Thursday, December 28, 2006

How to Pay Tithing: When you're making money with multiple streams of income

And this shall be the beginning of the tithing of my people.

And after that, those who have thus been tithed shall pay one-tenth of all their interest annually; and this shall be a standing law unto them forever, for my holy priesthood, saith the Lord.

Background

I grew up being taught to give 10% of everything I earned to the Church of Jesus Christ of Latter-day Saints as tithing.  If I got a job and was paid $10, I paid $1 to the bishop the next Sunday in tithing.  Pure and simple.
Then I grew up, made a bit more money, and tracked it using Intuit Quicken, then Microsoft Money.  Living alone and making more money than I spent, I felt comfortable paying tithing in lump sums a few times a year rather than every time I made money.  This worked well for me when I was single.  Being married, making more money and having more expenses brought me back to paying tithing almost after every paycheck. 
I am a full tithe payer, and have been for all my life. I feel that God has blessed me with good jobs and low expenses (fewer broken down things) because I live the law of tithing.

Problem

The problem is that I have found paying tithing to be necessarily much more complicated in recent years.  "No!" you say?  "It's just 10%.  It's only complicated if you make it so (perhaps to find loopholes)."  I beg to differ.  Allow me to explain.
Scenario P: the one you learned in primary
I used to calculate the tithing I needed to pay with this formula:
tithing = (sum of all income earned since I last paid tithing) * 0.10
That worked well when my only source of income came in the form of checks in the mail or direct deposit.  Adding up the sum of a direct increase like that is easy.  If you keep your money in an interest bearing bank account, then you include that as income.  Same for gifts we receive. 
But this simple scenario can get more complicated:
Scenario 1: deposits that "jump" above the tithing line
You receive a check in the mail, you deposit it to your bank account.  A day or two later, before the check clears the bank and is posted to your account, you are adding up your income using a computer accounting program (like Quicken or Money).  The uncleared deposit may not show up in your account register if you download all your statements online into your program.  You sum up what appears though and pay tithing on it.  You add a line to your computer register stating that you paid tithing on that date.
By the time you next pay tithing, that deposit of yours has cleared and is added to your register -- with a date that predates the time you last paid tithing!  When you add up your income from the last tithing date in your register the next time, since that check is now above the "last paid tithing" line, your eyes miss it, and you don't include it in your sum of money to pay tithing on.  As a result, that money never gets tithed.
Now, obviously there are ways to prevent this from happening, including writing your checks as deposits into your register when you first get them.  But this is a simplified example to a problem that was a little harder for me to solve.
Scenario 2: Reimbursable expenses and resold possessions
You spent $10 to prepare for a church activity and the church paid you back with a check.  Do you pay tithing on it?  I'll stick my neck out and suggest that you don't.  It wasn't income, it was a reimbursement, and put you back to where you started.  And this deposit in your bank account should be excluded from the sum of tithable income you calculate. 
You sold your kitchen table and bought a better one.  You bought the original one for $100 and sold it for $20 at your garage sale.  Do you pay tithing on the $20?  Again, I'll stick my neck out and say no.  You paid tithing on the $100 before you bought the table.  To pay tithing on the $20 would be tithing that money twice.  To make this a little more obvious, say you returned the new table you bought to the store and got all your money back.  Do you pay tithing on the credit to your charge card?  Of course not.  If you did, then buying and returning a $100 table ten times would cost you $100 just in tithing.  That's absurd.  Assuming you're with me on this, that's another line to exclude from your tithable income sum.
Scenario 3: owning a home
Now you own your home.  You purchased it at price $X and now it's worth $Y.  Maybe the current price is higher and maybe it's lower than when you bought it.  That doesn't matter too much because you haven't sold it -- yet.  When you do sell, presumably you'll pay tithing on the profit that you'll hopefully make from an increase in real estate value in your area, or improvements you've made to your home.  Ah, speaking of improvements you've made, does that take away from the profit?  What if you've spent $10,000 building up your home and sold it for $15,000 more than you bought it for?  Do you pay tithing on a $5,000 profit or $15,000?  You probably have an answer ready to give me.  And I'll bet 50% of my readers agree with you.
Scenario 4: private contracting work
You may take on an extra job that you can do from home from time to time.  Maybe these types of jobs form a sort of side-business for you that you buy supplies for.  At what point do you stop paying tithing directly on the income generated from your side job and only pay tithing on what you "take home" after paying your side-business expenses for your equipment/supplies? 
If you don't believe that point should ever come, ask yourself whether FedEx would stay in business long if they paid 10% on tithing for all their income before expenses.  You're not FedEx?  I know that.  But there must be a line between your side-business and FedEx which defines where you stop paying tithing until after your expenses.  Where is it?  I'm not here to draw it for you.  (sorry!)  But if your decision includes any expenses paid prior to tithing income at all, that complicates the math in your computer accounting program.
Scenario 5: stock market -- gains, losses, and dividends, oh my!
Add to the last scenario a stock portfolio with several stocks and mutual funds in it.  Maybe you are only investing into your retirement and won't sell until you retire or maybe you are shooting for short-term capital gains and plan to buy and sell stocks throughout each and every year up to retirement.  Now add a VUL life insurance policy.  Don't forget the traditional and Roth IRAs and 401k.  You may have stocks that pay dividends
When do you pay tithing, and on what?  Do you pay tithing on the money you make before you invest it in your retirement?  When do you pay tithing on the increase you earn (each day, each year, whenever you sell)?  What if you lose money when you sell?  If you are successful in your investments, you may sell your investments 40 years from now at a 800% profit -- which earnings you didn't pay tithing until for 40 years.  Is that a problem? (rhetorical question)
The stock market is the most complicating element to the story, and the one that forced me to rethink how I calculated tithing.  Not everyone is in the stock market.  Those who aren't probably don't get salaries or (good) benefits at their jobs or else they'd at least have a 401k plan.  Some feel the stock market is no better than gambling in Las Vegas.  That argument is beyond the scope of this article. 

