Street smart finances for covenant pastors 2012

551
-1

Published on

Presented by Elliot Johnson at the 2012 Covenant Midwinter.

Topics covered:
• Financial & Tax Issues for Ministers
• Covenant Benefit Programs
• Investment/Retirement Considerations
• Covenant Financial Resources

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
551
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
18
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • A one-dollar bill met a twenty-dollar bill and said, "Hey, where have you been? I haven't seen you around here much."The twenty answered, "I've been hanging out at the casinos, went on a cruise and did the rounds of the ship, back to the United States for a while, went to a couple of baseball games, to the mall, that kind of stuff. How about you?"The one dollar bill said, "You know, same old stuff - church, church, church."
  • Street smart finances for covenant pastors 2012

    1. 1. $treet $mart Finance$for Covenant PastorsFacilitated by: Elliott Johnson, Controller;& Assistant Director of PensionsToday we will becovering thefollowing topics:H. Financial & Tax Issues for MinistersI. Covenant Benefit ProgramsJ. Investment/Retirement ConsiderationsK. Covenant Financial Resources
    2. 2. Objectives for this seminarA. Discuss financial & tax issues pertaining to those serving as ministers. What you need to know about:  Financial reporting-budgets  Compensation  Taxes/Self-employment taxes  Housing allowance  Ministerial expenses
    3. 3. Objectives for this seminar Covenant Benefit Programs Pension Plan  Bethany Benefit ServiceC. Investment Considerations  Retirement PlanningD. Covenant Financial Resources  Covenant Trust Company  National Covenant PropertiesE. Q & A
    4. 4. Resource MaterialsHandouts: Retirement Planning for Covenant Pastors & Missionaries Minister’s Guide for Income Tax – Conrad Teitell Covenant Pension Plan – Summary Plan Description Covenant Pension Plan – “All you wanted to know…” Bethany Benefit Service –An Overview Covenant Trust Company National Covenant PropertiesResource Materials: The 2011-12 Compensation Handbook for Church Staff –Cobble & Hammer Church & Clergy Tax Guide – Richard R. Hammer
    5. 5. Glossary of Definitions SECA – Self-Employment Contributions Act for Social Security purposes. Paid by the self-employed individual at the rate of 12.4%. (For 2011 only, rate is 10.4%) FICA - Taxes on non-self-employed persons for Social Security purposes is paid equally by the employee and the employer at 6.2% each. (Except for 2011, employee pays only 4.2%) SECA Medicare Tax - Paid by the self-employed individual at the rate of 2.9%. Medicare Taxes - Paid equally by the employee and the employer at 1.45% each. Housing Allowance - The amount of compensation that a pastor designates prior to the beginning of each year and has the church pay is not subject to income tax up to certain limitations. The designation of the housing allowance must be approved by the church council prior to the year starting.
    6. 6. Definitions continued Parsonage - The church furnishes a pastor a church-owned home to live in during their employment. The pastor is required to pay SECA taxes on the fair rental value of the parsonage. Accountable Expense Plans – A church requires the pastor to submit documentation for reimbursement of expenses and mileage. Non-accountable Expense Plans – Churches pay the pastor a set amount each month for items such as books or auto expense. They amounts are taxable to pastor. These can be deducted as unreimbursed employee expenses as itemized deductions.
    7. 7. Definitions continued Retirement Plans IRA – Individual Retirement Account. There are 2 types: Regular IRA, which allows you to reduce your taxable income on your tax return. Any withdrawals are taxable and must start by age 70 ½. Roth IRA: does not allow you a current reduction of taxable income, but withdrawals are tax free (including earnings) and are not forced by age limits (i.e. do not have required distributions).
    8. 8. Definitions continued Employer Retirement Accounts. There are 2 types: Defined contribution accounts such as 401k (generally for-profit companies) and 403b for non-profit companies. These accounts are structured so that each account is yours personally and any earnings or losses are credited to your account based on your investment decisions. This can also be done as a “Roth.” Defined benefit accounts are accounts set up by employers that pay a pension to you based on years of service and your salary. All investment decisions are made by the employer.
