For many clergy members, tax planning is something that only comes to mind in the weeks leading up to April 15th.
However, taking a proactive, year-round approach to clergy tax planning can save you thousands of dollars and eliminate the stress of last-minute filing. With unique tax considerations like housing allowances, self-employment tax, and retirement benefits, effective clergy tax planning requires ongoing attention.
So what does year-round clergy tax planning look like?
Let’s break it down by season so you can stay ahead of the game and maximize your financial benefits.
Winter (January – March): Setting the Stage for Success
The beginning of the year is a crucial time for clergy tax planning. During these months, you’ll be gathering tax documents from the previous year while also setting up key financial strategies for the year ahead.
1. Review Last Year’s Tax Return
Before filing your new return, take a close look at your prior-year tax return.
- Are there any mistakes or missed deductions?
- Were you surprised by a large tax bill or refund?
Use this information to adjust your strategy for the coming year.
2. Gather Important Documents
Collect necessary forms such as your W-2 from your church, Form 1099s (if applicable), and records of charitable contributions.
Ensure your housing allowance is properly documented.
3. File Your Taxes or Work with a Professional
Consider working with a tax professional who specializes in clergy taxes to help ensure you’re taking advantage of every possible deduction.
If you owe taxes, be prepared to make a quarterly estimated tax payment (due April 15th) to avoid penalties.
4. Set Your Housing Allowance for the Year
Your church must officially designate your housing allowance before you receive your income.
Review this with your church finance team early in the year to ensure compliance and maximize this tax benefit.
5. Adjust Your Withholding or Estimated Tax Payments
If you owed a significant amount in taxes last year, consider increasing withholding on your voluntary tax withholdings or adjusting your quarterly estimated tax payments to avoid a surprise bill next year.
Spring (April – June): Refining Your Tax Strategy
Once tax season is behind you, it’s time to focus on refining your tax strategy and implementing adjustments that will benefit you in the long run.
1. Make Your First Quarterly Estimated Tax Payment (April 15th)
If you are required to make quarterly tax payments, be sure to send your first payment by April 15th.
Self-employment tax for clergy is 15.3%, so estimating your payments accurately can prevent underpayment penalties.
2. Reevaluate Your Budget and Tax Strategy
Take a look at your monthly budget and financial goals. Are you setting enough aside for taxes, retirement, and unexpected expenses?
Adjust your contributions to retirement accounts like a 403(b) or Roth IRA to ensure tax-efficient savings.
3. Track Expenses for Deductions
Keep track of business-related expenses that may be deductible, such as continuing education, travel, mileage for church-related trips, books, and office supplies.
Using software or a spreadsheet can help you stay organized.
4. Review Health Insurance and Benefits
If you are self-employed for tax purposes, you may qualify for a self-employed health insurance deduction.
Consider a Health Savings Account (HSA) if you have a high-deductible health plan—it provides a triple tax advantage: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
Summer (July – September): Mid-Year Check-In
With the year halfway over, summer is the perfect time to evaluate your progress and make adjustments.
1. Make Your Second and Third Quarterly Estimated Tax Payments
Payments are due June 15th and September 15th. If your income has changed, revisit your tax calculations to avoid underpayment penalties.
2. Perform a Mid-Year Tax Review
You can do this by:
- Comparing your actual income to your projections.
- Checking if your housing allowance is still appropriate or if adjustments are needed.
- Ensuring you’re still on track with estimated payments and deductions.
3. Consider Charitable Giving Strategies
If you plan to make significant charitable contributions, doing so before the end of the year can help maximize deductions.
Look into donor-advised funds for larger, tax-efficient charitable contributions.
4. Evaluate Retirement Contributions
If you have a 403(b), make sure you’re contributing enough to maximize tax benefits.
You can also look into additional retirement strategies such as a Roth IRA or Traditional IRA.
Fall (October – December): Wrapping Up the Year Strong
As the year comes to a close, it’s important to finalize your tax planning strategies and make any last-minute adjustments before December 31st.
1. Make Your Final Quarterly Estimated Tax Payment (Due January 15th)
Ensure you’ve made all necessary estimated tax payments for the year to avoid penalties.
2. Review Your Housing Allowance for Next Year
Work with your church to designate your housing allowance for the upcoming year. This must be done before January 1st for it to be valid.
3. Maximize Retirement Contributions
You have until December 31st to contribute to your 403(b) or Roth IRA for the current tax year.
If you haven’t contributed as much as you’d like, now is the time to catch up.
4. Check End-of-Year Charitable Giving
Ensure that any charitable contributions you plan to deduct are made before December 31st.
5. Work with a Clergy Tax Professional
A tax professional who understands clergy-specific tax rules can help you optimize your tax situation before the year ends.
Focus on Year Round Clergy Tax Planning
Year-round clergy tax planning is about staying ahead of the game so you’re not scrambling when tax season arrives. By breaking your tax planning into manageable steps throughout the year, you can reduce stress, avoid surprises, and make the most of your tax-saving opportunities.
At Crosstribe Advisory, we specialize in helping clergy navigate the complexities of tax planning. Whether it’s optimizing your housing allowance, planning for self-employment tax, or maximizing retirement savings, we’re here to help.
Ready to take control of your clergy taxes year-round? Let’s talk today and build a tax plan that works for you.