By Dr. James M. Dahle, WCI Founder
I've thought about writing about tithing for many years, but figured it was way too niche and wouldn't be of much interest to the majority of our readership. However, I keep getting asked privately how much to tithe, so I'm writing this post so I can simply link to it in the future when I receive that question. Like anything on this blog, take what you find useful and leave the rest. If you are not religious or not Christian, you may find the subject of tithing and how much you should do it fascinating. You may find it boring or even silly. If so, feel free to browse on over to another post. Try to resist making snide remarks in the comment section.
Jewish people have something similar to tithing called Tzedakah, but this is more of an optional charitable donation rather than any sort of a strict tithing code that requires the calculation of a percentage of income. Or perhaps you are Christian but view tithing simply as any money donated to your church or, perhaps, just to charity in general. Still, others view it as an Old Testament law that was superseded by a higher law after the coming of Jesus Christ. Again, these folks will not find the majority of this post useful. In fact, they'll likely find it pharisaical and legalistic.
This post isn't for them. It is written for those belonging to denominations that have a relatively strict definition of tithing. Muslims may find some of this useful, as one of the five pillars of Islam is Zakat, which is giving 2.5% to charity. However, Zakat is 2.5% of wealth above a minimum (but a controversial amount) known as Nisab. It is not given to a mosque but directly to the poor or indirectly to the poor through a Zakat collector.
Read on to learn more about tithing and what approach you could take.
What Is Tithing?
Tithing is defined simply as “one-tenth,” and the idea behind it is that faithful Christians pay 1/10th of their income to God via His church. Simple enough, right? Five-year-olds in Sunday School can quickly grasp the concept that if they are given 10 pennies, they should give one back to God since He provided all 10 of them. Perhaps the most famous verses of scripture about tithing are found in the Book of Malachi in the Old Testament:
“Will a man rob God? Yet ye have robbed me. But ye say, Wherein have we robbed thee? In tithes and offerings. Ye are cursed with a curse: for ye have robbed me, even this whole nation. Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the Lord of hosts, if I will not open you the windows of heaven and pour you out a blessing, that there shall not be room enough to receive it. And I will rebuke the devourer for your sakes, and he shall not destroy the fruits of your ground; neither shall your vine cast her fruit before the time in the field, saith the Lord of hosts.”
While tithing is used for the work of the church, the reason it is paid is not necessarily to further the work of the church. It's simply because a believer is commanded to do so. Not only will the believer be blessed for doing so, but the tithe-payer will better remember the role of money in their life, keep it in its proper place, and develop a stewardship mentality.
However, once you start spending a lot of time thinking about tithing and/or trying to calculate out 10% of your income, you quickly realize this is not nearly as simple as it seemed back in Sunday School. Which brings us to the first and most important principle about calculating your “tithing bill.”
How Much You Should Tithe? It Should Be Between You and God.
That's right. If you're unsure what to do, pray about it, decide between you and God what is reasonable, and pay that. I'm serious. This is the most important principle. Reasonable people can disagree on every other recommendation in this post. If you do disagree, come back to this one and do whatever you think and feel is best. Now, let's go down the rabbit hole. With each topic, I'll explain the dilemma and provide my recommendation.
Tithe on Gross or Net? How to Calculate Tithe.
Perhaps the most common discussion about tithing—and about as deep as any Sunday School discussion ever goes—is whether you should pay tithe before or after taxes. Your gross income or your net income? It's a serious question, so we can simply dismiss simplistic sayings such as, “Do you want gross blessings or net blessings?” If your effective tax rate is 33%, 10% of your gross income is 15% of your net income. That's a substantial difference.
