Clergy couples are limited to the equivalent of one housing allowance between the two incomes, providing they live in the same location. In this instance, clergy need to be mindful of the amount requested by each spouse in the annual housing allowance resolution.
Generally, any expense to provide or maintain the home can be used to justify the housing exclusion. Regulations do specifically state that expenses for groceries, paper products, personal toiletries, personal clothing, and maid service cannot be used. You may legitimately include the following:
(1) rent, principal payments, or down payments plus the cost of buying the home;
(2) taxes and mortgage interest (even if these are includable as itemized deductions);
(3) utilities (heat, electric, basic telephone, water, etc.);
(4) the purchase of furniture, appliances, dishes and cookware, and decorating items including rugs, pictures, curtains, bedspreads, sheets, towels, etc.;
(5) insurance on the home and contents; and
(6) miscellaneous expenses including improvements, repairs and upkeep of the home and its contents, snow removal, lawn mowing, light bulbs, cleaning supplies, etc.
Up to 100 percent of compensation can be designated as housing allowance, but this does not necessarily mean that this is the amount which can be excluded from income taxes. IRS Publication 517 provides a definition of how much parsonage allowance can be excluded for ministers: “If you own your home and you receive as part of your pay a housing or rental allowance, you may exclude from gross income the smallest of the following:
• The amount actually used to provide a home,
• The amount officially designated as a rental allowance, or
• The fair rental value of the home, including furnishings, utilities, garage, etc.
In some circumstances, a clergy couple may live in separate homes, serving in two different locations, each with a designated housing allowance.
In these situations, the clergy couple should have solid documentation to support the two housing allowances that are excluded from gross income. The clergy couple should also have good documentation of the reason for and the professional necessity of maintaining two separate homes.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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