Mark Helland is a CPA who is focused on the specific and unique needs of pastors and churches. Mark is with the accounting firm Elliott, Dozier and Helland, PC ( which specializes in outsourced accounting, compliance and tax related issues for church and ministry clients across the United States. For further assistance from Mark on these services, Mark can be contacted via email at or by phone at (918) 627-2286.

Year End Tax Planning Strategies for Pastors
Mark Helland

Tax Planning StrategiesSince we are getting close to the end of the year, now is the time to make last minute preparations and planning steps for the annual ritual of the dreaded United States income tax return. Once you provide your information to your CPA to prepare your income tax return, it is too late to take any tax planning/tax saving steps for the prior year (aside from possibly contributing to an IRA). Rather than something you do when you file your tax return, tax planning has to be looked at as an incremental process. Everyone is looking for the magic bullet idea that saves huge amount of tax without any financial out of pocket outlay on their part. These ideas simply do not exist. Anyone who claims to have such ideas should be avoided at all cost because they will cause you great financial damage. The way to save income tax is to incrementally implement as many of these small ideas as possible, which taken together will add up to large savings.

As I have written about many times in the past, pastors have some very unique and complex tax issues (such as the housing allowance, treatment of pastoral compensation and self-employment tax issues). While the income tax issues specific to pastors can be complex, aside from these issues, pastors largely share the exact same income tax issues that other U.S. taxpayers face. So, in order to help everyone get ready for tax season, I thought this would be a good time to elaborate on some more general tax planning strategies that are always available to help pastors pay less to Uncle Sam this tax season:

Adjusted Gross Income Ideas

Idea # 1: Retirement Plan Contribution Alternatives:

One of the few good ways to reduce your adjusted gross income (“AGI”) is to contribute the maximum amount to a tax-deferred retirement plan. This also has the effect of lowering your adjusted gross income and reducing your overall income tax. If your employer offers a retirement plan, it is a good idea to fund the plan to the highest degree possible. At a minimum, make a contribution that is sufficient to receive the employer’s full matching contribution. Everyone should contribute to a tax-deferred retirement plan of some sort and your focus should be on plans that offer an employer match first. After contributions to these types of plans have been maxed out, additional options such as a traditional IRA or Roth IRA can be considered. Although the Roth IRA offers no up front deduction, amounts contributed grow tax-deferred and eventual distributions are tax-free if held for more than five years.

Idea # 2: Consider Dividend Paying Securities:

Under the tax law changes passed during the Bush administration, dividends receive a preferential tax rate as compared to interest income. However, there are several conditions that must be met in order to receive this “qualified dividend” treatment such as holding period and type of security.

Idea # 3: Consider Selling Your “Dogs” to Generate Tax Losses:

If you own any investments outside of tax deferred retirement accounts that have losses, a basic tax reduction strategy is to time losses to offset capital gains. If you have capital gains to offset, it might make sense to sell some of your poorer performers, which you no longer wish to own. Capital losses are fully deductible against capital gains, but any capital losses in excess of capital gains can only offset up to $3,000 of ordinary income. Amounts in excess of $3,000 are then carried forward indefinitely.

Idea # 4: Carefully Evaluate Capital Gain Transactions:

Favorable tax treatment is given to long-term capital gains or gains on investments which have been held in excess of one year. Capital gains on investments which have been held for less than one year are taxed as ordinary income at the taxpayer’s marginal tax rate.

Itemized Deduction Ideas

Idea # 1: Pay Fourth Quarter State Estimated Tax Payments Prior to December 31st:

If you are required to make quarterly estimated tax payments, make sure to pay your fourth quarter state estimate prior to December 31st. By doing this, you will succeed in accelerating the deduction into the current year, rather than waiting a year for the deduction of this payment. However, wait to pay the fourth quarter federal estimate until January 15th. In contrast, federal income taxes are not deductible and there is no benefit to make this payment early.

Idea # 2: Accelerate Mortgage Interest Expense on Mortgage Loans:

If possible, make your January 2016 mortgage payment during December 2015, prior to December 31, 2015. By so doing, you will accelerate one month’s worth of interest expense into 2015 rather than waiting until 2016 for the deduction for this amount. This is a good strategy for those who are not subject to the alternative minimum tax and it is also a good strategy to employ if your income is high in the current year but will be lower in the subsequent year. For pastors, this also helps to use up the housing allowance so that any excess is not subject to federal income tax.

