Tithing & Finances

Introduction

Today, tithing is typically straightforward for members of The Church of Latter-Day Saints. You put 10% of your income aside as a tithe for the Church. However, as you look at your income in greater detail, figuring out what ‘is’ income and calculating that 10% can become complicated.

My goal is to help you understand this complexity so that you can tithe in whichever way helps you best. In addition, you can review the following article to learn about giving tax strategies: Charitable Giving & Tax Strategies

W-2 Employees: Gross or Net

For many, they are a W-2 employee receiving pay by the hour or per a salary.

Some choose to pay based on Gross Income - the amount before taxes and deductions.

Others pay based on net income - what actually hits their bank account - after taxes, deductions, insurance premiums, etc.

10% Tithing on Gross Income

Gross income is fairly straightforward. You look at your paystub instead of your bank account to determine the 10%.

This creates consistency and simplicity until you hit retirement.

Upon retirement (with some exceptions), you then start taking out funds from retirement/savings accounts.

You likely have not yet paid tithing on the growth/increase of those funds, but did on the cost basis/principal (what you previously contributed as part of the deductions after your gross pay).

This leads to your first decision which is: 

• Do you consider withdrawals from these accounts to be part principal and part growth? 

  • Or do you prefer to first withdraw ‘growth?’

  • Or do you prefer to first withdraw ‘principal?’

Whichever your decision, you'll pay tithing based on growth, not the principal because you already paid tithing on that amount.

Start by determining your cost basis - unless you are still receiving income from employment AND contributing to your retirement/savings accounts, otherwise the cost basis should remain the same going forward.

For example, you have a $500,000 account, and $250,000 of that is your principal. You don't pay tithing on those withdrawals until the entire $250,000 has been withdrawn.

This tends to be the easiest way to manage tithing, though it might not be the most tax efficient.

Another way is to say the first portion of what you withdraw is principal and the rest is growth (which you would pay 10% tithing on).

Alternatively, you might consider all withdrawals as growth until you only have principal left in the balance of your account. You would then always be paying tithing until/if the balance becomes equal to your principal.

See the Bunching Your Charitable Contributions strategy below to evaluate how your withdrawal strategy affects your taxes.

Employer contributions can complicate this a bit more. Most likely, you technically did not pay tithing on the employer match in your retirement account. Therefore, you would keep track (can be seen on 401(k) statements) of the amount your employer contributed into your account. You would then pay tithing on 10% of that portion. The same choices apply: your withdrawals could be seen as employer match portions now or later.

• The same withdrawal concept applies to Social Security benefits and annuities.

Your social security statement shows how much you have paid in so you can determine your cost basis (what you already paid tithing on).

Sample:

In the above statement you would note that you have paid into Social Security $75,568. Once you have received a total of $75,568 in social security benefits, you then start paying 10% tithing on social security benefits.

This is one way to think about Social Security benefits and how/whether to pay tithing on your benefits. It’s an educational exercise, not a recommendation.

The most tax efficient way will vary based on your specific situation. For example, you may be showing a lot more income in the early years of retirement because of various plans: be it traveling, Roth conversions, or other reasons. Or you might be showing a lot more income later in retirement because of RMDs (required minimum distributions), health and long-term care expenses. 

The reality is that every situation is different AND you don't know what tax rates will be in the future, so it involves educated guesses.

10% Tithing on Net Income:

If you pay tithing based on your net income, which would mean after taxes, deductions, retirement contributions, etc. then it’s more complicated now, but could be simpler in retirement.

You pay the 10% based on what comes into your bank account (the net amount of the paycheck).

So if you are contributing to a 401(k) (whether it’s Roth or Not) then you have not yet paid tithing on those contributions. You also haven’t paid tithing based on Social Security, HSA contributions, and other employee deductions (vision, medical, dental, life & long-term disability insurance employee premiums, among others) .

If you get a tax refund, then technically that could be a portion of income that you haven’t paid tithing on.

If you use your HSA, then technically that is a portion of income that you haven’t paid tithing on…unless the contribution was made directly from your personal funds rather than a payroll deduction.

