Skip to main content

What Counts as a Housing Allowance?

Question:

As a pastor, what can I deduct for a housing (parsonage) allowance?

Answer:

A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. A minister living in a parsonage qualifies for a housing allowance to the extent of his own out-of-pocket costs. The IRS lists only food and servants as prohibitions to allowable housing expenses.

The minister’s church or other qualified organization (e.g. religious school or college with board members accountable to local churches) must designate the housing allowance by official action taken in advance of the payment. If none of the minister's salary has been officially designated as housing allowance, the full salary must be included in gross income. 

If a minister owns a home, the amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following three amounts: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, (c) the fair rental value of the furnished home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The following is a list of allowable housing expenditures:
  • Total mortgage payments (be careful not to duplicate amounts included under "real estate taxes" and "homeowner's insurance")
  • Real estate taxes
  • Homeowner's or renter's insurance
  • Furniture, furnishings, appliances
  • Utilities (e.g. heat, lights, water, sewer, telephone, water softener, cable, waste disposal)
  • Rent paid
  • Repairs paid personally
  • Loan refinancing costs
  • Other household supplies (everything except food and household employee compensation)




Comments

Popular posts from this blog

Form 944 or 941 Filing for Churches

Question:   A new church filed for an employer identification number (EIN) recently. It received notification from the IRS about the EIN, stating that the church must file Form 944 by the following January deadline. The church has no non-ministerial staff members. Since income tax withholding is elective by ministers and none of the pastors has elected to request non-mandatory withholding is the church required to file Form 944 annually? Also, a quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Technique Guide  explains in further detail a minister's treatments for social security, Medicare tax, Fed

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

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