Tax strategy for Clergy

[Target59]

I am making a major career change late in life and will soon become a pastor of a small church. While the finances are certainly not the driver, I'm trying to determine how to minimize taxes. The income will be subject to 15.3% self-employment tax plus federal tax (it's in a state with no income tax). I can save on federal taxes through the housing allowance, but that amount would be subject to self-employment tax.

Here's my thought: I have money in a 401k that I can access without penalty. I would save the 15.3% self employment tax by diverting my clergy income into a 403b and then I would just pull the money from the 401k, resulting in only income taxes. I will also be able to contribute to an HSA, further reducing self employment tax. I'm thinking I'm better off to divert my entire salary into the 403b and HSA to essentially have zero reported income from the church, since that would save me the self-employment and income tax. The housing allowance would only save income tax.

Added benefit (I think): by putting money in the 403b, it appears that I can have the church declare withdrawals as housing after I retire, which would make the withdrawals non-taxable up to the actual amount I spend on housing. So I would never pay self employment or income tax on that amount.

Am I thinking correctly about this? Any holes in this strategy? Thanks.

 

[FANOFJESUS]

I don't think the housing thing will fly after you retire . The IRS will not buy that. You are retired period!

 

[Stormy Kromer]

I would highly recommend that you find a tax preparer in your state that is familiar with clergy and tax treatment. Clergy is treated different in many ways for tax purposes and many options are available to you. I was the treasurer for many years at a small church and our Pastor had a great tax preparer that he met while still in the seminary. He helped him out a great deal. The synod office also helped, but his tax preparer knew more. He only did tax returns for clergy members.

 

[joesxm3]

Matthew 22:21

(edit). John 8:7

 

[DuluthGA]

I worked in a Baptist church for 21 years and know that Baptist ministers can withdraw from their 401/403 in retirement funds held by the baptist retirement plan and have it designated as housing. I’m not sure you can avoid the self employment tax but the income tax for sure. Make sure your tax professional is knowledgeable about ministers. A firm that audits churches usually has a tax guy that is good with minister returns.

 

[Dash man]

I can’t imagine getting away without paying the payroll taxes before you put the money in your retirement account.
I also believe it’s morally wrong (aka sin).

 

[Target59]

Thanks for the feedback. I’ll find a tax expert to make sure I follow the law and render appropriately to “Caesar”.

 

[DuluthGA]

Check out IRS pub 517. Clearly states contributions to retirement plan are not included in income for self employment taxes.