Year-End Tax Planning for Pastors

Written by Amy Artiga
From her column Sensible Stewardship

We’re coming to the Christmas season and the end of the year, so you probably have a lot on your mind and plate right now. If you started sharing your “To Do” list for the rest of 2023, I doubt taxes would be included, since most people don’t think about them until spring. But if you could take time to consider these five year-end tax planning opportunities between now and January 1, it could be worth the effort.

1. Compare your actual housing expenses with your 2023 designated housing allowance.
As we wrap the year, it’s time to compare what you’ve actually spent on housing with what you anticipated and designated as housing allowance. If you’re not on track to use up your entire designated allowance, now might be a good time to do that house project or redecorating you’ve been considering. Since the housing allowance has already been designated, you might as well take full advantage of it, that is, if it fits in your budget.

You may not have a need to spend your entire housing allowance in 2023, and that’s okay. The excess allowance will need to be added back to taxable income filing your return in a few of months. There is no penalty for this, but your tax bill could be a bit higher, since what you didn’t spend will be taxable.

2. Check your tax withholding.
It can be hard to get withholding right, especially for pastors who have to pay self-employment taxes. By now you should have a good idea of what your 2023 total income will be so it’s a good time to double-check to make sure you have been withholding enough from your paychecks or paying enough in quarterly estimated tax payments throughout the year.

To do so, simply estimate your total 2023 taxes and compare them to what has been withheld or paid. If you find you haven’t been withholding enough, increase your withholding or make an estimated payment. That way, you will avoid a surprise tax bill in April or an underpayment penalty.

If you’re not on track to use up your entire designated allowance, now might be a good time to do that house project or redecorating you’ve been considering.

3. Update your tax withholdings for 2024.
Now that you’ve double-checked your tax withholding, it’s time to think of the coming year. If you weren’t withholding enough, fill out Form W-4 to increase your tax withholding or increase your quarterly estimated tax payments. If you have calculated that you will get a large refund, you might want to lower withholding so you can use the money throughout the year instead of giving the IRS an interest-free loan.

4. Take your required minimum distribution (RMD).
If you’ve already celebrated your 73rd birthday or will do so before 2024 and aren’t still working, then you must start taking money out of your tax-deferred retirement accounts, including your Nazarene 403(b). These are called required minimum distributions (RMD) and the IRS determines how they are calculated. If you don’t take your RMD, the penalty is a hefty 25% of the amount that was supposed to be withdrawn from your account. If you have a traditional IRA, 401(k), 403(b), or similar retirement account, you can use this calculator to determine how much you need to withdraw by December 31, 2023. Any funds received as housing allowance count toward your RMD amount.

5. Set your 2024 housing allowance.
Speaking of housing allowance, now is the time to set yours for 2024. Consider how inflation and personal life changes have affected your housing expenses and adjust accordingly. I always recommend ministers overestimate and request a higher housing allowance, since there is no penalty for doing so and underestimating means you will be paying taxes unnecessarily.

As you enter this busy holiday season, I encourage you to carve out at least half an hour to think about taxes. I’ve listed five actions here you can take to put yourself in a better position tax-wise and possibly save money in the coming year. If you’re really busy and that’s too much to think about, just focus on #5 and you’ll reap immediate benefits. However, if you’re 73 or older, #4 is probably the most important one for you!

Amy Artiga is a Certified Financial Planner (CFP) who serves at Guide Financial Planning and author of the clergy personal finance blog Send questions for Amy to Note: This material is provided for informational purposes only. The author and NBUSA do not provide tax, legal, or accounting advice.