We can start with the position that one should pay on gross income. The argument is that you receive something in exchange for the taxes you pay. You get a military and cops and roads and schools. However, a reasonable counterargument is that a higher earner should only pay on some portion of that, since we all use the military and cops and roads pretty equally. Perhaps that high earner should only pay tithing on part of those taxes paid. For example, the average American tax bill is about $15,000, and the median tax bill is significantly lower. Maybe one should only pay tithing on the first $15,000 of taxes paid each year. However, does that mean a low earner needs to pay extra tithing for their share of the average tax bill? That seems kind of tough.
Or imagine you live in a country with much higher effective tax rates. Maybe it's fine to pay on gross in the US, where the effective tax rate averages about 22%. But what about in Sweden, where it averages 57%? Now 10% of gross equals 23% of net.
By the way, if you pay on net, remember to pay on your tax refund!
Personally, my take is that it's best to pay on gross income, but I admit I don't feel particularly strongly about it. You want to pay on net? Knock yourself out.
There is more to taxes than just your income taxes. What about those payroll taxes like Social Security and Medicare? I think it's fine to go either way on these; you just need to stay consistent. If you want to pay tithing on taxes paid, then I wouldn't pay tithing on benefits received down the road from Social Security or Medicare. If you decide to exclude Social Security and Medicare taxes from your income before you calculate your tithing bill, you should probably count any benefits received as income.
Note that the self-employed seemingly pay more in Social Security and Medicare taxes, since they pay both the employee and employer half of those taxes. Is an employee who doesn't add back in the employer half of those taxes to his or her income “cheating” on their tithing? I don't know, but again, I think it's best to remain consistent. If you didn't pay tithing on the employer half when you were an employee, then feel free not to pay it on the employer half once you are self-employed. Take a “tithing deduction” for that portion of your tax bill.
Personally, I find it easiest to pay on the amount paid in payroll taxes but plan not to pay later on benefits received. Those would be relatively easy to calculate for Social Security but very difficult to calculate for Medicare. I don't pay on the employer half of these taxes.
Payroll taxes aren't the only thing your employer is covering for you. For many employees, the employer also purchases insurance such as health, life, and disability insurance. Perhaps part of the premium is paid by the employee, deducted each month from their paychecks. Should they be paying tithing on the portion paid by the employer? If not, what about those who purchase health insurance on the open market or pay for it as an employer? Again, I recommend consistency. Most people start out life as an employee and don't pay tithing on any benefit paid for by the employer. Do the same thing once you are the employer. That means healthcare is generally paid for both pre-tax and pre-tithing. I can live with that. Likewise, if you aren't paying tithing on the premiums your employer pays for your life and disability, I would plan on paying tithing on those benefits should you ever receive them.
Life and Disability Insurance
Term life and individual disability insurance are generally paid for with post-tax dollars, and any benefits paid are also post-tax. I think that's a good rule to apply to your tithing too. Pay on the premiums but not on any disability benefits received. The term life decision will be on your heirs, of course. See the discussion about inheritances below.
Next, we come to the subject of retirement accounts. If you put post-tithing money into retirement accounts and then try to pay tithing on any increase you get in those accounts, you will quickly find the tithing bill either eats up a huge chunk of your earned income as the accounts become larger and larger or it requires you to make periodic withdrawals from those accounts paying taxes at a high rate in addition to early withdrawal penalties. I think there are two reasonable approaches to this dilemma, and neither requires tithing calculations or payments on earnings in the account as it grows. Either pay tithing on the money when you put it in the account and then never again (kind of like a Roth IRA), or take a “tithing deduction” for money put into the account and simply pay tithing on the withdrawals from the account (like a tax-deferred 401(k)). I think the latter is the simpler and fairer way to do it, so that's what I do.
Health Savings Accounts
Health Savings Accounts (HSAs) can be treated similarly. There is an additional dilemma, though, since HSA withdrawals can only be taken without penalty if the money is spent on approved healthcare expenses. You cannot take out an extra 10% for tithing and expect the IRS to not require a penalty. However, since these withdrawals are likely a relatively small portion of your living expenses, I think it is much easier to pay tithing on them from another source of funds. Again, for me, money goes in pre-tithing and is tithed when it comes out.