    9. 9. Financial ReportingTips for Ministers Don’t be intimidated by accounting reports. The goal is not accounting expertise—it’s leadership. A leader’s job is not to calculate a profit and loss statement. A leader’s job is to know how to read and then use the information to make leadership decisions. Get help where you need it. The only “dumb question” is the one you don’t ask.
    10. 10. Financial ReportingTips for Ministers Things to consider:  “Tone at the top” regarding accountability.  People are watching!  Internal controls, checks and balances.  Qualifications of staff. Is outside help needed and if so, how often and for what purposes?  Budgeting.  Financial reporting, monitoring process.  Risks of fraudulent reporting and/or misappropriation of assets (stealing in a church?!)
    11. 11. Financial ReportingTips for Ministers Remember that for management purposes, there is no “right” or “wrong” system per se – use what works best in your situation. Goals of financial reporting:  Measure financial performance and monitor changes therein.  Target operational changes.
    12. 12. ScripturalConsiderations Maintain a high level of public accountability - 2 Cor. 8:20-21. Keep fiscal behavior above reproach – Acts 24:16, 1 Cor. 4:2. Ensure that dollars remain the servant and not the master of the ministry – Matt. 6:24, 33. Remember that “counting the cost” is a biblical principle – Luke 14:28-30.
    13. 13. Compensation  What’s considered taxable?  Base salary.  Non-accountable expense reimbursements.  Reimbursement of non-deductible moving expenses.  Special occasion “gifts” from the church.  Social Security supplement (for pastors). (cont.)
    14. 14.  Bargain purchase of church property. Personal use of church-provided automobiles.  Annual lease valuation rule  Taxation of automobile allowances Premiums on group term life insurance in excess of $50,000 (BBS $100,000).
    15. 15.  What’s considered non-taxable?  Accountable expense reimbursements.  Group term life insurance of $50,000 or less.  Group insurance premiums paid by church.  403 (b) contributions.  Qualified moving expenses.  Parsonage or housing allowance.  Cafeteria (I.R.C. Sec. 125) plans, medical reimbursement plans.  Contributions to Covenant Pension Plan.
    16. 16. Example of Pastor vs Non-Pastor Taxes  Pastor   Janitor  Joe  John                  Salary $50,000      $50,000   FICA  or SECA                     contribution $3,825  7.65%   $3,825  7.65%Total                  Compensation $53,825      $53,825          Housing Allowance $25,000                          Base Salary $28,825      $50,000   
    17. 17. Example of Pastor vs Non-Pastor Taxes  Pastor   Janitor  Joe  John                  Base Salary $28,825    $50,000    Optional           (Include            Federal W/H $8,800 SECA) $5,000  10.00%FICA &                Self            Medicare W/H -    Employed $3,825  7.65%                      State W/H $865 Optional $1,500  3.00%Housing                        Allowance $25,000    -                      Net Take Home $44,160    $39,675   
    18. 18. Taxability of Income Non Pastor Income Taxes FICABase Salary $50,000 $50,000Housing AllowanceExcess Life Insurance $25 $25Year end gifts $500 $500Excess Housing AllowanceTotal Income $50,525 $50,525
    19. 19. Taxability of Income Non Pastor (cont.) Income Taxes FICATotal Income $50,525 $50,525FICA Taxes @7.65%* $3,865Adjusted Gross Income $50,525Itemized Deductions & Exemptions $21,000Taxable Income $29,525Income Taxes $4,855Total Taxes $ $8,720* Except for 2011 which is 5.65% and 1st 2 months of 2012 unless extended by Congress.