Finding the solution

These scenarios, all of which were true for me, made it difficult for me to feel comfortable that I was paying a full and honest tithe.  I wanted to find a new formula for calculating tithing that would fulfill these goals:
  1. Provide the sense of a full and honest tithe.
  2. Protect against paying tithing twice on the same money.
  3. Ensure that all money that should be tithed would be tithed when it should be.
  4. Flexibility in determining what is tithable income and what is not.  (thus making the solution applicable whether you pay on gross or net income, or whether you claim other "exemptions" such as reimbursable expenses and other such items I discussed earlier.)
  5. Simple enough that you can explain it to your spouse (if you have one) and have him/her be comfortable that he/she is a full tithe payer with you.
  6. One you'd feel comfortably justified in explaining to the bishop should he ask you about it.
As tithing settlement was coming up in a couple of months, I said a prayer on my way to a recent Stake Conference that the Lord would inspire me with a solution that would suit Him and me (and my wife). 
What I ultimately came up with I believe was simple and inspired, although to you it is by definition nothing more than heresay because I do not have authority to receive revelation for you.  You may agree or disagree with the solution I share with you here.  That's ok.  I'm hoping that you will either feel good about this solution and apply it to yourself, or that you will be inspired with one that is correct for you. 

The solution

Here is the new formula to calculate tithing anually:
tithing = 0.10 * ((net worth this year - net worth last year) + spending this year).
So simple.  Why this formula?  Well doctrinally it seems to be the most literal and correct interpretation of the scriptures: "pay one-tenth of all their interest annually."  Let's break the equation into bits to see how it works with the scriptural law of tithing. 
  • "pay one-tenth of..." gives you the "0.10 *" part.  In math-speak, of is translated as multiplication.  I doubt we have any problems understanding this.
  • "...all their interest..." where interest has been interpreted to mean increase by modern-day prophets.  It's fair and accepted to define increase as the amount you have now that is more than what you had before.  No criteria of "money" is expressed or implied here.  It includes money and everything else you possess.  As examples:
    Before Now Increase
    Broke and homeless Broke and homeless None
    Broke without a car Broke with a car Car
    $10 $100 $90
    $10 $90 and a new book $80 and a new book
    We don't pay tithing in kind (oh wait, maybe we do!) typically, so this table needs to be updated to replace the things with money values.
    Before Now Increase
    $0 $0 $0
    $0 $0 + $500 (assuming car is worth $500) $500
    $10 $100 $90
    $10 $90 + $10 (assuming book is worth $10) $90
    See how this reveals increases both in kind and in money?  In words, this means that I owe tithing on money I made and saved, and on money I made and spent.  Fair enough, right?  Every dollar you made, you either saved or spent, right?  Simple. 
  • "...annually" means you are accountable to the Lord for your increase exactly once per year.  Not once per paycheck, not once a month, but yearly. 
So why is this solution so elegant?  Well, hopefully you can reason with me that it's fair.  It's a full and honest tithe based on simple and apparent scriptural interpretation.  And as you'll see next, actually implementing this formula is much easier in the complex scenarios described above than just trying to pay 10% on dollars as you earn them.