The same applies to your Roth & Traditional IRA contributions. If you made a contribution outside of payroll (i.e. directly through your bank account), then you have paid tithing on that contribution.

Now in retirement, you’ll pay tithing on everything you take out from your retirement accounts - unless of course you did contribute to those Traditional/Roth IRAs (typically from your bank account and not payroll). In that case you would want to figure out how much you contributed to your IRAs. 

Another complexity arises where you contributed to your Traditional IRA, which lowered your taxes, thus leading to a refund based on funds you already paid tithing on. In that case, you would not pay tithing on that tax refund.

• You would pay tithing on all Social Security benefits since you paid tithing on your net income (after Social Security & Medicare Taxes were taken out).

For Business Owners:

If it wasn’t already too complicated, this is where things can start to feel overwhelming, especially for business owners!

A mistake I see that business owners make sometimes is paying tithing based on gross revenue. You may ruin your business if you do that. Paying tithing based on gross revenue is not 10% of your increase.

First - you need to separate out what is the business and what is your personal income. Think of a car dealership that brings in $2,000,000 of revenue every year. If they paid tithing on that it would be $200,000! Car dealerships have high costs of goods so, yes, it looks great with $2MM of revenue, but with all the expenses the net profit could be $0 or a loss, or $150,000.

Let’s say you are the only owner and your net profit was $150,000. It likely doesn’t make sense to pay tithing based on the $150,000 net profit. That’s because some owners might leave the $50k in the business account to reinvest back into the business to continue growing the business.

Most business owners set up an entity for their business. Typically, it’s a pass-through entity meaning the net profit of that business is passed through to be taxed on your personal return. You are taxed whether you left money in the business account or transferred everything over to your personal account.

So how do you figure out how much to pay tithing on? How do you figure out what is 10% when there are so many different variables (revenue, expenses, tax deductions, AGI vs Total Income, owner distribution, and owner wages)?

The Answer: Bookkeeping

To determine 10% for charitable giving, many business owners track what they personally receive from the business—typically through a combination of wages and distributions. While net profit shows the business’s total taxable earnings, it doesn’t always reflect the owner's personal financial benefit. Good bookkeeping helps clarify what portion of business profit is truly available for giving.

Start with Net Profit

• This is the total taxable income generated by the business.

Determine Actual Personal Benefit:

Personal Increase = Wages + Distributions – Owner Contributions (Capital Infusions)

A simpler, less accurate way may be to just go off your tax return: Either your ‘Total Income’ or your Adjusted Gross Income. These are less accurate for business owners because you are being taxed on net profit which could include funds still in your business bank account that you are reinvesting back in the business (not taking in for personal gain).

Additional Important Notes:

Review your financial accounts to determine what you are paying tithing on now and what you will pay tithing on later.

• Interest earned from high yield saving accounts.

• Dividends (whether you received it or whether it was paid to you)

• Capital Gains (after subtracting out Capital Losses)

• Selling a business (determine what you put into the business and what was the growth of the business)

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Make Tithing Easier To Calculate:

Review the Following Taxable Accounts (brokerage investment, savings, checking, CDs, etc.)

• Monthly Interest Earned: $?

• Monthly Dividends Distributed/ReInvested: $?

• Capital Gains - Capital Losses = $?

You can review this monthly, quarterly, semi-annually, or annually.

You’ll then pay 10% tithing on the growth. The important thing is creating a consistent process to know how much to pay and when to pay it.

In Conclusion - paying tithing can become quite complicated when you dig into the details. It takes too much effort and time to track every portion of growth/earnings for an exact tithe. It also depends on your definition of growth/earnings. For example, what about the health insurance benefit your employer pays for you, the cell phone reimbursement, the gym membership, the HSA contribution, etc.? These typically are not counted as your Gross pay on your pay stub. Do they count as a part of your earnings?

It’s best to create a consistent way to pay tithing based on the growth/earnings you see in your financial life. If there were extra earnings here or there you forgot about or if you paid too much in tithing accidentally, then don’t worry too much about it.