Taxes in Retirement: Maximizing Income and Keeping Taxes Low

1. Taxes in Retirement Pam Hicks, VP of Finance & Administration

2. Tax Considerations How to maximize income and keep taxes low How the housing exclusion from IRC Section 107 affects retired clergy Covering your taxes — estimated tax payments versus withholding How large withdrawals affect tax liability — should you pay off home or debts? Moving expenses

3. Maximize Income & Keep Taxes Low • Meet with a tax advisor and financial professional — laws and circumstances change • Know sources of income and needs over next few years — age starting Social Security • Know your deductions — review exemptions and itemized deductions under tax law • Social Security could be taxable — 50 percent to 85 percent over a threshold • Some income or deductions may have limitations or requirements

4. Meet With Tax Advisor or Financial Planner Example: selling a home purchased while under appointment • Allowable exclusions: up to $250,000 (individuals) or $500,000 (married, filing jointly) of gain for sale or exchange of principal residence • Must have owned/used home as principal residence for at least two (730 days) of five years ending on sale/exchange date (does not have to be continuous) • If requirement not met: allowed to exclude a fraction of $250,000 or $500,000, equal to percentage of ownership and use requirement met • Exclusion may not be claimed for more than one sale or exchange during any two-year period

5. Meet With Tax Advisor or Financial Planner • Requirements may have changed under tax laws • See IRS publication 523 (www.irs.gov/pub/irs-pdf/p523.pdf) • Space once used for business or rental purposes may be considered residence at time of sale if the following apply: • The space was not used for business or rental when sold • No business or rental income from the space was earned in the year the property was sold • The space was used as residence for two of five years leading up to the sale • If the space was considered residence when sold, former business usage does not affect gain/loss calculations

6. Sources of Income/Cash – Social Security You can retire between 62 and full retirement age Starting benefits early reduces benefit a fraction of a percent for each month before full retirement age Visit www.ssa.gov/planners/retire/agereduction.html to determine benefit if retiring early • Select birth year • If birthday is Jan. 1, benefit will be determined as if birthday was in previous year

7. Social Security — Retirement at Age 62 The chart lists reduction amounts and examples based on an estimated monthly benefit of $1,000 at full retirement age (ssa.gov)

8. Medicare Cost — 2019 Monthly Premium Standard Part B premium: $135.50 or higher depending on income (some with Social Security benefits pay less) Pay the standard premium amount (or higher) if you: • Enroll in Part B for the first time in 2019 • Don’t get Social Security benefits • Are directly billed for Part B premiums (not deducted from Social Security benefits) • Have Medicare/Medicaid and Medicaid pays your premiums (state pays $135.50) • Reported a modified adjusted gross income on tax return from two years previous that is above a certain amount — you pay standard premium amount and added Income Related Monthly Adjustment Amount (IRMAA) chargehttps://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance

9. Itemized Deductions & Personal Exemptions Tax Cuts and Jobs Act repealed personal exemptions and increased standard dedutions (see summary at www.guidestone.org)

10. Standard Deduction 2019 to 2018

11. Itemized Deductions & Personal Exemptions New tax law modified tax tables — broadened-lowered tax rate • Individual tax brackets for 2019 (expire in 2025): 10%, 12%, 22%, 24%, 32%, 35% and 37% • Individual tax brackets in 2017: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%

12. Itemized Deductions & Personal Exemptions • Law repealed or modified itemized deductions — examples: • Charitable contribution available, but altered: • Increased standard deduction — may exceed itemized deductions • Increased annual limitation (percentage of AGI) to 60 percent • Itemized deductions for planned gifts (donor-advised funds, IRA rollovers, sale of appreciated stock) could exceed standard deduction • Repealed miscellaneous deductions subject to 2 percent AGI floor • Home mortgage interest — modified-separating acquisition indebtedness from home equity indebtedness (set limits) • Repealed casualty and theft deductions except under presidential emergency declaration • Reinstated 7.5 percent AGI floor for medical expenses (2017 and 2018)

13. Itemized Deductions & Personal Exemptions Other considerations under tax law: Consolidates and repeals several education-related deductions and credits Modifies alternative minimum tax (AMT) so it applies to fewer taxpayers Modifies the estate- and generation-skipping transfer taxes

14. Taxable Social Security – Quick Method • Social Security could be taxable • If Social Security-only income — probably not taxable • Form 1040 and 1040A have worksheet to determine taxable amount — up to 85 percent maybe taxable www.fool.com/retirement/2016/06/06/social-security-tax-calculator-are-your-retirement.aspx • Quick computation: • Add half of Social Security benefits to all income, including tax-exempt interest and exclusions from income • Compare to base amount ($32,000 for married jointly; $25,000 for single, head of household, qualifying widow/widower with dependent child; $0 for married filing separately, living together) • If total is more than base amount, some benefits may be taxable

15. Taxable Social Security — Example John and Jane Mapes have AGI of $24,000 for 2019. John, who is retired, receives Social Security benefits of $7,200 per year. The couple also receives $6,000 a year from a mutual fund invested in tax-exempt municipal bonds. On their 2019 joint return, the couple would make the following computation: Adjusted gross income $ 24,000 Plus: all tax-exempt interest $ 6,000 Modified adjusted gross income $ 30,000 Plus: one-half of Social Security benefits $ 3,600 Provisional income $ 33,600 Less: base amount $ 32,000 Excess above base amount $ 1,600 One-half of excess about base amount $ 800 One-half of Social Security benefits $ 3,600 Amount includible in gross income (lesser of 8 or 9) $ 800

