[Editor’s note: This is a guest post by James M. Dahle, MD. He blogs at The White Coat Investor, and also wrote “The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing.”
When it comes to tithing, my belief aligns with the 1970 First Presidency letter on the subject: “Every member of the Church is entitled to make his own decision as to what he thinks he owes the Lord and to make payment accordingly.”
Dahle’s post was a fun read for me because it’s coming from an analytical mind. I prefer a much more simple approach, but these are some interesting things to consider.]
I have been writing a blog where I help doctors and other high-income professionals stop doing dumb things with their money for the last six years. It is the most widely read physician-specific personal finance and investing website in the world.
Over that time period, many of my readers have figured out that I’m Mormon. As such, they ask me for my thoughts on tithing. I suspect I have spent more time thinking about tithing than anyone else on the planet.
The only discussions I ever see in both Sunday school classes or on the internet seem to center around the gross versus net question. However, tithing can be way more complicated than that. In fact, it can be so complicated, that every time I think about it I see the wisdom in the common recommendation that it’s between you and God.
That recommendation is where I will start and finish this discussion. In the middle, we’ll dive deep into the topic and discuss some questions you’ve probably had and probably a few you’ve never thought about.
The basics of tithing
A tithe is 10% of your income that you pay to the church. It pays for things like:
- Printed materials
- Church employee salaries
- Other expenses required to run a worldwide church
For the devout Mormon, a tithe is a commandment. If you don’t pay your tithing in full, you can’t go to our most sacred of buildings, the temple.
However, tithing comes with a promise. As God said through his prophet Malachi:
Bring ye all the tithes into the storehouse…and prove me now herewith…if I will not…pour you out a blessing, that there shall not be room enough to receive it….I will rebuke the devourer for your sakes, and he shall not destroy the fruits of your ground….and all nations shall call you blessed.
So, tithing is a commandment, and we can expect to be blessed for keeping it.The implication seems to be that the blessing is both temporal and spiritual.
Sunday school is full of stories of latter-day saints who paid their tithing despite financial challenges and then were rewarded financially for doing so. And if that isn’t enough of a blessing, it also serves as fire insurance in the second coming, as noted in Doctrine and Covenants 64:23.
Extra tithing = extra blessings?
If you’ve been in the church for a long time, what I’ve written above probably isn’t new to you. What I’ll cover from here probably is. Note that tithing has repeatedly been defined at 10%. Pay 9%, you aren’t obeying the commandment. Pay 11%, no extra blessings. It’s 10%. So for a Mormon, calculating 10% tends to become somewhat of an exact science. Most Mormons calculate their tithing to the dollar, if not the penny.
Here’s something you W-2 employees out there have probably never thought about. Your employer likely offers some benefits. Maybe a retirement match, a flexible savings account, life insurance, disability insurance, “free” meals, or health insurance. Your employer also pays half of the payroll tax (Social Security and Medicare) as well as unemployment tax.
Are those a business expense or are they part of your salary? If you bought those things on the open market, you would be doing so with post-tax (and presumably post-tithing) dollars. So why does the fact that your employer gives them to you change how much you pay in tithing?
In this respect, a self-employed Mormon is at a disadvantage. I doubt any employed person is adding the employer half of his Social Security taxes back to his gross income before calculating his tithing, much less the unknown employer portion of his family’s health insurance premium.
So perhaps the self-employed person should be subtracting those costs out of his gross income before calculating his tithing. I also haven’t paid tithing on free meals and similar benefits, mostly just because of the hassle factor of doing so.
If you are paying tithing on your Social Security and Medicare taxes, do you also plan to pay tithing on the benefits? I don’t. That’s not an increase; that’s just getting my money back. (Yes, I know the Social Security calculations are complex and you may be getting back more or less than you paid in, even when adjusting for the time value of money.)
Insurance premiums and benefits
Here’s another dilemma when you start spending too much time thinking about tithing. In general, when you pay the premiums on an insurance policy with pre-tax dollars, the benefits are taxable. If you pay with post-tax dollars, the benefits are tax-free. If we’re only paying tithing on increase, that’s probably the way it ought to work.
So do you deduct your insurance premiums from your income before calculating tithing and then pay on any benefits received, or do you pay with post-tithing dollars and accept the benefits tithing-free? I’ve chosen to do the latter, mostly just because the accounting is easier!