    20. 20. John Jones W-2 36-1234567 50,525.00 5,000.00 Evangelical Covenant Church 50,525.00 3,100.00 1234 Main Street 50,525.00 725.00 * Anywhere, IL 60060 123-45-5678 John Jones c 25.00 28678 Main Street Libertyville, IL 60055IL 36-1234567 50,525.00 1,500.00 2011 *Assumes 7.65% rate (not in 2011)
    21. 21. Taxability of Income Pastor Income Taxes SECABase Salary $28,825 $28,825Housing Allowance 25,000Excess Life Insurance 25 25Year-end Gifts 500 500Misc. items from Church 150 150Honorariums 1,000 1,000Excess Housing Allowance 3,000Total Income $33,500 $55,500
    22. 22. Taxability of Income Pastor (cont.) Income Taxes SECATotal Income $33,500 $55,500Subject To SECA Tax @ 92.35% $51,254SECA Taxes @15.3%* $7,84250% SECA Taxes ($3,921)Adjusted Gross Income $29,579Itemized Deductions & Exemptions $21,000Subject to Income Tax $8,579Income Taxes @ 10% rate $858Total Taxes $ $8,800 * Except for 2011 which is 13.3% and 1st 2 months of 2012 unless extended by Congress.
    23. 23. Pastor Joe Smith W-2 36-1234567 28,825.00 8,800.00 Evangelical Covenant Church 1234 Main Street Anywhere, IL 60060 123-45-5678 Joe Smith c 25.00 678 Oak Street Libertyville, IL 60055 Housing Allowance 25,000.00IL 36-1234567 28,825.00 865.00 2011
    24. 24. Ministerial Wages-Miscellaneous Rules Income tax withholdings are voluntary, not mandatory. Ministers’ wages are NEVER subject to FICA. Ministers are considered self employed for Social Security tax - subject to SECA on Total Compensation (base plus housing). Reimbursement of SECA by church is taxable for both income tax and SECA.
    25. 25. Housing Allowances -Who Qualifies? Credential “hoop”  Must be licensed, commissioned, or ordained.  How does this work in the ECC? Performance “hoop”  Must perform qualified services.  Administration of sacraments.  Considered a religious leader by the church.  Conduct religious worship.  Management responsibility in the control, conduct, or maintenance of the church.
    26. 26. Housing Allowances -The Effect on Taxes Excluded from federal and (most) state income tax. Double dip - ministers can deduct interest & property taxes as itemized deductions in addition to reducing taxable income. Housing allowance is subject to Social Security.  SECA not FICA.
    27. 27. Housing Allowances -The Effect on Taxes (cont.) IRS does not require housing allowance to be listed on Form W-2; however, the church can include it in box 14.  Most churches exclude it completely from Form W-2 and issue a letter instead.
    28. 28. Housing Allowances -Miscellaneous Rules Designation must be prospective, by the church, and in writing.  It may be amended.  Who should determine the amount? Pastor. Income Tax compensation.  Total compensation less housing allowance. This will be called base salary.  The amount of base salary goes on line 1 of your W-2.  Other items that will be discussed later can be added to line 1 on your W-2.
    29. 29. Housing Allowances -Miscellaneous Rules Housing allowance is limited to the lesser of:  The amount prospectively designated,  the amount of actual expenses in the calendar year, or  the fair rental value of the residence, plus utilities & furnishings. Any excess of housing allowance over the limit must be reported as income on IRS form 1040.
    30. 30. Sample Letter Requesting Housing AllowanceTo: Elliott Johnson ECC Business OfficeFrom: ____________________________For the calendar year 2012, I request that myhousing allowance be $____________________.2011 amount: $_____________________Signed:______________________________________Date: ___________________
    31. 31. Reporting Of Excess Housing AllowanceMortgage Payments $ 14,000.00Real Estate Taxes $ 2,000.00Property Insurance $ 500.00Utilities $ 2,400.00Furnishings $ 1,500.00Home Repairs $ 1,600.00Total Housing Allowance Expenses $ 22,000.00Designated Housing Allowance $ 25,000.00Excess to be reported as income $ 3,000.00
    32. 32. Where to go for help… Church & Clergy Tax Guide by Richard Hammer, J.D. 1-704-821-3845 www.churchlawtoday for more useful information, including Church Law & Tax Report and Church Treasurer Alert!
