The tax code gives ministers the ability to have a portion of their compensation earned in ministry designated toward housing expenses. Properly designated, this portion of the minister’s income is excluded from income for federal income tax purposes. There are a few rules which must be followed: The designation must be officially designated by the church governing board or compensation committee. A definite amount must be designated: The designation cannot be made retroactive if the minister is part-time, or does not earn more from ministry than his actual housing expenses, then the church can designate 100% of the minister’s pay as a housing allowance. Since the designation cannot be made retroactively, always include language in the resolution to include future years (i.e.: “this allowance is for 2010 and all subsequent years until and unless changed”). This will protect the pastor from losing part of his housing allowance in the event that the board does not approve the next year’s housing allowance prior to the beginning of the year. In determining how much to designate as a housing allowance, the minister should add up all housing expenses including house payment, real estate taxes, insurance, utilities (including trash and home phone), furnishings and appliances (purchases & repairs, furniture, pictures, etc.), structural repairs, remodeling, yard maintenance, landscaping and maintenance items (cleaners, light bulbs, pest control). Don’t forget the little things – flowers, mulch and gas for the lawn mower – it all counts. There is a limit to how much housing can be claimed and excluded from income. The amount allowed is the smallest of: 1. The actual amount of allowable expenses 2. The amount officially designated as a housing allowance 3. The fair market rental value, including utilities & furnishings It is a good idea to set your housing a little higher than you think you will need to cover any unforeseen expenses. Any housing allowance received that exceeds the actual expenses (or the fair market rental value including utilities and furnishings) should be added to taxable income on line 7 of Form 1040. Although the housing allowance is not required to be reported on the W-2, it is suggested that it be listed in box 14 of the W-2, which is for information purposes only. Do NOT put housing allowance on a form 1099. If 100% of the minister’s pay is designated as housing, we suggest a letter on church letterhead be given to the minister stating the amount of housing allowance paid for the year. This will assist him if he needs to show the income when getting a loan, etc. Although the housing allowance is exempt from federal income tax, unless a minister is exempt from social security taxes, the allowance is subject to self employment taxes. Other notes: If a minister is retired and still receives a housing allowance, it is not subject to self employment taxes = 100% tax free (certain restrictions apply). Home equity loans used to pay for a car, college education, medical expenses, etc. cannot be considered a housing expense. Although the designated housing is not subject to federal tax, the minister can still deduct mortgage interest and property taxes on schedule A of income tax return. Payments to evangelists can also be designated as a housing allowance If a minister is in a lower tax bracket, it is not always better to have a higher housing designation. Some available tax credits could be lost, resulting in more federal tax being paid or a lower refund. Delano Sherley is a CPA from Cincinnati, Ohio. He is president and owner of Delano Sherley and Associates. He has over 25 years experience working with privately held companies and churches. He can be reached at 513-737-1314 or Delano@dsacpainc.com. The above article should not be construed as accounting or tax advice on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own advisor concerning your situation and any specific accounting or tax questions you may have. Under U.S. Treasury Regulations, we are required to inform you that any tax advice contained in these materials is not intended to be relied upon, and cannot be relied upon, as substantial authority to avoid penalties under the Internal Revenue Code. Great effort has been made to insure the accuracy of the material in this publication; however, the author shall not be liable for any damages claimed by any person as a result of any information contained herein for any reason, including but not limited to, those by reason of errors and/or omissions. If you have any questions on any of the enclosed materials, please call us.