As a pastor, your life looks a little different than the average person. While everyone else relaxes in front of the TV for an afternoon of college football, you’ve got one eye on the game and the other on the sermon notes sitting in your lap. You bring more than a casserole when you visit someone who’s sick. You stay for a while—offering prayer and encouragement.
The differences extend to your financial situation, too. Because pastors fall under unique tax rules, you can’t always do what everyone else is doing. You’ve got to spend a little extra time working through the math.
We’d love to help, let’s tackle the housing allowance. Specifically, should you keep your mortgage in order to continue receiving the full housing allowance?
First, a few numbers: For this hypothetical situation, consider the following as if it were your own annual information.
At first glance, it looks like keeping the housing allowance is a better deal. That’s why we’ve got to dig a little deeper and actually do some math. So, grab a calculator and follow along.
The housing allowance means you can subtract $15,000 from your taxable income of $75,000. You’ll be taxed at 25% of $60,000. That’s a tax savings of $3,750. With us so far?
Like other home owners, you can also write off the interest paid on the house. Instead of being taxed on an income of $60,000, you’ll now only be taxed on an income of $50,000. That’s an additional tax savings of $2,500.
Wow! So, your housing allowance saves you roughly $6,250 a year! Sounds pretty good, doesn’t it?
It is good. In fact, it’s a huge blessing. But, when the time comes that you are able to pay down your mortgage, you should. Not only because the Bible says the borrower is slave of the lender (Proverbs 22:7), but because it just makes sense.
By keeping a mortgage, you are choosing to send the bank $10,000 a year in interest alone to save $6,250. That’s an annual loss of $3,750. You could choose, instead, to pay off your home early, invest the savings and eventually have plenty of money to bless your family and tons extra to give away!
If you’ve visited any major news site in the past few years, you’ve probably seen it. Scroll past the political mumbo jumbo and you’ll find a topic slightly more depressing: Social Security.
In 2011, congress temporarily reduced the Social Security payroll tax from 6.2% to 4.2%, meaning extra money in the pockets of the American people and, ultimately, the marketplace. It was designed to help spur on the economy.
That tax cut expired on December 31, 2012. The change back to a 6.2% Social Security payroll tax rate took place immediately. If your paycheck seemed lacking, that’s why.
In short: your salary was cut by 2%.
Fortunately, as a pastor, you are in a unique situation to avoid this pitfall altogether. If, that is, you have a conscientious objection to participating in this government benefits plan. This is where things get a little tricky. Read below for a few quick tips.
How to decide
God calls each of us to be good stewards of His money. As a pastor, you alone can determine if contributing to Social Security is a good, biblical way to manage the resources God’s given you. Many people believe taking care of oneself is a matter of personal responsibility, and that the church—not the government—should be on hand to provide for those who can’t take care of themselves. Based on your beliefs as a minister, you have the right to opt-out of Social Security.
How to cover your bases
Keep in mind that electing not to pay into the system now ultimately means you’re electing not to receive benefits later. So, you’ll need to be financially prepared for retirement. You’ll also need to make sure your family is covered if you are disabled or if you die. To cover your bases buy term life insurance, long-term disability insurance and long-term care insurance. Of course, long-term care insurance is only necessary if you are 60 years of age or older. If your debts are paid and you have three to six months’ expenses in the bank, you should also contribute to a 403(b) and Roth IRA.
How to complete the paperwork
The required paperwork to opt-out can be found in Publication 517 from the IRS. You’ll complete Form 4361 to request approval for exemption. Note, though, that this exemption only applies to your ministerial income. Any other source of income, such as a non-ministerial part-time job, is still subject to Social Security deductions.
Overall, if you have a genuine objection to running your ministerial income through the Social Security system, this is a fantastic option. But whatever you do, make sure you’re covering the insurance and investing bases first!