Idea # 3: Convert Non-Deductible Interest into Deductible Interest:

Personal interest paid on credit card debt or an automobile loan is not tax deductible. Should you have any of these types of obligations, you may want to consider re-financing them with a home equity loan or a home equity line of credit in order to deduct the interest paid. Of course, the rate of the home equity loan should be compared to the rate paid on the personal loans to ensure that an after-tax saving would result after refinancing. For pastors, keep in mind that even if the interest rate is higher on a home equity line of credit, such interest can be used to offset the housing allowance.

Idea # 4: Donate Appreciated Assets to Charities, Not Cash:

An effective tax reduction strategy is to give assets that have appreciated in value, primarily stocks or mutual funds, directly to the charity of your choice. By so doing, you will get a deduction for the fair market value of the asset and will avoid having to pay capital gains tax on the sale. This strategy works best for assets that you plan to sell anyway and would then have to pay tax on the capital gain.

Idea # 5: Donate Non-Cash Items to Goodwill or Other Charities:

You may have clothing, electronics or other personal items that you may no longer want or need. By donating these items to an organization such as Goodwill or the Salvation Army, you may be able to take a tax deduction equal to the thrift shop value of these items. For contributions over $250 you will need both a receipt from the charity as well as a list and description of the items donated. Additionally, the IRS requires that all non-cash items donated be in “good” condition.

Idea #6: “Bunch” Miscellaneous Itemized Deductions for Maximum Deductions:

Miscellaneous itemized deductions are subject to a 2% of adjusted gross income (AGI) “haircut”. So, to derive any tax benefit from these expenses you first must be able to itemize deductions and next, the total amount of the miscellaneous deductions must be greater than 2% of your AGI. The trick is to identify as many of these deductions that are applicable to your personal situation and attempt to “bunch” them into a single year by deferring and/or pre-paying them where possible. Here are some of the major categories that are deductible:

Unreimbursed Employee Business Expenses:

Business gifts (up to $25 per recipient), business mileage to temporary work locations, professional dues and fees, professional education, business phone calls, business meals, business travel, business postage, business office supplies, business shipping, etc. are all valid unreimbursed employee business expenses.

Investing and Other Expenses:

Magazine and newspaper subscriptions, investment web site fees, seminars, books and tapes, worthless securities, depreciation on home computer to extent used for investment management, safe deposit box rental, investment management fees and IRA fees if paid with non-IRA funds are all valid itemized deductions.

Home Office Deduction:

The home office deduction is subject to many requirements that are complex and should be carefully considered. Generally, a home office deduction may only be claimed if it is the only office available, and the office is used for the convenience of the employer. Expenses that may be deducted are the home office portion of mortgage interest, property taxes, utilities, repairs and depreciation.

Withholdings and Estimated Tax Payments Ideas

Idea # 1: Avoid Penalties on Withholdings or Estimated Tax Payments:

Make sure to avoid penalties for underpayment of tax by having the appropriate amount of tax paid in prior to the end of the year. In general, to be safe from penalty, you need to have at least 100% of your prior year tax liability or 90% of your current year tax liability paid in prior to year-end. For high income tax payers (AGI over $150,000) the federal tax requirement is 110% of prior year tax liability.

Idea # 2: Don’t Give the IRS an Interest-Free Loan:

If you find that you are receiving large refunds every year, you may want to consider reducing your withholdings. You can do this very easily by providing a new W-4 Form to your church’s payroll department. However, over the years that we have prepared tax returns we have found that most people would rather know for sure that they will be getting money back at tax time than to owe money unexpectedly. So, take this idea with a large grain of salt.

Children and Educational Funding

Idea # 1: Maximize your Child Tax Credit:

The income limits for the maximum child tax credit are frequently hit by dual income families, thus increasing your tax liability. One of the few good ways to reduce your AGI is to contribute the maximum amount to a tax-deferred retirement plan. We can help run the numbers for you to determine the best way to maximize this tax credit.

Idea # 2: College Funding is Equivalent to Retirement Funding:

Before you get too excited about contributing to a 529 plan or other college savings account, keep in mind that college funding and retirement funding are completely intertwined. In general, it usually makes more sense to fully fund your own employer sponsored retirement plan before making contributions to an educational savings account. Loans are available to fund college expenses but no one is going to loan you money to fund your retirement.

Generally speaking, I will rarely have a client that has a personal situation in which all of these ideas will pertain and be actionable ideas. However, at the same time almost all of my clients will have at least a few of these ideas that pertain to them and be actionable. Just a few of these ideas, implemented properly, are guaranteed to help you save money at tax time. These ideas, taken along with the basic “blocking and tackling” type ideas that I have written about previously for pastors (such as using up your housing allowance) will help you win the tax return game this year!