What is a housing allowance?

What should I do for a housing allowance?

Good! You’ve heard about it. For a long time, ministers have been able to live in a church parsonage without paying income tax on the benefit (except for state income tax purposes in Pennsylvania). But you do owe the 15.3% SECA tax on its fair rental value, just not income tax. The same is true if you are purchasing or renting your own home. The amount of cash income you can exclude in those cases is the lowest of three amounts: 1) The amount of your cash compensation that your employer designates as housing (in lieu of providing you a parsonage to live in), 2) the amount you actually spend for housing, just not food or servants (it’s a very old rule), and 3) the fair rental value of your home, plus the cost of your utilities. It almost all cases, we recommend that you “guess high.” You never know what surprises might come in terms of your housing expenses. And if you don’t spend as much as was designated by your employer, then you add the unused portion back to your income on Form 1040. It’s rare, but young families with children and low income can “overcook” their housing allowance designation requests. Get advice in these situations.

This excerpt is a portion of our top 10 list for new ministers. If you would like to see all of the frequently asked questions ministers have you can visit this link.

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Rental of a Church Parsonage to a Non-Minister

Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant. IRS Publication 598 states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property. However, a second concern not a...

How can my ministry expenses be covered by the church?

How can my ministry expenses be covered? Many ministers use their personal autos for ministry purposes. Their employers can reimburse these costs using a standard mileage rate published by the IRS. The per mile rate represents employees’ entire reimbursable cost other than highway tolls and parking tabs. If not covered by use of the ministries’ credit card, other costs can be reimbursed as well—business and travel meals, lodging, office supplies, and professional library purchases among them. Some ministries reimburse travel costs using per-diems published by the IRS. If employee business expenses are not reimbursed, the personal tax deduction benefit to the individual minister is severely limited. Non-taxable reimbursements after documentation is provided to the employer follows IRS rules for accountable plans. Non-taxable cash advances before expenses are in...

What is the best retirement account for a Minister?

What are my options for retirement savings? Regardless of options, start now! You probably have learned about traditional and Roth IRAs. We have often found them well short of the benefits we will share here regarding Internal Revenue Code section 403(b) plans. These plans must be established by your employer (although you might need to be the initiator). They are funded in two ways—withholding from your paycheck at your option (called “elective deferrals”) and as initiated by the employer (matching or non-elective contributions). These contributions not only save income tax, but they also reduce the income you must report as subject to the 15.3% SECA tax. Further, at retirement with the cooperation of your church or Christian ministry the distributions to you can be tax-free to the extent of your qualified housing expenses. Many ministries also adopt what are often called “FICA alternative” be...

MinistryCPA - Corey A. Pfaffe, CPA, LLC

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