-employed for your Social Security purposes. You may be an employee of the mother church, the sponsoring church, and they might give you a W-2. You, at some time, you’re going to be an employee of the new church, the new church plans. That church will give you a W-2. But perhaps you might be receiving money from different sources, and there could be a time that you might be truly self-employed. I’ll explain the difference as we go.
What are the tax changes for 2018? Number one, they doubled the standard deduction. I’m going to speak today in round numbers just to keep things simple. I’m also going to use the example of a married couple. Linette and I have been married a long time, and so it’s hard for me to think any differently. If you’re single, these numbers will be about half the number for a married couple. In 2017, the standard deduction for a married couple was about $12,000. In 2018, it’s now $24,000 for a standard deduction. Now, what I’m speaking of is that many people will try to itemize their deductions. They’ll add up all of their deductions for medical and property taxes and mortgage interest and charitable deductions, things like that. Charitable giving, things like that, and see if it exceeds the standard deduction. In 2017, 70% of all Americans could not itemize deductions. The itemized deduction were there, they just didn’t have enough. In 2018, it’s estimated that as many as 95% of Americans won’t be able to itemize their deductions. Most of the familiar deductions are still there, but the majority of us won’t be able to itemize because we just simply won’t have enough. That’s a major tax change.
One question is, what might happen to charitable giving in 2018? You could think, well, charitable giving might go down because there’s not quite as big of a tax advantage to charitable giving. But I believe that in the church, people give more so, for the reason of our Christian beliefs and what the Bible says. I believe that we as churches will pretty much be okay. Now, the Evangelical Council on Financial Accountability reports that giving is actually up slightly in 2018, and that our economy is a little better, and so people are giving a little bit better. It will, however, perhaps affect those year-end gifts in December that we might receive. It might also affect other charities, not churches. I believe that we’re going to be okay, concerning charitable giving in the church in 2018.
The second major tax news is that they eliminated the personal exemption. We’ve been accustomed to a personal exemption of about $4,000 for each person in the family, but those deductions are eliminated. That exemption has been eliminated. Here’s how it might compare. In 2017, a married couple would have a $4,000 exemption for the husband, a $4,000 exemption for the wife, and a $12,000 standard deduction. That would mean that that couple could make $20,000 before they would pay their first dime in federal income tax. In 2018, there’s a zero personal exemption. However, the standard deduction is 24,000. This means that in 2018, a married couple can make 24,000 before they owe any federal income tax at all. They can make a little bit more before paying any taxes.
Is there a possibility that a married couple might even pay more in taxes in 2018 as compared to 2017? It is possible, especially if they had very, very large itemized deductions in 2017. This example of a couple in 2017, they would have $4,000 for each, plus a large amount of itemized deductions, $20,000. That would be $28,000 total, and so, 28,000 before they paid their first dime in taxes. I’m not talking about housing allowance. I’m just talking about the exemptions and the standard deduction. But in 2018, they would have zero for personal exemption. They would have a $24,000 standard deduction, which is larger than their itemized deductions last year, and so, they would have that $24,000 total before they paid their first amount in taxes. It would be possible that somebody might actually pay a little bit more in taxes in 2018 as compared to 2017.
They did work on the tax rates, as well, and those are more favorable. The first rate is 10%. The second rate is 12% rather than 15%. The third rate is 24% rather than 25%. Those are a little bit more advantageous to us as well. Now, the third thing that the Congress did is they doubled the child tax credit to $2,000. It doubled from $1,000 to $2,000. But that’s for children under age 17. Now, you’ll remember that the law eliminated that $4,000 personal exemption, but we have a doubled child tax credit. Families that are a little bit on the low to medium income ranges will probably do better with the doubled child tax credit. Those in the high end of the spectrum might do a little worse than they did in 2017. The other factor is that those with 17-year-olds, 18-year-olds, and college students, those children will not help us as much as they used to on our taxes.
The new law will benefit most ministers. However, for those ministers who’ve been accustomed to itemizing, we have a very unusual situation. We have a double deduction on mortgage interest and property taxes. That meant that in the past, we could include those things as a part of our housing allowance, including the payment, including interest and taxes. We can include utilities and furnishings and maintenance and upkeep. But also, those two particular items, mortgage interest and property taxes, we could also deduct those on Schedule A itemized deductions. In effect, we’ve got to count them twice. Since many ministers will not have enough to itemize, many will only be able to count the mortgage interests and the property taxes one time as a housing allowance. And so, it might be a little bit less advantageous for some ministers.
Now, here’s what did not make the news. It hasn’t been in the news, and still isn’t in the news. I had to read some really very nerdy kinds of CPA articles to find it. That is that the employee unreimbursed business expense deduction is completely gone. On Schedule A under itemized deductions, we as employees, for example, a pastor serving a church, would deduct his business expenses that were not reimbursed by the church on Schedule A under unreimbursed business employee business expense. In 2018, they won’t be able to write off any employee unreimbursed business expenses at all. There’s a lot of ministers who do not have an accountable reimbursement plan for their church business expenses. Some of ’em don’t even want one because they thought it was too much trouble. However, in 2018, the amount of unreimbursed employee business expense that a pastor will be able to write off will be zero. Wow. That is huge. Many of our ministers, even if they do have an accountable reimbursement plan for their business expenses, that accountable plan might not be an adequate amount of money, and the minister would just consider, “Well, I’ll write it off on my taxes.” But in 2018, they will not be able to do so. That’s huge.
