Raise your hand if you’re the one who handles the finances for your home.
Not me!! And I couldn’t be happier. Because minister’s taxation is a bear! Lucky for me, I’m married to The Finance Man. I call him Hubs. You can call him the Right Reverend Shelby Pratt. On second thought maybe you should just call him Pastor Shelby.
I’ve asked Hubs if he could answer questions about minister’s taxes every once and awhile. So if you have something you’d like him to talk about, send me a message! I’ll post his responses periodically. Today he tackles Housing Allowance.
One of the most common questions that comes my way is about housing allowance. Typically, it goes something like this: “What can be included in a minister’s housing allowance?”
The short answer is, well…there really isn’t a short answer. Basically, a minister can include anything (other than food) that gets consumed or used in the provision of a home. But there are limitations. With as little IRS-ese as possible, the maximum amount that can be excluded from a minister’s taxable earnings is the lesser of one of three things.
- The amount officially designated by the church board. (This one is just plain ridiculous, because who, in their right mind, would ask their church board to designate a lower amount than one of the next two items?) Even for a bi-vocational pastor, whose entire church compensation could be housing allowance, I recommend having a larger-than-anticipated housing allowance designation. This will allow any and all honorariums or gifts to be distributed as housing allowance.
- The actual expenses incurred in providing a home. You’ll start off with an estimate of annual expenses, which can range from mortgage principal and interest payments (or rent payments) to lawn care to dish detergent to trash and recycling services. A good housing allowance declaration will be as inclusive as possible and may include a bit of a buffer for unexcpected housing-related expenses (e.g., replacing a broken refrigerator or that “honey-do” project you’ve been meaning to tackle). Estimating high will ensure you maximize your housing allowance benefit. But, in the end, the actual out-of-pocket expenses is the measure.
- The fair rental value of your home, furnished plus utilities. This, unfortunately, is a bit of a challenge to determine. The FRV is the standard set by law. The challenge is the IRS has never provided any guidance on how to determine the FRV. You can make a somewhat educated guess and check your local newspaper for comporable rental homes. Then just add the cost of your furnishings and monthly utilities. And determining the furnishings could even be done a couple of different ways (i.e., purchase versus rental price). To solidify the rental value, you could get a realtor or property manager’s opinion–in writing.
At the end of the year, the LOWEST of the three amounts is what can actually be excluded from a minister’s taxable income. If you estimated high (declared $30,000 and only qualified for $25,000), the excess amount is reported as taxable income. BUT, if you estimated low (declared $25,000 and could have qualified for $30,000), you cannot reclassify the difference as housing allowance. In the first example, you maximized your housing allowance. In the second, you paid taxes on $5,000 unnecessarily.
Lastly, let me pass along a few things to keep in mind. Getting a housing allowance in place is a two step process.
- Declaration–A minister declares the desired housing allowance amount to the church board.
- Designation–The board officially designates the housing.
Technically, there is no housing allowance until Step 2. And any payments made before board designation is taxable wages.
As you can see from this very brief and somewhat technical discussion, housing allowance can be quite a complicated issue. If you have further questions about this or any other topic relating to minister and church finance, let us know. In the meantime, don’t forget to file your taxes by Tuesday, April 17th!
~~Pastor Shelby
Shelby has a B.A. in Biblical Studies from Central Bible College, and an M.B.A. from Regent University. He has served in several church staff positions, including youth pastor, church administrator, interim pastor, and Executive Pastor. He served as a church business consultant for AG Financial Solutions. More recently, Shelby served as Vice President for Finance at Zion Bible College and as Vice President for Operations at Central Bible College. While serving both colleges, he also served the Southern New England Ministry Network as their Controller and had the privilege of working with many of the Network ministers and churches, in matters of minister’s taxation and church finance and administration. He joined the Ohio Ministry Network as Finance Director in June 2011.
Please understand, any explanation given on this blog should not be viewed as legal or financial advice. If you have questions or concerns you should consult your own legal or tax counsel. Thanks for understanding!
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