The allowance must be officially designated in advance by the church. The designation should be stated in writing, preferably by resolution of the governing body and/or in an employment
contract. In addition, the designation should be recorded in the church budget and payroll records. If the only reference to the housing allowance is in the church budget, the budget should be formally approved by the top governing body of the church.
The designation should be an amount that a minister feels they will spend during the calendar year. According to Reg. 1.107-1(b) the amount designated must also be a specific dollar amount or a specific percentage of salary.
The IRS does not place a limit on how much of a minister’s compensation may be designated as a housing allowance by the employing church. In a few instances, as much as 100% of
the compensation may be designated.
The excludable portion of a housing allowance is based on your actual expenses and is not taxable for federal income tax
purposes. The entire housing allowance is taxable for social security tax (SECA) purposes.
The excludable housing allowance deduction is the lowest of these factors:
• Actual expenses incurred to provide and maintain a home
• Amount prospectively and officially designated by the employer
• The fair rental value of the home including utilities and furnishings
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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