Tax season is upon us! If you have not already begun to receive documents in the mail for IRS forms, you likely will soon. With that, for clergy, comes both understanding your housing allowance and setting up your allowance for next year.
Income received by a clergy or minister can be broken down into two types of compensation: salary and housing allowance. There is an important distinction written into the Internal Revenue Code that allows for a portion of clergy compensation to be classified for “the rental value of a home…” or “the rental allowance paid to him as part of his compensation…” These amounts are not included in the minister’s gross income for income tax purposes and is only taxable for self-employment tax. This is a tax-advantaged way of planning a minister’s income.
Housing Allowance should be determined before the year begins as these funds cannot be allocated retroactively. Housing Allowances should be determined by the lower of the following three methods:
Estimating Annual Expenses
The Fair Rental Value of a Comparably Furnished Home
Properly Designated Housing Allowance
Let me elaborate on each of these:
Estimating annual expenses is a process where you estimate each individual detail of ownership expenses, rental expenses, and other housing expenses applicable to either situation. Wisdom uses this worksheet for our clients to both estimate their housing allowance and track their actual annual expenses. Get yours in our store for free!
The second option is the fair rental value of a comparably furnished home. If you do not know this number, a way to determine the fair market value of your home is to locate recently rented properties in your area that are similar to your home in size, square footage, condition, features and age. Add up the total rental price of each property, then divide by the number of properties to find the mean rental value.
The last option is a properly designated housing allowance. This amount must officially be designated in advance by your congregation or church organization. Keep this paperwork in your records.
We at Wisdom Over Wealth are experts both in clergy taxation and church payroll. We provide personal tax preparation and planning for both clergy and believers alike. We also provide payroll for churches looking to get the intricacies of clergy payroll right for all staff members. Contact Us for information on either of these services.