16. Taxable Social Security Benefits Up to 85 percent of Social Security benefits can be taxable • Single adults with a combined income of: • $25,000-$34,000 — up to 50 percent of benefits taxable • Greater than $34,000 — up to 85 percent of benefits taxable • Less than $25,000 — no Social Security benefits subject to tax • Married, filing jointly, with a combined income of: • $32,000-$44,000 — 50 percent taxable range • Greater than $44,000 — up to 85 percent of benefits taxable • Married, filing separately, up to 85 percent taxable, regardless of income • “Up to” — determining taxable benefits is not a simple multiplication: • Use a Social Security tax calculator • See page 7 and 8 of IRS Publication 915 for an example

17. Social Security – Up to 85 Percent Assume the same facts as in previous example, except the Mapes’ provisional income has increased from $33,600 to $53,600: Provisional income $ 53,600 Adjusted base income $ 44,000 Excess of 1 over 2 $ 9,600 85% of amount in 3 $ 8,160 Amount of otherwise includible: lesser of (a) ½ of benefits received $3,600 or (b) ½ of the excess of Provisional income minus base amount ($10,800) $ 3,600 One-half of adjusted base amount minus base amount (For joint filers) $ 6,000 Lesser of 5 or 6 $ 3,600 Sum of amounts in 4 and 7 $ 11,760 85% of Social Security benefits $ 6,120 Amount includible in gross income (lesser of 8 or 9) $ 6,120

18. Housing Exclusion & Retired Clergy Eligible for housing allowance exclusion if: Portion of pension income is designated housing allowance by church or denomination’s pension fund board Clergyperson has no relationship with the local church and relies on fund for pension • Pension compensates clergy for past services to local churches or denomination

19. Housing Exclusion & Retired Clergy • In most cases, will be eligible to have some or all benefits designated in advance as housing allowance (see Conference Resolution and Calculations of Housing Forms, www.flumc.com/housing_qa.pdf) • Conference annually considers housing allowance resolution stating Wespath pension payments qualify as housing allowance • Exclusion rules — the lesser of: • Amount designated as the housing allowance • Amount of actual housing expenses • Fair rental value of the property (furnished, plus utilities)

20. Housing Exclusion & Retired Clergy Example: aminister receives a 1099R from Wespath with $15,000 in box 1, $13,000 actual expense, $14,400 fair rental value

21. Housing Exclusion & Retired Clergy Example: calculation indicates lesser of housing allowance, actual expenses or fair rental value is $13,000

22. Housing Exclusion & Retired Clergy Example of 1040 tax return, line 16a — $13,000 excluded

23. Fair rental value of housing is greater than amount spent than amount spent $ 14,000.00 Pension exclusiong under IRC 107 Total Pension Received $ 15,000.00 Housing Expenses 2019: Real Property Tax $ 1,000.00 Insurance Premium Pid $ 1,200.00 Utilities $ 2,000.00 Maintenance and Furnishings $ 3,000.00 Down Payment on house $ 4,000.00 Mtg Payment Principal and Interest $ 1,800.00 Total Expenses to Exclude $ 13,000.00 Net Taxable Pension $ 2,000.00 Payments deemed pursuant to IRC section 107, a minister of the gospel may exclude amounts deemed to be rental allowance Schedule attached for housing exclusion Housing Exclusion & Retired Clergy

24. Housing Exclusion & Retired Clergy May exclude the rental value of a home (plus utilities) furnished by church as part of pay for past services from gross income Surviving spouse cannot exclude housing allowance or rental value of home unless allowance or home is for ministerial services he or she performs or performed Lost during appeal to the Seventh District Court 3-0, Case of Annie Laurie Gaylor, Freedom from Religion Foundation et al v. Steve Munchin et. al., Western District of Wisconsin, declared the tax-free housing allowance for clergy under Code section 107(2) unconstitutional https://www.umnews.org/en/news/appeals-court-backs-tax-free-clergy-housing

25. Withholding Versus Estimated Taxes Withholding is treated as if deducted all year, even if changes made at year-end Social Security (W-4V), pension, 403(b), IRAs (W-4P) can have monies withheld Estimated tax payments are based on prior year income and tax with modification sometimes for income in future year — spread over four times a year (April 15, June 15, Sept. 15, Jan. 15)

26. Large Withdrawals From Pension Don’t forget taxes — consider withholding • Paying off home mortgage with retirement — consider tax effect (taxable income, possible reduction in housing allowance exclusion, itemized deduction) • Largest component of housing exclusion lost when mortgage paid off • Payments for home equity or conventional loan on debt-free home may be claimed as housing expense in computing housing exclusion if loan is for housing-related expenses • Remodeling house • Pay off debts • Large withdrawals often result in taxes — tax accountants recommend including calculation of tax in withdrawal as withholding with possible payment over time to keep some debt, reduce taxes • Moving expense deduction and exclusion of employer reimbursements for moving expenses repealed, except for military moved while on active duty

27. Financial Planning & Tax Resources Certified Financial Planners: www.CFP.net Florida Conference Office of Financial Services: www.flumc.org/parsonagesandhousingallowances Wespath: www.wespath.org/resources/clergy-taxes/ GCFA (www.gcfa.org): search Tax Packet • Information on housing allowances and other tax issues www.irs.gov • Publication 517 Social Security and Other Information for Members of Clergy and Religious Workers • Publication 523 Selling Your Home Guidestone: www.guidestone.org Your own tax advisor and financial planner