Many churches help their ministers get into a home by providing money for a down payment. These funds can be a taxable gift and become taxable income in the year they are received and may be designated as housing allowance or the congregations may elect to assist a minister with the purchase of a home by means of a direct loan. Forgiveness of debt or interest free loans could result in additional income for the minister.
The congregation is required to report the interest payments made by the minister on Form 1098. The Form 1098 must also be submitted to the IRS with a Form 1096. Principal and interest payments made by the minister may qualified for housing allowance.
Although mortgage interest and real estate taxes are generally a housing allowance expense excluded from the minister’s gross income for income tax purposes, he or she may also claim deductions for the same if itemizing them on his or her tax return. This example of “double dipping” is a matter of law and another special tax benefit to ministers of religion–ordained or commissioned.
There are two ways to assess interest:
METHOD 1–Cannot be Designated as Housing Allowance
Multiple the amount of the loan by the interest rate and add that amount to the pastor’s wages on his W-2. No money actually changes hands. (Example: $15,000 x 3% = $450. The church would add $450 to box 1 of the W-2.) Because the pastor never actually makes an interest payment to the church the interest payment may not be housing allowance.
METHOD 2-Can be Designated as Housing Allowance
Multiple the amount of the loan by the interest rate and add that amount to the pastor’s income as housing allowance in box 14 of the pastor’s W-2. This increases the pastor’s total income by $450. (Example: $15,000 x 3% = $450) Using a salary reduction the pastor pays the interest back to the church each pay period. (Divide $450 by the number of pay periods. $450 divided by 12 = $37.50. If there are 12 pay periods per year the pastor would have $37.50 deducted from each paycheck to pay the interest due to the church.) The advantage to this method is that the interest payment may be designated housing allowance as long as the loan is secured by the home.
The housing allowance income tax exclusion is limited to the least of the three following amounts:
1. Amount of the minister’s compensation designated as housing allowance, approved by official action taken by the governing body of the church, and evidenced in the official minutes of the governing body.
2. Amount expended or “used” by the minister to provide a home during the year and properly substantiated.
3. The fair rental value of the home (including garage, etc.), furnished, plus utilities. A minister cannot exclude from taxable income any amount of the designated allowance that exceeds the conditions in those “least of” rules outlined here. The excess taxable housing allowance must be reported by the minister on his or her IRS Form 1040, line 7.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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