#1 Tax Benefit for Ministers: Housing Allowance pt. 2
In last weeks post we started this discussion by covering who qualifies for the minister housing allowance, why they want a housing allowance, how to properly designate the housing and how to claim housing on the ministers’ tax return. In this episode, we will conclude the 2-part series with information on when the minister lives in the church parsonage, what expenses are allowed to be included in the housing allowance calculations, and other helpful tips for reducing the ministers tax liability.
What if the Minister Lives in a Church Parsonage?
Let’s kick this off by addressing the situation when the minister doesn’t own or rent a home, but instead is provided a parsonage to live in.
As kind of a nerd, I was doing research for this episode and came across the following information that lets us know just exactly when the housing allowance exclusion went into law.
The parsonage allowance income exclusion was first enacted in the Revenue Act of 1921, Pub. L. No. 67–98, § 213(b)(11), 42 Stat. 227, 239 (1921). It granted an income exclusion for “the rental value of a dwelling house and appurtenances (which is simply a fancy legal term for driveways, drainage ditches, fences, and rights of way) thereof furnished to a minister of the gospel as part of his compensation.”
Commissioner v. Driscoll, 669 F.3d 1309, 1312 (11th Cir. 2012)
Now back to what you’re here to learn 😊
Many are not aware of this, but even if you live in a church-provided parsonage, you can still receive a parsonage allowance. You need to ask for this to help cover costs such as utilities, property taxes, furnishings, lawn care, insurance, etc.
Believe it or not, living in a church-owned parsonage can be a disadvantage for the minister as they are not building up any home equity to help when they retire. Once they retire, they have to move out of the parsonage and they have no money to purchase a new home with. To help alleviate this problem, the church can (and should) set up an equity allowance for the minister. This is an allowance set aside for the minister in a tax-sheltered retirement account that is accessible ONLY at retirement. This is income over and above the regular compensation and they are not allowed access to the funds until they retire. This is definitely something that should be researched and discussed with your tax and/or retirement professional to make sure that Section 409a of the US Tax Code for Non-Qualified Deferred Compensation (NQDC) requirements are met.
Now let’s take a look at what expenses are actually allowed to be included in calculating the ministers housing allowance.
What Expenses are Allowed to be Included?
The following list should help you streamline the process when it’s time to set the ministers compensation.
· Mortgage (principal & interest)
· Real Estate Taxes
· Property Insurance
· Utilities (gas, electric, sewer, water, garbage, local phone service – cell phones NOT allowed as they are not tied to/hard-wired to your home)
· Appliances and furniture (purchased, repairs, or rentals)
· Remodeling expenses
· Lawn care services
· Maintenance items such as light bulbs, cleaning supplies, etc.)
· Homeowners Association dues
· Pest control
The above expenses are allowed to be included for the PRIMARY residence ONLY. Home Equity loan expenses are allowed only if the funds were used directly for the primary residence. Items NOT allowed are cleaning services, food and hired domestic help.
If your minister is having a home built, those expenses are NOT allowed to be included in the housing allowance as they are not living/dwelling in the home yet and the IRS has stated that “no expenses incurred in constructing a new home can be counted in computing housing allowance exclusion until it has become the minister’s “dwelling place” “. So….. until the minister moves, no exclusion. You may check out the same Driscoll vs. Commissioner, referred to earlier in this post if you want an authoritative cite for that action.
· Do a mid-year review to see if any changes should be made to the allowance
· Can be amended any time
· IRS Publication 517 is a fabulous resource
I will reiterate that you MUST properly document and word the housing allowance resolution for it to be legal. Here is an example of what NOT to say:
Hoelz vs Commissioner 42 T.CM. 1037 (1981)
It is our policy that the Pastor should declare as non-taxable income the amount which he must extract from his weekly check to be spent for utilities, housing and car allowance. The tax court stated “it is evident that this statement would not suffice to satisfy the regulations under section 107”.
Don’t be like this church. You have learned how to properly designate the allowance over the last two episodes so now you are empowered with the knowledge you need to do this correctly.
And that’s a wrap for todays post. I pray that it has been helpful to you and that you can apply something you’ve learned to make your job more enjoyable for you and those you serve.
Be blessed my friend!