June 25, 2013

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.

2 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.

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  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.

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