529s and ESAs
A similar dilemma is faced with 529s and other educational accounts. One cannot take an extra 10% out for tithing without paying a penalty. However, I hope most can simply cover that additional 10% from their other sources of income. Alternatively, you can say the 529 is the kid's income, and they should pay the tithing on it. However, I think that's a much heavier lift for a college student to come up with $4,000 in tithing after making a $40,000 529 withdrawal for college tuition, room, and board. I think it's best to put in pre-tithed dollars and have the parents pay tithing on withdrawn money using other income.
The Taxable Account
The taxable account becomes more interesting still. In this case, I think it is easiest to pay tithing on the money before it goes in, just like you pay taxes. Now your basis is post-tithing money and you can calculate your tithing bill along with your tax bill. If the investments produce dividends, interest, rent, or capital gains distributions, then you pay tithing on them as you pay taxes on them. That still leaves some dilemmas, however.
For example, is depreciation real or not? Should you get a tithing deduction on depreciation? Should you then pay tithing on depreciation recapture? Or should you ignore both when calculating your tithing (which is what I do)?
How about capital losses? Should you get a tithing deduction for those? If you are going to pay on capital gains, then I think it is only reasonable that you take a tithing deduction for capital losses.
Speaking of capital gains, just because the IRS makes you pay taxes on capital gains attributable solely to inflation doesn't mean that God does. Maybe you should subtract out the portion of the gain attributable to inflation before calculating your tithing. If you want to do that, then you'll need a fair measurement of inflation. Lots of people feel the federal government's Consumer Price Index (CPI) understates inflation. What measurement will you use? Personally, I do make that adjustment and simply use the CPI-U measurement of inflation over the time I owned the investment.
Donor Advised Funds, Charitable Trusts, and Private Foundations
What if you donate appreciated shares to a Donor Advised Fund (DAF), charitable trust, or private foundation? Should you pay tithing on the increase in value of the shares even though you didn't have to pay taxes on it? I think you should.
What about any increase in value that occurs within the DAF, trust, or foundation? Is it still your money, or have you given it away? Does that change if you want to pay your tithing with a donation from the DAF or foundation? In my opinion, you've given it away so you should no longer pay tithing on any gains or take any tithing deductions on any losses. If that's the case, it probably also means you can't get out of your tithing obligation the rest of your life simply by donating from the foundation you control. However, if your DAF is simply your conduit to pay the tithing, I think that's fine.
Trusts, Corporations, and LLCs
A revocable trust is basically still your money. You should probably still pay tithing on any income you get from there. However, with an irrevocable trust, the money is no longer yours. I would argue you are no longer responsible for paying tithing on it. I would argue tithing is a personal commandment and doesn't apply to entities like corporations or trusts. When you take a salary or distribution from a corporation or other business, then you should pay tithing on it. But if you're reinvesting in the business, I would argue that money should not be tithed, even if it is a pass-thru business (sole proprietorship, partnerships, S Corp) requiring you to pay tax on that reinvestment. You can pay tithing on it all when the business is sold. The recipient of the irrevocable trust should be responsible for paying tithing on those funds.
However, it gets even more complicated when YOU or YOUR SPOUSE is the beneficiary of the irrevocable trust. The first happens with a Domestic Asset Protection Trust (DAPT), and the second with a Spousal Limited Access Trust (SLAT).
If you put a valuable family business into the trust, do you get a “tithing credit” for its value? Do you take the “real value” or the appraisal done to show the IRS the business is not that valuable? If the trust is a grantor trust (meaning you are paying the taxes due on any assets in the trust), what do you pay tithing on? Do you pay tithing on all of the income in the trust? What about capital gains in the trust? What if that is more money than you even have outside the trust? How about if the trust bought your assets with a promissory note? Do you pay tithing on the income in the trust, the interest on the promissory note, or both? What if the promissory note is owned by another trust? Does it matter how much of the trust money you expect to use yourself, how much you expect your spouse to use, how much to go to heirs, and how much that goes to charity? I'll be honest, I'm still wrestling with this one.