When I started earning money and using retirement accounts, I realized it would be crazy difficult to keep track of my tithing basis for contributions. So I decided to just plan to pay tithing when I take money out of retirement accounts like 401(k)s and Roth IRAs.
I look at it as deferred salary (even if it is a Roth account.) Contributions to those plans are basically tithing “deductions” on my tithing spreadsheet. I’ll pay on it when I take withdrawals from it.
Coverdell Education Savings Accounts and 529s
I took a similar approach to education savings accounts. However, they bring in an additional complication. You’re only allowed to take out, at least tax and penalty free, an amount from the 529 or Coverdell as what was spent on legitimate educational expenses. There’s no allowance for an extra 10%.
I have not yet figured out how to deal with that other than the fact that I don’t plan to pay for every single dime of my children’s education using 529 money. So I should have the educational costs to pull a little more out of the account because the kid’s or my own earnings will be paying some of the cost. Or more likely, I can just make it up with other income.
Health savings accounts
These triple-tax-free accounts are pretty awesome. But they have the same issue as a 529: You can only make withdrawals tax and penalty free the same amount of money as you spend on health care. In other words, you can’t take out an extra 10% to pay tithing.
If it’s a small part of your income, no big deal. If you pull out $100,000 to pay for some crazy experimental medical treatment your insurance won’t cover, however, finding $10,000 to pay tithing with might be a little tougher.
Capital gains and losses
Part of the issue with capital gains is that, especially for something you’ve owned for a long time, a large part of those capital gains are just inflation. That’s not really an increase at all. So I actually adjust my capital gains for inflation before calculating my tithing. I also subtract my capital losses from my income before calculating my tithing.
Owned a house for 20 years and it doubled in value? If inflation went up 50% in that time period, perhaps you should only pay tax on 25% of the house value. What about significant home improvements? Should they be added to your tithing basis just like they would to your tax basis for a rental property? Maybe they should, although I can’t say I’ve ever done that.
Other random bits of increase
What about other stuff, like scholarships or grants? Or the fact that two-thirds of the cost of education at BYU is paid by tithing. Or that your degree at a state university is subsidized by your state? What about birthday gifts and Christmas presents? What if you don’t know what the present cost? What about credit card rewards points, free miles for signing up for a credit card, or a voucher given to you for missing your flight?
I don’t typically tithe on any of these things. It’s just too big of an accounting hassle. I think the Lord understands.
The best way to pay tithing
The best way to pay tithing is to donate appreciated shares from a taxable (non-qualified) account directly to the church. The “in-kind donations” office takes care of all that, and the church has an account at every major brokerage or mutual fund company that makes the share transfer easy.
The benefit of doing so is that you don’t have to pay capital gains taxes on those shares and neither does the church. But you still get to deduct the full value of the donation on Schedule A. Cool trick, eh? Of course, don’t forget to pay tithing on the inflation-adjusted increase in value of those shares!
How often to pay tithing
You visit with your bishop once a year for tithing settlement, so I see no reason to pay more than once a year. It makes for some really big tithing checks (unless I’ve donated shares that year) but it sure makes for easier bookkeeping.
Just don’t raid that tithing fund for some other expense during the year. You might need that fire insurance! Of course, be sure to pay tithing on the interest earned by that money during the year.
Marginal tax + tithing rate
Your marginal tax rate is useful for determining all kinds of things. For example, at very high marginal tax rates many of us decide to work less. It just isn’t worth it when 46% of everything you earn goes to the government. For a Mormon, some of those decisions should be made by adding your tithing rate to your tax rate. Now 56% of the next dollar you earn goes somewhere else.
Well, not entirely true, since you can probably deduct a good chunk of that tithing check against your taxes, so maybe it’s only 51%. But either way, Mormons, despite their Sunday school lessons on industry, service, and work, have more incentive than others to earn less.
Tithing can be complicated
Now you can see the wisdom in “it’s between you and God,” right? So as you come upon these decisions in your financial life, figure out what you would feel fine about if you were handing your check directly to God, and then don’t feel a bit bad declaring yourself a full tithe payer. Most of your ward probably hasn’t considered half of this stuff in calculating their tithing donation.
What do you think? How do you calculate your tithing? Do you agree or disagree with what I’ve written? Comment below!