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The Impact of the Tax Reform Act of 1986 on Churches and Clergy

The Impact of the Tax Reform Act of 1986 on Churches and Clergy

The Tax Reform Act of 1986 has been called the most massive overhaul of our federal tax system in more than thirty years. The act, which was signed into law by the President on October 22, 1986, contains many provisions that affect churches and clergy. The more significant provisions are summarized for you in this special report.

1. Ministers' housing allowance

In 1962, the IRS ruled that ministers who owned their homes and who itemized deductions in computing their federal income taxes could exclude mortgage interest and real estate taxes in computing their housing allowance, and still deduct both items as itemized expenses on schedule A of Form 1040. Many ministers referred to this benefit as the "double deduction." In 1983, the IRS abruptly reversed itself, warning that home owning ministers could no longer deduct mortgage interest or real estate taxes after June 30, 1983 to the extent that such items were included in the calculation of the housing allowance exclusion. The IRS based its ruling on section 265 of the Internal Revenue Code, which generally denies a tax deduction for any expense previously excluded in computing gross income.

The elimination of the deduction of mortgage interest and property taxes for ministers who owned their homes was later postponed by both Congress and the IRS through 1986, but the extension only applied to ministers who continued to live in the home that they owned and occupied prior to January 3, 1983 (the date of the IRS ruling). The growing number of ministers who purchased homes after January of 1983 were no longer eligible for the more favorable treatment.

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