Mr. Snailum also contributes his expertise to service-based organizations as in this example written for the Denver Rescue Mission’s human resources manual.
The allocation of the housing to those eligible individuals employed by the organization is a matter that should be reviewed by the individuals and the organization’s treasurer. The treasurer should be given written instructions as to the amount that will be designated as a "housing allowance" for each person authorized to participate in this allowance.
One of the few significant tax advantages left for clergy is the ability to exclude from federally taxable income the rental value of a parsonage or that part of compensation that is used to provide a home. (Internal Revenue Code section 107)
Who qualifies for the Housing Allowance?
- Must be employed by the organization
- Must be ordained, commissioned, or licensed
- Administers the sacraments
- Conducts religious worship
- Has management responsibilities in the church or denomination
- Considered to be a religious leader
- The benefit is made available to the minister as compensation for services.
- All of these need not apply.
What kind of expenses can be used when calculating the housing allowance exclusion?
- Mortgage or rent payments
- Real estate taxes
- Property Insurance
- Down payment on a home
- Furnishings & Appliances (purchase & repair)
- Remodeling & repairs
- Yard maintenance & improvements
How much of the Pastor’s salary can be used as the Housing Exclusion?
Only the lowest of the following can be used when the pastor files his federal income tax return:
- The fair rental value of the home.
- The amount actually used to provide a home
- The amount officially designated as the housing allowance.
How is the difference between the designated housing allowance and the lower of the three amounts handled?
If the allowance exceeds the lower of the actual expenditures or the fair rental value: the pastor needs to include the difference on Form 1040 as "other income."
If the actual expenditures or fair rental value exceed the allowance: the difference cannot be taken as an additional deduction on the pastor’s tax return. It is lost.
How is the Housing Allowance declared?
- It should be adopted by the missions board
- It should be in writing
- It should be in advance of the calendar year or in advance of a new pastor starting employment (If a organization fails to designate an allowance in advance of a calendar year it should do so as soon as possible in the new year. The allowance will operate prospectively never retroactively.)
What about the pastor living in a parsonage?
Those clergy living in church-owned parsonages are already having the fair rental value of their home excluded from their income. In addition they can request their church council to establish a "parsonage allowance" out of their salary that is used for such things as utilities, repairs and furnishings for the parsonage.
How is the Housing Allowance handled on the W-2?
The housing allowance (or the value of living in a church-owned parsonage) is always excluded from federal income. This means the treasurer excludes this value from Box 1 of the W-2. The treasurer can however put this amount in Box 14 of the W-2 which is merely an information box.
Allowable amount of housing allowance is not taxable for federal and state income tax.
Housing allowance is taxable for social security and medicare taxes.
Review your situation with your accountant or tax preparer.
Ted Snailum Jr., CPA, TWS Financial, Littleton, CO 80128 | 303.933-4207