NOTE: Please see information below about new online calculators and W-4 Forms from the IRS. Also, join us at 2:00 pm ET on Thursday, March 8, 2018 for a one-hour live webinar on the Tax Reform legislation.
As we have discussed earlier, Congress ended 2017 by passing the largest tax bill in over 31 years. While some call this tax reform, most would say that it was just tax legislation in that the Tax Code remains as complicated as ever. On the positive side, the Benefits Board, with assistance from some of our Administrative Bishops and pastors across the country, was able to make substantial in-roads on protecting many of the tax provisions that dealt with our retirement plan and ministers in general.
Highlights of Tax Reform
While this is very complicated legislation and contains provisions that will not be fully understood for months and maybe years to come, below is a list of just a few of the highlights of the bill that impact ministers and churches:
- Outside of a few provisions, the bill only applies after January 1, 2018 (and therefore does not apply to tax returns that are filed in 2018)
- There are seven tax brackets, ranging from 10%-37% (formerly 10%-39.6%)
- Standard deduction (married filing jointly) increased from $12,700 to $24,000
- Personal exemptions ($4,050 per person) were eliminated
- Child tax credit was enhanced
- State and local tax deduction limited to $10,000
- Mortgage interest limited to houses valued below $750,000
- Home equity interest is no longer deductible unless used for acquisition indebtedness
- No miscellaneous itemized deductions allowed now which necessitates that ministers should have an accountable reimbursement plan to be able to take advantage of the tax savings
- Qualified moving expenses paid by an employer is now taxable income – and moving expenses paid by an individual are no longer deductible. Further, there is no exclusion for overseas transitions
- Section 529 plans can now include elementary and secondary education up to $10,000 per year.
Impact on Charitable Giving
There has been much discussion about the impact of the tax reform bill on charitable giving. Most of the discussion is speculation at this point. However, because the standard deduction has been increased so drastically, many former itemizers will no longer find it advantageous to itemize – and end-of-year giving will most likely drop off. Consider these statistics according to Charity Navigator:
- 31% of annual giving to churches and non-profits occurs in December.
- 12% of annual giving to churches and other non-profits occurs on the last three (3) days of the year
Some have emphasized that donors to churches give not to just get a tax break but out of a commitment to God and the church. While it is agreed that such is true during regular giving cycles, the end-of-the-year giving seems to be primarily dependent upon getting a charitable deduction.
Due to the potential drop off in giving at year-end because of the new tax bill, it is suggested that churches, state/regional offices, and other non-profits plan their annual budgets without the historical December “bump.” For many churches, giving in December increases some 50% over an average month. It would be wise not to plan for such an increase in coming years.
Since the individual tax rates changed effective January 1, 2018, all withholding amounts for employees should be reviewed immediately. The Internal Revenue Service has issued several tools to help in this process:
- Withholding Tables – on January 11, 2018, the IRS released Notice 1036 (https://www.irs.gov/pub/irs-pdf/n1036.pdf) that provides details on withholdings under the new tax tables.
- Online Calculator – on February 28, 2018, the IRS released an on-line calculator to allow employers and employees to check withholding rates to make sure such is correct. You can access the “withholding calculator” at https://www.irs.gov/individuals/irs-withholding-calculator.
- New W-4 – also on February 28, the IRS issued new W-4 withholding forms. Since the old W-4s were based upon personal exemptions that were eliminated by the new legislation, the new W-4s (found at https://www.irs.gov/pub/irs-pdf/fw4.pdf) should be used for all new employees and for change in status (marriage, new child, change in dependents, etc.) of current employees.
All church treasurers and pastors should pay close attention to the changes required by the new tax legislation. If not, such could result in either over-withholding or under-withholding of tax liability. Further, the Internal Revenue Service has given notice that they plan to make further changes involving withholdings over the coming months and even into 2019. Therefore, it is important that you stay aware of impending changes.