Implementation strategy 

With the old formula of 10% of everything you earn that you learned in Primary, you could calculate exactly how much tithing you owed every time you made money.  With the new formula you can calculate exactly how much tithing you owe exactly once per year.  I discuss how to pay tithing more frequently below, if you're interested.  There are several questions that came to my mind as I began implementing this method of tithing calculation that I have found answers to, and I include them in this section below. 
How to calculate your net worth
Mathematically speaking, net worth = assets - liabilities.  In concept, net worth represents all that you own, minus what you owe.  If you had a bike yesterday and today you have a bike and a scooter, your net worth increased by the value of your scooter, and your total net worth is your bike and scooter together.  Taking in all the complexities of the above scenarios, net worth is the sum of your bank accounts, your house's market value, your car, your investment portfolio, the cash value of your life insurance policy, and subtracted from that would be your credit card balance, whatever you may owe on your home, student loans, etc.  If you're in a lot of debt, you may have a negative net worth.  If you own a $100,000 home and have 5% equity in it, you would have a net worth of $100,000 - $95,000 = $5,000 considering only your home. 
The easiest way to calculate your net worth is to let your computer accounting program figure it for you.  Microsoft Money does this in the Account List view if you look at the bottom line "Total Account Balance".  Another way of course would be to go through each of your assets and liabilities and add them up by hand.
How to calculate your annual spending
Annual spending is how much money you've spent that is no longer reflected by your net worth. 
Key to calculating spending correctly is to exclude money transfers within your own accounts.  So if you write a check to move money from one account to another, that's a transfer and not "spending" by this definition.  Likewise, if you are paying a mortgage, the amount of what you pay that actually reduces the loan's principle is a transfer of money from your bank account into the liability account that represents your loan.  The loan interest that you pay is "spending".  The reason we don't include mortgage principle portion of mortgage payments is that "transferring" money to your liability account is moving your net worth from your checking account to your house, but your net worth is actually the same.  If I have $100,000 in cash and a $100,000 house in which I have 0% equity, then I really have a net worth of $0.  If I put $50,000 of my cash into my house to give myself 50% equity, then my net worth should not have changed as a result of just that money transfer.  But if you considered that "spending", then that's $50,000 of spent money, plus you "magically" got $50,000 of bonus equity in your house, resulting in a net worth increase of $50,000 when you didn't actually earn anything. Considering mortgage principle payments "transfers" in your computer accounting program makes this all work out for you.
A very easy way to get an accurate spending sum is to categorize each expenditure you make, and reserve a few categories for non-spending purposes.  Some examples include "Reimbursable expenses" and any categories you use for transfers between accounts.  When you generate your spending report using your accounting program, you should include all expense categories except for these special categories that aren't "spending".  Also, be sure that any returns for prior purchases show up as a credit to your account under the same category as the expense did.  That will reverse the "spending" amount calculated for that purchase and you won't be paying tithing twice on the same money.
What about when you buy/sell a car?
I suggest that you include your car when calculating your net worth.  Create a "car" account. 
If you paid for your car all upfront, create a money "transfer" from your bank account to your car account so that the balance in your car account equals the price you paid. 
If you bought your car with a loan, create a car loan liability account as well as your car account and transfer the purchase price from your loan account to your car account to create the necessary deficit in the liability account and the value in your car.  This will keep your net worth from changing at all, which is good, since you haven't earned anything, and you don't really own the car yet as the bank really does.  For each car payment you make, split the payment into two categories (in Money one transaction can be associated to multiple categories through the Split feature), using one Transfer category for the principle payment into your loan account, and a Bank Charge category (or some other non-transfer, spending category) for the part of your payment that is for interest.
While you own the car, leave the value of the car as recorded in your car account alone.  It's needless work to calculate reducing value with time until you sell it. 
