Today’s post was inspired by one of my loyal readers who had a very frustrating time trying to figure out the answer to that simple question. Unfortunately, I’m too late to come to his rescue, but my hope is that others of you may find this useful.

It Doesn’t Work Like The Housing Allowance

I think this subject may actually be harder for pastors than for others. Why? Because of the clergy housing allowance. The housing allowance is exempt from taxation. IRA contributions are tax-deferred, which is basically exempt from taxation at the present time. So shouldn’t they work the same way?

Hardly. Which can throw pastors for a loop. 

With the housing allowance, it’s never even included in your income. It never shows up on your W-2. The only way the IRS even knows you got the money is when you pay your self-employment taxes, if you didn’t opt out. If you did opt out, the money never appears anywhere except your bank account.

It’s not nearly that simple with IRAs.

How IRA Contributions Appear On Your Pay Stub

You can make IRA contributions through direct payroll deductions or on your own after you get paid. If you have it come straight out of your paycheck, it will be very different than the housing allowance. It will appear at the bottom where medical insurance premiums and the like are deducted, Adjustments to Net Pay. 

The top line that shows your salary or earnings will include the total amount. Your tax withholdings will be calculated on that total amount. Then, at the bottom, the IRA contribution will be deducted.

You may be wondering, how are traditional IRA contributions pre-tax if my withholdings are calculated before they are deducted? Good question. They are exempted from taxes, or made pre-tax, on your tax return. 

How To Report IRA Contributions On The New Form 1040

On the old Form 1040, there was a line called IRA Deduction (line 32). That line was subtracted from taxable income to arrive at Adjusted Gross Income. Simple.

Not so simple with the new, “simplified” Form 1040. They basically took half of the information from the old form and divided it into a handful of new schedules. Line 32’s new home is on Schedule 1, Additional Income and Adjustments to Income (see below). At least they were nice enough to keep the same line numbers!

Thus, to get a tax benefit from making an IRA contribution, you have to first enter that contribution on Schedule 1, line 32. That will then become a part of the total on line 36 of the same form. The number from Schedule 1 line 36 is then transferred back over to Form 1040 and included on line 7. 

Don’t just write the same number on line 7, though. Line 7 is your total income from the previous line less the number from Schedule 1. Aren’t you glad Congress simplified our taxes? 😉

So, whether your IRA contributions are deducted directly from your paycheck or you make them on your own after getting paid, you need to fill out Schedule 1 when you file your taxes in order to defer income taxes on the contributions. I hope this article has made the process a little bit less confusing and good job on saving for your future!