    33. 33. Covenant Benefit Programs Covenant Pension Plan Bethany Benefit Service Retirement Planning
    34. 34. Covenant Pension Plan Mission statement: -to provide retirement benefits to Covenant pastors, missionaries and surviving spouses and -to make available medical, dental, prescription drug, life, vision and long-term disability benefits programs to Covenant pastors, missionaries, retirees, surviving spouses & office workers. Summary Plan Description.
    35. 35. What is the Covenant PensionPlan? It is a “defined benefit plan”.  The Pension Board (not the participant) assumes responsibility for achieving investment returns needed to pay retirement benefits.  Participants cannot “outlive” their benefits.  Professionally managed.
    36. 36. How are payments calculated? “Considered compensation”-the cumulative base salary & additional income from employer for all years of service. 12.5% of annual considered compensation. (*Where a parsonage is provided, base salary for purposes of calculation is increased by 33%).
    37. 37. Pre-retirement communication At age 59, you will receive a “heads up” letter from the Pension Department. At age 61, you will receive a letter detailing early retirement procedures. At age 64, you will receive a letter & forms to complete in anticipation of receiving benefits the month following 65th birthday.
    38. 38. Important pension terminology Vesting – 5 years (in the past, up to 25 years). Normal retirement age is 65. Pastors can continue to work & still collect pension benefits. NOTE: When you stop working, monthly payment is recalculated.
    39. 39. Early retirement age is 62. Howeverwith a decrease of 0.5% for eachmonth before age 65.Surviving spousal benefit isautomatically 65% of retiree benefit.Optional selection of 75% or 100%.Housing allowance for retiree onlycan offset some or all of retirementpayment.
    40. 40. Long-term disability – throughBethany Benefit Service.Minimum payment – for less than 25years of service (or surviving spouse)$989/$742 respectively.
    41. 41. Pension payment increases Since 1996, minimums raised from $480 to $989 (spouse: $320 to $742) Overall benefits raised 34% since 1996 Surviving spouse benefit raised from 50% to 65%.
    42. 42. The Plan’s ProfessionalManagement A “selection advisor” assists in performance evaluation; asset allocation; investment manager selection. An “actuary” annually determined the liability of the Plan; financial soundness. Outside auditing firm conducts thorough yearly audit.
    43. 43. Professional Management cont.Investment Managers: currently 27different professional investmentmanagers oversee investment of assets.Investment Committee (Pension Board& Covenant staff) – regularly review,analyze; meet 3 times yearly.
    44. 44. Bethany Benefit Service Governed by the ECC Board of Pension and Benefits. Covenant office staff manage the program, provide help with any complicated claim issues. Lower than “marketplace” rates. Coverage available for Covenant pastors, missionaries, surviving spouses & office workers.
    45. 45. Bethany Benefit Service Medical Dental (including Orthodontia) Prescription Drug Benefit Long-Term Disability Life Insurance Vision Long-Term Care Employee Assistance Program
    46. 46. Investment Considerations Asset Allocation
    47. 47. Investment Considerations Asset Allocation Timing
    48. 48. Investment Considerations Asset Allocation Timing Some Key Principles
    49. 49. Time is Money!Jane started saving at age 25 and put aside $25 weekly until age 65. 400000 350331John saved $25 a week too, 350000 but waited until age 35 to 300000 start. 250000 200000 153197Jane put aside only $13,000 150000 more than John, but at 100000 age 65 had accumulated 50000 $197,134 more than John! 0 Age 65 John Jane
    50. 50. Key Principles for Investors Save regularly (wherever possible). Start at an early age and even if you are not young, start now (if you can). The power of compound investment returns over many years is very substantial. Invest on a tax-advantaged basis where it is consistent with your personal financial objectives. Examples are a 403(B), Roth IRA, etc.
