Linda S. Posted February 18, 2012 Report Share Posted February 18, 2012 Should an ordained minister whose entire salary of 17000 is allocated as housing allowance work to pay off his house early or should he just make the maximum contributions up to the 17000 to avoid paying income taxes when the houe is paid off. He owes 95000 on a 200000 house and is selling another investment property in which he will receive around 30000. His original plan was to put it towards his house to eliminate the only debt he has however after thinking more about the "math" maybe the money would be better suited in mutual funds as an investment. Any thought would be great. He has not opted out of social security. He has another part-time job in the school system and has managed his money very well in the past. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 18, 2012 Report Share Posted February 18, 2012 This is a detail question that does not have a quick answer. You left out a lot of important information. How old is he, is he married, does he have children, what is the status of his other retirement vehicles (if any)? What will the church do for benefits for him. Does he need LTC insurance and when is the best time to buy it. How close is he to retirement (or just ministry - or on the other hand - just the school job). Is 200K the price of his home or the value of his home? How much of the 30K he will get is taxable gain and how much is return of basis? Then there are the non-math issues like how he feels about debt and how his congregation feels about the indebtedness of their minister. I could go on, but I think you get the point. There is no cookie cutter answer to what you are asking. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
MAMalody Posted February 19, 2012 Report Share Posted February 19, 2012 Tom has a good point. Most, if not all, financial decisions should not be driven only by tax considerations. Being debt free has much to be said for it, especially in the economic times we are currently in. I would not volunteer guidance on his investment plans. If I was asked I would share the prior sentences and then explain the tax impact of his decisions. Quote Link to comment Share on other sites More sharing options...
Linda S. Posted February 19, 2012 Author Report Share Posted February 19, 2012 thanks for the responses, Tom & Mike. The answer to the questions you raise are: he is 32 years old - I know because I gave birth to him on 2/29/80 - yes a leapyear baby. He is married with a 3 year old and one due in March -- yeah, me!! His wife works as a PTA and makes around $55,000 a year. His wife puts in the max in her 401k with perhaps $20,000 in it. He puts money into his Roth each year and perhaps $20,000 in it. He has some $ in his school public retirement program. He probably can't expect many, if any, benefits from the church other than salary. Probably doesn't need LTC right now - his momma just bought her a policy. he wants to go full-time into ministry and his church is working towards that end, possibly in a year or two. the 200k is the value of the home. he picked it up on a foreclosure for $155,000 and owes $95,000 on it. the 30k is non-taxable - i won't go into details. he believes in david ramsey and being debt free as soon as possible, but also knows of the tax benefits of mortgage interest. he faithfully tithes 10 per cent or more to his church. I have been blessed with a wonderful, intelligent, caring son!!! he beleives in being a good steward of his money and had some hard questions for his mom so that's why the post. Thank you. Quote Link to comment Share on other sites More sharing options...
Randall Posted February 20, 2012 Report Share Posted February 20, 2012 Housing allowance. Fair rental value of home (including utilities and furnishings). Actual out of pocket cost of home (including total loan payments, repairs, utilites, furnishings, lawn care, landscaping, custodial, etc). The lower of these three is what he can exclude from tax and SE tax. So if he pays off the mortgage, what will his actual out of pocket cost be? It will go down without a mortgage payment. Assuming fair rental is greater than $17,000, then actual costs may fall below the $17,000 and he'll have to pickup the excess for income tax and SE tax purposes. Be careful with small independent churches. They tend to want to help the minister but skirt some of the accounting and tax rules. Quote Link to comment Share on other sites More sharing options...
Randall Posted February 20, 2012 Report Share Posted February 20, 2012 Also, keep in mind, there is a double benefit for the mortgage interest. Total mortgage payments reduce amount of housing allowance that is taxable to both income tax and SE tax. But the mortgage interest is also deductible on Sch A reducing income tax more. A double deduction for income tax purposes. Quote Link to comment Share on other sites More sharing options...
MAMalody Posted February 20, 2012 Report Share Posted February 20, 2012 <<<Housing allowance. Fair rental value of home (including utilities and furnishings). Actual out of pocket cost of home (including total loan payments, repairs, utilites, furnishings, lawn care, landscaping, custodial, etc). The lower of these three is what he can exclude from tax and SE tax.>>> The above statement is technically not correct. Nowhere are total loan payments taken into account. What you would use in place of Loan Payments, is principal reduction, mortgage interest, property taxes and insurance. Quote Link to comment Share on other sites More sharing options...
Randall Posted February 21, 2012 Report Share Posted February 21, 2012 <<<Housing allowance. Fair rental value of home (including utilities and furnishings). Actual out of pocket cost of home (including total loan payments, repairs, utilites, furnishings, lawn care, landscaping, custodial, etc). The lower of these three is what he can exclude from tax and SE tax.>>> The above statement is technically not correct. Nowhere are total loan payments taken into account. What you would use in place of Loan Payments, is principal reduction, mortgage interest, property taxes and insurance. Yes, I short cutted the description. Quote Link to comment Share on other sites More sharing options...
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