Skip to main content

Partial-Year Housing Allowance

Question: 

A pastor begins serving at a new church on July 1 of a given year. The church intends to designate a portion of his compensation as housing allowance. How should the pastor and the church establish a partial-year housing allowance?

Answer:

The pastor can receive a housing allowance for a partial tax year. In order to do so, he should request a designation from the church of an agreed-upon portion of his compensation as housing allowance. This portion or percentage can then be applied against his salary to determine the designated amount of housing allowance. Additionally, he will be required to comply with the final two rules for excludable housing allowance:
  • Actual housing expenses, July 1-December 31
  • Fair rental value plus cost of utilities for the same period
The actual amount of excludable housing allowance is equal to the lesser of these three amounts. The pastor and church should keep in mind that up to 100% of his salary can be excludable as housing allowance within the guidelines described above.

Comments

  1. What if the minister is terminated mid-year? Let's say the minister was paid through June 30th. Can the church designate a portion of severance as parsonage and can the minister take advantage of the housing allowance for expenses incurred after termination (July 1 thorugh Dec. 1)? The argument for this might be that he has not stopped being a minister and has not stopped performing many ministerial duties, but may be in between jobs.

    ReplyDelete
  2. Thank you, Brian, for your question.

    While the IRS offers no guidance on severance pay designated as housing allowance, it is our understanding that severance pay is payment for the minister’s prior services. From this argument, severance pay could be designated as housing allowance.

    ReplyDelete

Post a Comment

Popular posts from this blog

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence. The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct you…

403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.