Clergy Tax Issues – Vol 6 of 8: How much of the Clergy’s salary can be designated as Housing Allowance?

Clergy Tax Issues – Vol 6 of 8: How much of the Clergy’s salary can be designated as Housing Allowance?

 

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Interesting you should ask that question. But perhaps, more importantly you should be asking, how or when do we designate a housing allowance? And what are we actually responsible for, as the church, in designating this allowance?

First of all, it is completely on the pastor to substantiate the ultimate amount that is reported on his/her tax return as housing allowance. But NONE of his salary may be designated as housing allowance, unless the church has approved such designation in either a Salary Reduction Agreement, Board Minutes, Budget Line Item or some other means.

Spreadsheet

So, since the pastor is ultimately responsible for what is reported on their income tax return as housing allowance, I would suggest using one of many worksheets available to help him come to a reasonable amount.  It is better for the church to over designate than under designate, as the pastor cannot take more than is designated, even if he actually has more housing expenses this year due to a  hail storm or such.

No matter what amount is designated, the pastor is only allowed to take the LESSER of one of the following three calculations and it is up to him to ascertain these numbers:

  1. Designated Housing Allowance (Approved by Church before paid)
  2. Fair Market Rental Value of a similar, furnished home + utilities
  3. Their actual housing expenses including mortgage or rent, insurance, furnishings, utilities, yard care and remodeling/redecorating.

If the housing allowance actually paid is more than #2 or #3 above, the clergy must declare the “extra” housing allowance designation as income on Line 1 of Form 1040. It is not for the church to be responsible for monitoring  after the designation is made.

While the IRS has no maximum as to the amount of salary that may be designated as housing allowance, it is appropriate for the church to apply common sense and reasonableness to this designation.

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Please see Clergy Tax related blogs here.