CHURCH FINANCIAL WELLNESS – Church Executive

By Rev. James R. Cook, CFP®, RICP®

We are now in the fourth quarter of the year, which means it is the perfect time to start thinking about tax planning.

Many of us don’t think about our taxes until we sit down to gather information to fill out our tax returns, but by then it’s often too late to make changes that could potentially save our taxes, or at least make our taxes easier to prepare.

Reduction in taxable income

The primary way to reduce the taxes you have to pay is to reduce the amount of income that is considered to be taxable. This doesn’t have to mean making less money; Rather, it usually means depositing money into tax-privileged accounts or maximizing the use of funds that can be received tax-free. Let’s look at a few ways to reduce your taxable income.

Retirement accounts. These can be traditional IRAs or the workplace 403(b) or 401(k) accounts. Every dollar invested in one of these accounts reduces your taxable income, potentially saving you on your federal taxes, as well as your state taxes if you live in an income tax state. The added long-term benefit is that you also build assets for the future.

“As you near the end of the year, it is a good time to review your housing costs so far and plan where you will be at the end of the year. If you think you have excess funds, consider how you can use them for eligible expenses. otherwise all remaining funds will be treated as excess housing benefit and will be taxable. “

529 plans. These plans offer a tax-deductible way to save for a child or grandchild’s college education. You don’t reduce your income for current federal taxes, but if the benefits are withdrawn and used in the future for skilled education expenses, the money, including income, comes out tax-free. If you live in a state with state income tax, you may be able to lower your taxes for the current year if you join a plan sponsored by your own state.

Housing benefit. Most ministers take the opportunity to claim part of their ministry income as tax-free housing allowance. Remember that your employer must determine the amount of housing benefit before it is paid out to you (usually at the beginning of the year). You need to track your actual expenses for the year and then you can deduct the lower amount as housing benefit from:

• The amount reported to you by your employer

• The actual amount you spent

• The fair imputed rental value of the furnished property plus ancillary costs

As you near the end of the year, it is a good time to review your housing costs so far and plan where you will be at the end of the year. If you think you have excess funds, consider how you can use them for eligible expenses. otherwise, any remaining funds will be treated as excess housing benefit and will be taxable. Use your current expenses and any changes you anticipate for the year ahead to make your 2022 Housing benefit declaration from your employer.

Qualified charity payouts. When you have money in an IRA and you are old 70 1/2 or older and intending to give gifts to qualified charities, consider conducting a Qualified Charity Distribution (QCD) from your IRA. Charitable donations made as QCDs are different from donating and then collecting a deduction. QCDs instantly reduce your taxable income as they are deducted from a taxable account but not reported as income and are therefore not subject to any restrictions on donation deductions.

If you are subject to the required minimum payouts (currently people aged 72 and older), any amount taken as QCD counts towards your required minimum payout. Note that QCDs can only be extracted from traditional IRAs; they must not be taken by Roth IRAs or 401(k) or 403(b) accounts.

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FSA accounts. If you have a flexible health or childcare expense account, check your balance and plan to use it before the end of the year. This is money that you or your employer deposited into the account that you can receive tax-free. While some accounts allow you to use an unused portion for the following tax year, not all do. You lose any amount that you ultimately don’t spend.

Estimated taxes and withholding taxes. If you have your 2021 Taxes, watch out for the amount you either owe for taxes or the refund you get. If either number is large, consider adding your W-4th Withholding certificate or the amount you pay in quarterly estimated tax payments to reduce the discrepancy between your actual taxes and the amounts withheld or paid.

Final thoughts

As the year draws to a close, it is a good time to make sure your records are in order so that next year your taxes are easy to deal with. A … create 2021 Control file and start collecting information as soon as it comes in. You’ll be grateful to yourself as you sit down to prepare your taxes or share information with your tax advisor, rather than looking for a misplaced form.

Rev. James R. Cook, CFP®, RICP® is a specialist in financial planning. He brings expertise in comprehensive financial and retirement provision to his work at MMBB [www.mmbb.org]. Cook holds a BS in Psychology from Lewis & Clark College, a Master of Divinity from Fuller Theological Seminary, and an MBA from the University of Missouri Kansas City.

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