THE NEW TAX LAW: GOOD NEWS, BAD NEWS FOR CLERGY
Manfred Holck, Jr., C.P.A.
January 1, 1987
In January 1986, pastor Brad Thomas took the district superintendent to dinner at Denny's prior to a church committee meeting. He carefully noted the purpose on the receipt he kept. When he next figured his taxes, he planned to deduct the amount of the meal from his taxable income. Since the church gave him an expense allowance, Brad was not spending personal income for church business, nor would he pay income tax on what amounted to a reimbursement for expenses the church intended him to incur. Thousands of pastors have operated this way for years. If, in January 1987, Brad ate the same meal uniter the same circumstances and followed the same accounting procedure, he might not be able to deduct any of the expenses from his taxable income. The Tax Reform Act of 1986 has made significant changes in the way many churches should compensate their pastors and in the way many pastors will figure their taxes, beginning in 1987. In brief, if Brad continues with business as usual, he will pay more income taxes than would otherwise be required, and that means his take-home pay will be less than it could be. As with most regulations, the Tax Reform Act of 1986 is both good news and bad news for pastors. Good news for homeowners
Without a doubt, Section 107 of the Internal Revenue Code has for more than sixty years provided ordained clergy with one of the greatest tax benefits available. Qualifying clergy pay no income tax on the value of the parsonage they live in, nor, if they own their own home, do they pay on any allowance they receive, to the extent it is spent to provide for that home. (However, that value or allowance is fully taxable for social security tax purposes.) Clergy are also allowed to deduct mortgage interest and property ...
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