When you sell your car, whatever reduction in value you suffered in your car should be recorded in your car account as some spending category that reflects car usage.  For example, suppose you bought your car for $10,000 and sold it a few years later for $4,000.  You essentially spent $6,000 of your car's value by driving it.  The other $4,000 you recovered by selling it while it still had value.  Your car account should reflect this.  Once you enter your "spending" of the car's value so that the account shows $4,000, record a Transfer of funds of $4,000 from your car account to your bank account (where you'll deposit the check the buyer wrote to you) to reflect the transfer of money. 
By doing it this way, throughout the whole process of buying, owning and selling your car your net worth and your expenditure records accurately reflect the real world, and your tithing formula will accurately tell you how much tithing you owe. 
What is really happening to your tithing when you buy a car using this method?  Well if you buy the car outright, then you paid or will pay tithing on the money you purchased the car with in the same year you earned the money.  If you used a car loan, then you pay tithing on the money as you earn it and pay the loan off.  So you end up paying tithing the same time and amounts that you would by calculating tithing your old way.  But this way it's implicit in the process and you don't have to do extra work.
What about a garage sale or other small sale of things you own?
For each item that you sell, if you were including its value in your net worth, then you need to transfer that value back into some other bank account in the form of cash.  Read about the process for buying and selling cars elsewhere in this post.
For each item that you sell that was originally purchased just under a "spending" category in your accounting program and that was not included in your net worth after it was purchased, selling it and putting the money back into your bank account looks like a gain and the tithing formula will tithe you on that gain unless you either 1) spend the cash you earn without ever telling the computer about it, or 2) mark the deposit of that cash in some spending category instead of an income category.  Recording a deposit as an expense rather than an income category effectively creates a "tithing exemption" for the deposit, similar to a deposit for a purchased item that was returned to the store. 
What if you want to pay tithing more frequently?
Simple.  Estimate your tithing by multiplying your regular paycheck amount by 10% and pay that each time you are paid.  At the end of your yearly tithing cycle, you can use the tithing formula that is based on your net worth to calculate exactly how much tithing you owe for the whole year, subtract from that how much you've paid periodically, and know what your outstanding balance is.
The risk you run when paying tithing to the bishop more frequently than annually is that if you anticipate a large gain in your net worth and end up with a small gain or even a loss (if most of your money is in the stock market and it took a downturn) you may end up paying tithing that you don't owe.  You can't get the bishop to write you a "tithing refund" check like you can get the government to write you a tax refund. 
A safe way to avoid over-paying your tithing while ensuring that you have enough money to pay tithing with at the end of your yearly cycle is to set up a dedicated bank account (read: safe investment -- not stock) and deposit your periodic tithing into that throughout the year.  When the time comes to pay your once-a-year tithing, you use the money in this bank account to pay it.  Since this bank account is part of your net worth, interest you earn on that account should be automatically included as an increase and will be factored into your calculations for tithing owed without any extra effort.
Picking your annual tithing reckoning date
Although the law of tithing doesn't explicitly state December as the time for the annual reckoning, since tithing settlement with your bishop happens in December that may be the most natural choice.  Does it have to be the day of tithing settlement or the end of the year?  No.  You could pick July 1 if you wanted.  Every July 1 you would reckon your increase and would pay tithing on that increase based on your net worth on July 1 of this year as compared to your net worth from July 1 of last year, plus any money you spent during that same period. 
I will add that some arbitrary date picked to fall before a tithing settlement could possibly be scheduled may make it easier for you to declare yourself a full tithe payer.  (Imagine yourself declaring yourself a full tithe payer when you haven't paid tithing that year at all yet, since you were waiting until Dec 31 at 11:59 AM to calculate your worth). It should technically work, but I think it would be awkward.
Net or gross?
I've actually heard "answers" given to "do I pay tithing on my net or gross income" more frequently than I've heard the question itself asked.  From what I am aware of, I believe the correct answer to this question is to merely quote the doctrinal law of tithing to the questioning party and leave it to him/her to interpret. 

Summary

I hope this has helped you.  If you think of other scenarios, or if you have questions or comments, please add those comments at the end of this post.  I look forward to hearing how helpful or not this article has been.

Other Resources

Here are some articles I have found with interesting tips on tithe paying:

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