Kernels of Korn

I call my columns Kernels of Korn, because they aren’t intended to teach it all to you! I just want to basically plant a seed of interest, doubt or concern so that you will want to learn more! You can start this learning process today by reading this article at least twice. Once to overview it, second time to see how much you can learn about what you don’t know about! Got that?

Bi-vocational or Small Church Pastors

If your church can't afford to pay you enough to cover your housing expenses, what should you do?

A.  Quit?
B.  Work another job?
C.  Give more money to the Church?

Well, some of you will be surprised to HEAR that the answer is C.

Give More!

Here's the theory. If you give more, the church can then afford to pay you the housing allowance amounts. Which are not taxable as income!  And YES, if you qualify for Schedule A itemization, you can deduct the contributions (subject to the 50% limitation) and not report the housing allowance as income on the W-2. WOW! What a deal! YES, this is a legal tax savings strategy!

Double Deduction!*

The church has sold the pastorium or manse. You've finally decided it is time to buy a house. The church greatly increases  your housing allowance with the funds from the sale so your new mortgage payments and real estate taxes are covered! You then revise your church approved housing allowance estimates. You're concerned because your housing allowance is close to 80% of your "salary" and the new interest portion of your mortgage payment now allows you to itemize your deductions on Schedule A of the 1040. 

Well, rest easy. You're all right and you definitely can:

1. Increase your housing allowance to 100% and not report it as W-2 income if your housing expenses equals or exceed the allowance and the allowance was church approved prior to the expenditures.

2. Deduct the interest on your 1040

3. Deduct the real estate taxes on your 1040.

* This legal tax shelter is often called the DOUBLE DEDUCTION but it is really an exemption and a deduction. Exemption is for the housing allowance and just means it is exempt from income taxes. The deduction is for the interest and taxes.

Now, let's also recall that housing allowance amounts are still subject to Social Security and Medicare TAXES! (Yeah, I know these are not really taxes, just contributions! RIGHT?)

By the way—If you do take 100% as housing allowance—You don’t have any earned income for your retirement planning or your annuity board contributions? (You are making retirement plan payments? If not, you better start yesterday!)

Note here: Sometimes we forget about EARNED INCOME! Check with your tax advisor and retirement counselor before setting up your housing allowance

Another note!  HOW MAY OF YOU ARE STILL USING SCHEDULE C TO REPORT MINISTERIAL INCOME?

You should only be using Sch C for honorariums, funeral earnings, wedding fees etc. 

They don’t call it Master Card for nothing!

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