What is a Housing Allowance? How is it Set Up? What are the Tax Benefits?

A housing allowance is the greatest tax benefit available to ministers. It is also one of the least understood.

Basically, it is payments made by the church to the minister for the minister's estimated housing expenses.

It is very beneficial for ministers to designate part of their compensation package as a housing allowance.

The main reason is because it is exempt from federal income tax. However, it is not exempt from the minister’s self-employment tax...more on that later.

In order to qualify for the exclusion of the HA from federal income tax, two very important conditions must be satisfied:

• It must be board approved before it was paid (A housing allowance is NEVER retroactive)
• The minister actually spent the allowance on eligible housing expenses during the year

Your church must make sure the HA amount is determined before it is paid. It should be included in a board approved resolution and properly documented in the church records. Most of the time, it is reviewed and adjusted at the beginning of each new budget year.

Your church does not have anything to do with the second condition. The minister has the responsibility of tracking actual housing expenses and determining the fair rental value of the housing.

What types of expenses are included in the HA?

It may be used for any expense relating to renting a home, purchasing a home, and maintaining a home. Some of the eligible expenses are:

• Mortgage payments/rent
• Utilities
• Mortgage interest and insurance
• Home insurance
• Property tax
• more detailed list

What about taxes on a church provided parsonage?

If minister lives in a church provide parsonage, the minister is not subject to income taxes on the use of the parsonage.

However, the fair rental value of the parsonage is added when figuring his self-employment tax. (The minister is responsible for determining the fair rental value of the parsonage.

What if the minister does not spend all of the allowance on housing?

The church does not have any responsibility in making sure that the minister spends all of his HA on housing expenses.

Instead it is the minister’s responsibility to report any excess funds as taxable income. The church should never know, and has no right to know, what the minister does with his housing allowance.

Can non-minister employees receive a HA?

No. To receive the special tax treatment of a ministerial housing allowance, the employee must meet the IRS’ 5-test definition of a minister.

The church is not required to report the minister's housing allowance to the IRS. However many churches choose to report it in Box 14 of the minister's W-2 (which is labeled “Other”) as a courtesy to the minister.

Or, churches can just include the amount of the HA in a separate letter to the minister. (This separate letter should not be sent to the IRS and will not be included or attached to the minister's personal tax return.)

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Additional Resources

Recommended Reading and Products:

Clergy Tax: For 2008 Returns By J. David Epstein / Gospel Light IRS regulations are ever changing, and to avoid costly mistakes you must stay current. Written by an attorney specializing in church tax law, this user-friendly step-by-step manual will assist you in accurately preparing your return and avoiding troublesome audits. Get up-to-date answers to your specific questions about housing allowances, medical reimbursements, social security, and more. 64 pages, softcover from Regal.

Zondervan 2009 Minister's Tax & Financial Guide: For 2008 Returns By Dan Busby, CPA / Zondervan If you find April 15th taxing in more ways than one, let Busby's easy-to-follow manual come to the rescue! The 2009 edition features a line-by-line explanation of the 1040 Form and recent changes in the tax code---with valuable hints about how to reduce next year's bill. Also includes guidance on compensation, retirement planning, and medical expenses. 192 pages, softcover.

The Church Treasurer's Manual: A Practical Guide for Managing Church Finances - Book & CD-ROM By Bruce Nuffer / lifestream Have you been appointed church treasurer? This handy manual will help you do your job efficiently and effectively! Packed with time-saving tips and practical suggestions, it offers an easy-to-understand overview of basic accounting principles; explanation of tax regulations; record keeping forms for taxes, individual contributions, and weekly offerings; advice for handling payroll and other compensations; and more. 160 pages, softcover from Beacon Hill.

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Pastor Mug By Kemp (kapan-kent Co) Deep blue mug with white interior, professional in style and design with Pastor inscription and simple cross motif. Quotation from Roy Lessin on the reverse A pastor is obedient to God's calling, responsive to His grace, faithful to His service, committed to His people and a representative of His love. 4.5" tall.

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