What should you do with inherited money or assets? What if you would have to sell the family farm just to pay tithing on it? Does it make a difference if the person who gave it to you has already paid tithing on it? Do you get a step-up in tithing basis at death? All great questions; no definitive answers. It's certainly easiest to assume a step-up in basis at death. If you decide that you should pay tithing on it (and I'm not sure I've even decided what I would do in this situation), then I think it's also reasonable to wait until the assets are sold before paying tithing on them.
What about gifts? Do you pay tithing on the birthday money you received as a kid? Does it make a difference if the gift is cash or a present? Does it matter if the person who gave it to you is a tithe-payer or not? Birthday money isn't much of a tithing bill, but what if your parents are gifting you $32,000 a year? Does that change things? How is that different from an inheritance? Personally, I ignore gifts for tithing purposes as long as the gifts are small. If they're large, I would treat them the same as you plan to treat any inheritance received.
Now, how about if you are the one on the giving end? Does it matter if the recipient is a tithe-payer or not? If you're putting money into a UTMA account for your kids each year, should you take a tithing deduction for that money? Personally, I think you should, but again, I think it's important for you to be consistent in your life. If you plan to pay on your own inheritance, then I think it's reasonable to take a deduction on your gifts and vice versa.
What if you are paid in stock options or directly in equity? Does it matter if they're incentive stock options or non-qualified stock options? What about profit interests? Should you pay when you receive them or exercise them? Personally, I think it's reasonable to not pay until you have cash in hand, just like you wouldn't pay until you sell a stock.
Do you get to take a tithing deduction (or even a credit) for money donated to charities other than the church? I would argue no; that those donations are on you.
Tithing Is Between You and God
I think you can now appreciate the wisdom of the first principle I put forward above—that how much you pay in tithing is between you and God. There is no “tithing code.” If there were, it would likely be just as long and complicated as the Internal Revenue Code! Your ecclesiastic leader may not even ask you if you are a “full-tithe payer.” If you feel right about what you've paid, then feel right about what you've paid.
How Often Should You Pay Tithe
I think most people grow up assuming they should pay tithing every time they are paid. That might mean 12-24 payments a year. But what if you have multiple streams of income? Are you really going to pay every couple of days? Seems really time-consuming. Certainly, people who struggle with budgeting should pay more frequently so they aren't tempted to spend their tithing money, but I don't believe God blesses you any more for paying 12 times a year than for paying once a year. You could pay at the beginning of the year or you could pay at the end of the year or you could pay once a quarter. All are fine. Personally, we've paid less and less frequently as time goes on. I think if you're paying less frequently than once a year, you probably need to reexamine this. But in my opinion anything up until that is probably fine.
I suppose someone could even make a reasonable argument that they're just going to leave their entire estate to the church and pay their tithing as their final bill. The heirs might not be too happy, and it might be that you end up paying just 5% or “overpaying” by paying 20%, 30%, or more of your lifetime income. I guess I wouldn't recommend that approach. It's supposed to be 10%; otherwise, it's just a crapshoot. It also seems to go against the spirit of the law if you're only paying using money you didn't need or want to spend as you went through life. In reality, you're paying it using your heirs' money.
How to Pay Tithing
Finally, we're left with the dilemma of how to actually pay tithing. Well, if you're going to pay it, you might as well maximize any tax benefit you may get from it. Tithing is generally tax-deductible for anyone who itemizes, as most churches are registered with the IRS as 501(c)(3) non-profits. If, like most people, you take the standard deduction, maybe don't worry too much about this. But some people who would take the standard deduction if they were to pay their tithing once a year might consider “bunching” their tithing. That is, paying double tithing every other year. You can pay for the previous year on January 1, then pay on December 31 for this year. You would itemize every other year. I doubt God cares that you paid one day late, but doing so may allow for a significantly lower overall tax bill.
