HOUSING ALLOWANCE

"A Clergy Benefit"

Darlene M. Davis

Often, we find that members of the clergy are missing out on one of the largest tax savings opportunities. Ministers are allowed to receive an income tax free benefit known as the Housing Allowance. A housing allowance is the payments a church pays to its minister to cover housing expenses. 

It is important that the church designates a portion of the minister’s compensation package as a housing allowance so that the payments are not subject to federal income taxes. Depending upon the minister’s income tax bracket, excluding the housing allowance from the income tax calculation can result in significant tax savings.

To qualify for the exclusion of the housing allowance from the income tax calculation, three conditions must be satisfied:

The housing allowance must be approved BEFORE it is paid. There is no provision in the tax code for a retro-active housing allowance designation.

The minister spends the allowance on eligible housing expenses during the year. The minister has the onerous to prove how the allowance was spent, not the church.

Only an amount up to the fair market rental value of the housing can be excluded from income. This should include the cost of utilities.

The minister should be involved in the process by outlining best estimates of household expenses incurred, so the church may designate a proper amount. It is recommended that the housing allowance be properly documented in the church records. The housing allowance should be reviewed and adjusted at the beginning of each new budget year. The fair market rental value of the housing can be obtained by examining comparable rental houses in the same geographical area. 

When estimating the amount of the housing allowance it is better to overestimate rather than underestimate to get the most tax savings benefit. Any allowance the minister does not spend on housing must be reported as additional wages and income taxes will apply.

The maximum amount that the housing allowance can be is the smallest of these 3:

Amount of the approved allowance the amount the minister actually spent on eligible housing expenses during the year. The amount equal to the fair market rental value of the home including utilities.

You may be wondering what is considered eligible housing expenses. Well, it is easier to identify what is not an eligible housing expense for housing allowance consideration. Most expenses that are incurred to maintain the minister homestead is eligible except for these three things:

Food.  Maid Service.  Personal Toiletry Items.

Eligible housing costs include:

•Mortgage payments/rent

•Utilities

•Insurance

•Property taxes

•Repairs 

•Furnishing and appliances

•Security service

•Telephone service (base charge)

Other Items You Can Include in the Housing Allowance

Here are other items that many ministers don’t realize can be included in the housing allowance:

•Pest control

•Plumbing services

•Kitchen items, plates, silverware, dishes, utensils, cups, glasses, cookware, 

•Household cleaning supplies, detergent, wax, polish, tissue, mops, brooms, light         bulbs, trash bags, etc.

•Carpet, curtains, rugs, drapes, linens, towels, pictures, paintings, frames, decorator items, paint, wallpaper, door keys, locks, etc.

•Insurance on furnishings

•Maintenance

•Landscaping, lawn services, gardening, shrubbery, sod, grass seed, fertilizer, fencing

•Improvements such as adding on rooms or other structural changes

•Repairs to the home itself, and other upkeep

Ministers “Double Deduction” for Mortgage Interest and Property Taxes

If a minister is eligible for the housing allowance, the amount of the allowance is excluded from income. In addition, if a minister incurs mortgage interest and property taxes on his personal residence, the minister can deduct those as itemized deductions on Schedule A. The minister is receiving double benefit from the interest and taxes.

Unspent Housing Allowance

The church does not have any responsibility for assuming that the minister spent the entire housing allowance on housing expenses. It is the minister’s responsibility to report any excess housing allowance as taxable income. 

The church is not required to report the housing allowance or the fair rental value of the parsonage to the employee nor to the IRS. However, many churches choose to communicate the amount of the housing allowance as a courtesy to the minister. The church may choose to report the housing allowance in Box 14 of the W-2. Or, the church may prefer to include the amount of the housing allowance in a separate letter to the minister.

Darlene M. Davis, CPA

Principal & Managing Partner

Davis Associates, CPAs

4119 N Hwy 67

Florissant, MO 63034

www.DavisAssociatesCPA.com

314-653-0008