Now, even though ministers will not be able to write off unreimbursed business expense for employees, many ministers have some self-employment income, such as doing weddings and revivals and funerals and maybe preaching at another church, filling in or something like that. That is self-employment income, and the minister would be able to write off the expenses related to those activities on a Schedule C. Some of you as church planters, you will have some self-employment income. Perhaps you’re in the stage of church planting that you’re not really an employee of the sponsoring church or the new church, or either. Perhaps you might be self-employed. However, most of you should think in terms of being an employee of the church, because even if you’re self-employed now, you will soon be an employee of the church as you serve as pastor of the new church plant. Keep that in mind, and this being said, as soon as you are an employee of that new church, you need to have an accountable reimbursement plan for your business expenses.
In 2018, most won’t be able to deduct their itemized deductions. They’ll take the standard deduction, and the unreimbursed business expenses are eliminated. For many pastors, this could make a big difference in their taxes. If a church uses the old package approach, the lump sum approach, the kind of ideal where the church says to the minister, “Here’s X number of dollars. “You divide it up any way you want to,” that’s not going to work well. If you have that situation, the only thing that you could do tax-wise would be to ask for a housing allowance and to use a salary reduction to put money into the Church Retirement Plan. Everything else would be taxable. Even though many will not be able to itemize on their federal taxes, be sure to track your itemized deductions and your unreimbursed ministry expenses for state income tax purposes.
Alabama income tax has not changed so far. It might change one day to mirror what the federal government does, but so far, it has not changed, and you’ll want to track these things for Alabama income tax.
Another major item that has been totally eliminated is moving expense. You cannot deduct it anymore, and if the church pays for or reimburses the move, that amount of money will become taxable income. Wow, that’s huge.
Here are some takeaways for the church and for you as a minister. First, churches should provide an accountable reimbursement plan for ministry business expenses. They have a business purpose, they have written documentation which is submitted at least every 60 days, and are reimbursed to the employee. When it’s done in that manner, no taxes are paid on the reimbursement.
Second, churches should establish a system of salary and benefits, rather than salary alone. This practice will reduce taxes and provide benefits which are needed by the employee. The benefits could include retirement contributions, group term life insurance, medical, dental, disability insurance. Those things are very important. There’s an excellent guide for best practices for the church which can be found at guidestone.org/CompensationPlanning. It will outline these things that I’ve been talking about.
Many of you are bi-vocational. The number one question that I receive from bi-vocational pastors is, can all of my income be housing allowance? The answer is yes, if that’s appropriate for your situation. Number two, is there a dollar limit to housing? Number three really, or 2-A, I should say, is, is there a percentage limit? No, there’s no percentage limit. There’s no dollar limit. It can be up to 100% if that’s appropriate for your situation. But the question I ask ministers is, but should you? Should you have 100% as housing? The answer there that I recommend is no. Have some as taxable income so that you can participate in the Church Retirement Plan. If 100% is housing, do I need a W-2? No. That could be recorded on church letterhead in a memo statement, “For 2018 you received $18,000, “100% of which was housing allowance.”
If I have some taxable income, do I receive a W-2 or a 1099? Now, a minister serving a church would always receive, in that scenario, would always receive a W-2. For some of you, like we mentioned earlier, if you are not an employee of the church yet, or if you’re no longer an employee of the sponsoring church, perhaps you might be self-employed, and you might be receiving a 1099. However, that’s an unusual pastoral situation, and be on the lookout for that moment that you would become an employee, and then expect a W-2 rather than a 1099. Now, we recommend that you have some income as taxable so that you can participate in the Church Retirement Plan. The Church Retirement Plan, there’s tax savings now and preparing for retirement, which all of us should be doing.
There’s extra benefits, such as the survivor benefit that acts like life insurance, disability benefit, which could help you if you should become disabled, and possible contributions of up to $17.50 a month coming from the State Board of Missions. In retirement, you could receive a tax-free housing allowance from a denominational provider, which, that is what GuideStone is in the Church Retirement Plan. If the church budget is less than $75,000, you can look into and apply for a thing called Mission and Church Assistance Fund, which might mean $50 a month into your account for up to five years. However, the way that GuideStone says this in a simple manner, and there are some exceptions, but, they simply say it, you need to receive a W-2 from a Southern Baptist church to be in the Church Retirement Plan and receive the extra benefits.
Let’s suppose that you’re not an employee of a Southern Baptist church. You’ve got your money coming from different sources, and the church is not yet established yet. You’re not receiving a paycheck yet from the new church. You can participate in GuideStone through an IRA, for example, or through a thing called the Ministers and Chaplains Plan. It would work very similarly to the Church Retirement Plan, but you would not receive the extra benefits that I talked about.
And so, what other forms are needed? If the pastor’s the only employee and has only housing, there’s no additional IRS forms. That memo statement is adequate. If the pastor’s only employee and has salary and housing, you will need to receive a W-2, and then there would be a W-3 and an A-3. Those summarize the W-2s. Then, if there’s other employees later on down the road, such as a secretary, now the church would have to be submitting a 941 each quarter, and the Alabama A-1, the church would be providing W-2s and the end-of-the-year forms, W-3 and A-3. I hope this has been helpful to you to get an overview of some of your tax situation for 2018.
If I can be of help to you, please give me a call. My number is 334-613-2241. My cell phone number is 334-549-1383. Please give me a call anytime that I can help. My email is [email protected]. Thanks for being with us today.