    51. 51. More Key Principles for Investors Develop an asset allocation strategy, consistent with your desired risk/return tradeoff, in order to achieve the benefits of diversification. If you are an inexperienced investor, consider the benefits of a fund such as Vanguard Star Fund, which is a fund of funds—investing in 6 domestic equity funds, 2 international equity funds, 2 bond funds and one short-term fund. In this way, the purchase of one fund provides built-in diversification and asset allocation. Other fund complexes offer similar vehicles. Successful investing requires doing well in good markets and not losing too much in adverse markets.
    52. 52. Investment Considerations Asset Allocation Timing Some Key Principles Possible Investment Vehicles
    53. 53. Possible Investment Vehicles 403(B) – Regular and Roth Traditional IRA Roth IRA Non-tax advantaged
    54. 54. Comparison of Popular Investments Payroll Pre-tax Earnings Required Taxability of Deduction Contribution Grow Tax Distributions Distributions Deferred403(B) Yes Yes Yes Yes OrdinaryTraditional IRA No Yes Yes Yes OrdinaryRoth IRA No No Yes No NoneRoth 403 (B) No No Yes No NoneNon-tax No No No No Ordinary/advantaged Capital Gains
    55. 55. Retirement Considerations Life Expectancy defined as “that age at which there is a 50% chance you will still be alive.” In 1900 = 47.3 yrs. Today = 78.1 yrs.The U.S. Census Bureau predicts that 35 years from now there will be more than 800,000 over age 100. Some may spend up to 1/3 of life in retirement.
    56. 56. Inflation & Retirement Inflation is defined as “rate of change in the prices of goods and services people purchase.” Average = 3% yearly. Medical care/prescription drugs much higher than general inflation rate. Can be financially catastrophic for those on fixed income.
    57. 57. Retirement: the 3-legged stool Three major sources of retirement income:  The employer  The government  The individual
    58. 58. Employer: Retirement pension Survivor’s pension Death benefits Disability benefitsNOTE: All of the above available to Covenant pastors &missionaries through Covenant Pension Plan or Bethany BenefitService. Bethany also offers a Medicare Supplement Policy.
    59. 59. Government:  Social Security  Medicare/MedicaidSocial security: •Early Retirement (currently 62)-significant decrease: 25% or more •Full Retirement-FRA (currently 66)-no earnings limitation •Delayed Retirement (up to age 70)-increases your benefit by 8% per year over the amount at your FRA.
    60. 60. Individual Savings/investments Defined contributions (403b) Traditional or Roth Individual Retirement Accounts (IRA) Spouse assets/benefit programs Medicare Supplement Life Insurance/Annuities Working into retirement
    61. 61. Balancing the 3-legged stool Balance in each of the above 3 areas of retirement planning. Lack of support from any of the three creates instability. The Covenant benefit programs are stable & strong.
    62. 62. Examples of Different Retirement Savings Methods Roth  Roth  Activity 403(b) 403(B) IRA IRA TaxableOut of Pocket Cash $2,850 $5,000 $5,000 $3,600 $5,000Tax Savings $2,150  $1,400Annual Contributions $5,000 $5,000 $5,000 $5,000 $5,000Tax Savings  43% 28%2012 Contribution  Limits $17,000 $17,000 $5,000 $5,000 NoneOver Age 50  additional  amounts $5,500 $5,500 $1,000 $1,000
    63. 63. Suggested Investment Reading ListNewspapers  USA Today – money section www.usatoday.com/money/index  Wall Street Journal – www.SmartmoneycomMagazines  Money – Subscription: 800-633-9970 http://money.cnn.com/magazines/moneymagWeb Sites (large mutual fund organizations)  Vanguard.com: Lowest expense fund provider, emphasis on index and managed funds.  Fidelity.com: Largest provider of mutual Funds.Many other major mutual fund companies also havegood web sites.
    64. 64. Spread the word….. Credit for church health insurance  premiums. Your church can qualify for an IRS refund check  up to $3,000 per covered employee.  For  information, stop at the Bethany Benefit Service  booth today or contact Elliott Johnson  773-907-3362 elliott.johnson@covchurch.org 
    65. 65. Thank you!Please don’t hesitate to contact me if you have any questions.elliott.johnson@covchurch.org773-907-3362

    ×