There are pervasive misconceptions about ministers’ tax benefits that cost ministers year after year. Structuring a minister’s pay package most advantageously is best done on an individual basis since there are a number of factors that can impact those decisions. Proper tax planning for ministers isn’t a luxury, it’s a necessity. With that said, the three areas that are consistently “Big Tax Advantages” fall into categories of:

• Housing Allowance
• Clergy Advantage 403b or a Denominational Retirement Plan
• Ministry Expenses & Accountable Reimbursement Plan

  The #1 area of tax neglect or misinformation that we routinely see is in the realm of ministers’ housing allowance. This is the greatest of the clergy tax benefits by most estimation. It offers a plethora of opportunities for tax savings now, and in the future through a proper retirement plan. Congress intends ministry professionals to exclude all expenses involved in providing and running a home. This is often a nebulous concept and many people are understandably confused about exactly expenses qualify. There are a lot of myths around the questions of when and how often to set your housing allowance designation; who sets it and what language to use in the document. Can it be reset throughout the year? What if I don’t spend it all or what if I spend more than my designation? These can be significant issues and need to be addressed accurately earlier than later.

  More than that, very few ministers are familiar with all of the strategies necessary to fully utilize this wonderful exclusion and when those opportunities can apply.
  There are scores of housing strategies ranging in complexity and based on individual circumstances. Knowing when and how to apply housing allowance options has huge ramifications for ministers; especially if you consider the amount at stake over the course of a ministry.

  For example, most ministers don’t know:

• How high housing allowance should be set or what the real limitations are. There are no percentages or amounts that necessarily cause “red flags” as commonly believed.
• What even qualifies as a housing expense.
• That you can retain housing allowance benefits during retirement.

• How to use Housing Allowance strategies in a retirement plan for a stream of tax-free income.
• How to make new home down payments with housing allowance or even home improvements and spread them out over several years to ensure that every penny spent qualifies as deductible housing expense.

  Proper management of the mortgage, including extra principal payments, is also crucial to maxing out clergy housing allowance benefits. And the list goes on…For these and a host of other reasons it’s really important to find tax advisors proficient in these issues. Well-meaning and even very knowledgeable tax professionals are rarely versed well enough to do more than the very basic calculations and coaching.

  The 2nd critical area is using a Clergy Specific Retirement Plan with clergy- specific financial advice. This can only be fully accomplished with a Denominational Retirement plan or the Clergy Advantage 403b Plan for ministers. Pastors often miss out with common financial planning techniques, especially for retirement, when so much more is available to them. The Clergy Advantage 403b or a Denominational plan is the only retirement plan to provide ministers:

• Growth on the principal to stay ahead of inflation with
• A stream of tax-free income via the clergy housing allowance and
• Contributions that reduce State, Federal and Social Security tax! This is

  the only way to offer tax savings in all three areas now and during retirement.

  The 403b results in an immediate tax savings of 35% for most ministers and is one of the few ways to reduce Social Security tax. In the tax world it doesn’t get any better than that!

  Caution: A secular 403b set up by a regular financial planner, not experienced with clergy tax issues, will not be able to provide tax free housing allowance exclusion when the money is withdrawn. Secular 403b retirement plans that hospitals and other non-profits use are completely different and should NOT be confused with the clergy-specific 403b.

  The 3rd area is the Accountable Reimbursement Plan. The theory with an accountable plan is to get reimbursed on all ministerial expenses on a tax-free fringe benefit basis. There are six huge advantages to this; perhaps the biggest is that it properly identifies a minister’s expenses as church business and NOT personal expenses. The icing on the cake is that, a minister with a properly set up accountable plan, will rarely get audited because expenses are deducted before we even file the tax return. An accountable plan allows ministers to avoid:

A 50% Business Meals and Entertainment (BME) loss right off the bat.

•  Itemized Deduction Limitation Loss, especially if you rent or live in a parsonage.
• Section 265 Proration Loss. The IRS prohibits the deduction of a portion of a ministers unreimbursed expenses incurred when there is tax-free income (i.e., housing allowance).
• An Accountable Plan Clarifies and “Improves” Compensation

  A properly set up accountable plan for the average minister’s expenses usually results in a pay raise of $ 2000 to $8000 extra a year. There are four important but simple elements to a church’s Accountable Plan and it doesn’t cost the church any more, if set up properly; it’s the minister who ends up paying without such a plan.

  More importantly, there’s a definite correlation in the growth of churches and organizations that actively encourage ministry expense reimbursement. These expenses can include events, publications, periodicals, classes that foster personal/professional growth and much more.

  Certainly one of the most significant factors to corporate growth is entertainment either at home or in public. We all know the value of relationship building in church growth. Record keeping for home entertainment can be as simple as a kitchen calendar with peoples’ names with the function and estimates of expenses for refreshments and meals.

  An organizational system for ensuring easy or sure reimbursement for those ministry activities is a way of emphasizing the importance of new memberships and greater involvement in the church. Unfortunately, some ministers feel that they are putting a burden on the church or their pastorate if they don’t shoulder that expense themselves. This seriously limits those growth activities and puts an unfair strain on many ministry families.

  Unfortunately, we see about 90% of people getting it all wrong in one or more of these three important areas. That can really make the difference in a pastor’s overall financial picture.

  We’ve consulted with thousands over the years and continue to find that most ministers are still not getting accurate information about their tax situations. Consequently, we’ve developed free webinars and other resources to educate and inform pastors and their churches. Ministers are unique tax creatures, and their tax benefits can be truly amazing, if understood and applied properly.

By Steve Merriman, E.A