The financial impact taxes have on mission expenses can be significant. As I shared in my previous post, the taxability of the costs fits nicely into three buckets. When considering how to fund your mission, there are three places you can pull the money from: Pre-Tax, After-tax, and Tax-Free. You can think of these three areas as watering pails you’ll use to fill those expenses. Which pails you use, how much, and how they all combine to fill the expenses make a difference in the overall taxes that will be paid. Proactive financial planning can enhance tax savings and extend the longevity of your assets. However, these are ideas that may not apply to everyone. It’s crucial to consult specialized experts about your unique situation before implementing any strategy.

With strategic planning, you can reduce your tax liability during your mission. Many individuals have pre-tax funds in IRAs and 401(k)s, tax-free money in Roth IRAs, and after-tax money that may have unrealized gains. Consider these strategies:

1. Donor Advised Fund: If you anticipate a higher income in the last few years of working due to buy-outs, stock options, or other windfalls, consider contributing to a Donor Advised Fund with the Deseret Trust Company. This allows you to claim a charitable donation in a higher-tax year and direct the funds to your mission later when your income is lower and you are on your way to serve. Making this contribution before you retire could save you up to $10k in taxes compared to paying those mission costs in lower-income years.
2. Use the medical deduction on expenses above 7.5% of Adjusted Gross Income (AGI): Your healthcare costs, from Medicare or the church’s international health insurance, can be a source of deductions if they exceed 7.5% of your AGI. When you are serving, you won’t be making earned income, and if it’s possible to reduce other sources of income(portfolio income, retirement account withdrawals), you can max out your deduction on healthcare costs.
3. Qualified Charitable Distributions: Upon reaching 70.5 years old, you can donate up to $100,000 directly to charity from your IRA. That move will reduce your Adjusted Gross Income and potentially lower your taxable income. Since your AGI will be lower, it may be easier to reach the 7.5% AGI floor required to deduct qualified medical expenses and health insurance premiums. To do this, you will have the distribution from your IRA paid out directly to the Church.
4. Use Appreciated Stock: Donating appreciated stock can exclude the gain from your taxable income. If you itemize, you can also claim a deduction for the donation’s fair market value up to certain limits. This is handled through the church’s donation in-kind office, and can be directed to your deductible mission expenses.
5. Using tax-free money: Roth IRAs can be used elegantly to reduce income. You can take it from the Roth IRA if you are near a tax bracket cut-off but still need income. This can also be useful if you are in a high bracket and need more assets to cover the tax-deductible part of your mission. That way, your income won’t increase, and if you itemize deductions, you can deduct those donations and reduce your taxable income. Note that for Roth distributions to be tax and penalty-free, the money needs to meet a couple of requirements.
6. Unenroll from Medicare Part B: If you are serving internationally and are on the church’s health insurance from DMBA, you can unenroll from Part B until you are back in the States. Once you return home, you can use a special enrollment period to start part B back up again. This will save you the premium you would have paid for part B when you wouldn’t be using it!

Expert Financial Guidance

Navigating these financial considerations can be complex. Seeking advice from professionals in finance and tax planning can ensure that your assets are managed effectively and following tax laws. This will undoubtedly be one of the most memorable times of your life; you shouldn’t have to pay so much in taxes to do it!

Let’s connect about how these strategies can work for you!

All the best (financial moves),

Alan B. Faerber CFP®, CRPC®