Housing Allowance – Establishing and Maintaining
Clergy are afforded many tax advantages; but none are as great as the housing allowance exclusion from personal wages. Most ministries know what is required for pastoral staff to be allowed a housing allowance; however many do not know what documentation is required to offer a housing allowance and how often it must be updated.
Section 107 of the IRS Code allows up to 100% of total compensation provided clergy be designated as housing allowance as long as it “does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities”. In summary; clergy can be compensated entirely in the form of housing allowance (no W-2 wages) as long as the housing allowance does not exceed market rates. Here is what can be included in the calculation to determine the appropriate housing allowance amount:
- Rent, principal payments, or down payments plus the cost of buying the home
- Taxes and mortgage interest (even if these are includable as itemized deductions)
- Utilities (heat, electric, basic telephone, water, etc.)
- Purchase of furniture, appliances, dishes and cookware, and decorating items including rugs, pictures, curtains, bedspreads, sheets, towels, etc.
- Insurance on the home and contents;
- Miscellaneous expenses including improvements, repairs and upkeep of the home and its contents, snow removal, lawn mowing, light bulbs, cleaning supplies, etc.
These expenses MUST be itemized, calculated and presented to the board of directors of the ministry on an annual basis. This means that clergy staff should present an itemized list of “housing allowance expenses” to the board of director by the end of each tax year and have that amount approved before receiving any portion of the housing allowance – also by the end of each tax year.
Keep in mind; the housing allowance figure should change each year based upon the list of allowable expenses. For example; utilities, taxes and insurance generally vary from year to year, so housing allowance should vary from year to year as well. Any portion of the housing allowance not used on allowed housing expenses is treated as W-2 wages and should be reported correctly.
As you can see; housing allowances should be revisited each year in order to maximize tax savings for both clergy staff and the ministry. Housing allowances are a real blessing in the form of tax savings to ministries and their pastoral staff and should be maintained in order to ensure compliance with IRS guidelines.
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