The best way for retirees over 70 to donate to charity is to use Qualified Charitable Distributions (QCDs). This money comes directly out of your IRA or 401(k) to charity without being taxed by either. If you are 72+, the amount of the QCD is subtracted from your annual Required Minimum Distribution (RMD). This allows these retirees to still take the standardized deduction and avoid paying taxes on the money used to pay tithing.
If you're not yet retired, my favorite way to pay tithing is to transfer appreciated shares to the charity. If you itemize and have owned the shares for at least one year, you get to take a charitable deduction for the full value of the shares on the day of the donation. However, neither you nor the charity has to pay capital gains taxes on those appreciated shares. Combining these donations with tax-loss harvesting is a very powerful tax-saving technique that can allow you to basically never pay capital gains taxes.
Many churches, however, struggle with the receipt of appreciated shares. Not only can it be a hassle for you and them, but it also lets your fellow church members know about your financial status. If you prefer a bit more anonymity and less hassle, consider using a Donor Advised Fund. You can simply donate the appreciated shares to the DAF where they are sold for cash, and the charity receives a check. It's up to you whether you tell the charity if the money is from you.
How to Donate Appreciated Shares to The Church of Jesus Christ of Latter-day Saints Without a DAF
I had a reader recently send me this step-by-step guide:
- Log in to Vanguard
- Search for the form “Give Shares or Securities to an Individual or Organization,” and open it
- Select “Complete online”
- Check box for “I Accept” and select “Continue”
- Check “Yes” when asked if you want to continue and click “Next”
- Select “Existing Vanguard nonretirement account”
- Click “This link” to continue with request
- Check “Yes” when asked if you want to continue and click “Next”
- Choose your account from the dropdown menu when asked to “Choose a nonretirement account to gift from;” then select “Next”
- If the information looks correct, select “Yes” and click “Next”
- Select which assets you wish to donate
- Are you gifting to a charity, click “Yes”
- Is your gift valued at over 1 million, click “No” (Not sure what happens if you click “Yes”)
- Name of individual trust or organization: Corporation of the President of the Church of Jesus Christ of Latter-day Saints
- Account number: 09889660840
- Review and submit
At this point, it will fill out a DocuSign document that you will need to e-sign, then you should be done. The Tax ID number is 23-7300405 if you need it.
I then send an email to [email protected] that reads something like this:
We made the following donations-in-kind through Vanguard:
8-20-2021 tax lot of VTSAX: 100 shares
10-18-2021 tax lot of VGSIX: 80 shares
We have instructed that the shares be transferred to the church's account 09889660840. We would like it apportioned $1,200 to fast offering and the rest to tithing. Please send us a tax receipt, and inform us if anything else is required.
Tithing and Financial Planning
Want to go down the rabbit hole even more? Consider the effects of tithing on your financial decisions.
First, you'll have to make decisions about all of the factors above. Then, once you have done that, you may find that it changes how you live your financial life. Retirement accounts, HSAs, 529s, and UTMAs become even more attractive since you can fund them with pre-tithing dollars. Churning your taxable account becomes even more costly. If your heirs will take a step-up in basis on tithing, then there is even more incentive not to sell an asset prior to death. If you don't pay tithing on your health insurance, you're incentivized to have a more robust health insurance plan. It's like you're dealing with a 10% higher marginal tax rate, and that naturally affects everything. Maybe you work less or retire earlier than you otherwise would. Maybe you leave more money to heirs that don't pay tithing than those who do. Lots of complexities here.
If you belong to a denomination that follows a strict tithing code, I hope this post has been helpful to you. If you don't, I hope this has been at least somewhat enlightening as to the financial lives of a significant portion of the population around you.
What do you think? What tithing dilemmas did I miss? What have you decided to do about the dilemmas discussed in this post? Comment below!