How to correctly calculate your housing allowance
The minister’s housing allowance is arguably one of the most advantageous benefits available to ministers—while also one of the most confusing. It’s necessary to understand what a housing allowance is not so we can better understand what it is.
Let’s talk about four common myths, and their truths, surrounding a minister’s housing allowance.
Myth Number 1: Housing Allowance is an Additional Income Provided to the Pastor
A common misconception among pastors, church administrators, and boards is that housing allowance is added income to the pastor’s salary. This myth can lead to churches providing a separate check for the pastor to cover their housing.
This confusion is certainly understandable; the term “allowance” seems to be the main source of this confusion. The easiest way to think about housing allowance is to think of it as a housing exclusion. The portion of the salary that a minister uses to maintain their home is then excluded from the gross income and tax-free.
The amount reported as taxable income is the calculated difference after excluding the housing allowance from the total salary.
A housing allowance is one of several tax benefits available to pastors. At StartCHURCH, we will design a custom minister’s compensation package for you that includes setting up a housing allowance to help you protect your financial future. Give us a call at (844) 264-5705 today to speak with a specialist and take advantage of all of the benefits available to pastors and ministry leaders.
Myth Number 2: Housing Allowance is Retroactive
The truth about the minister’s housing allowance is that it is NOT retroactive; it is only projective.
What exactly does this mean?
The housing allowance (or exclusion) is applicable from the date it is approved through the end of the year. If the housing allowance is approved in June, any housing-related expenses prior to the approval date will not be able to be deducted for the year. Thus, it is imperative to approve the housing allowance in December for the following year or as early as possible in January.
Myth Number 3: Housing Allowance is Exempt from ALL Taxes
A minister’s housing allowance is often mistakenly thought to be completely tax-free income. While that is true to some degree, it’s not entirely free. The minister’s housing allowance is a portion of a minister’s income that is exempt from federal income tax. However, if a minister has not “opted-out” of self-employment taxes, then the entirety of the minister’s salary/income, including the portion designated as housing allowance, is subject to self-employment taxes.
Myth Number 4: There is a Limit to Housing Allowance Designation
The last myth to dispel about housing allowance is that there is a limit to the amount that can be designated as a minister’s housing allowance.
The truth is, there is nothing stated in the tax code, treasury regulations, or other IRS publications limiting the amount that a church can designate as a housing allowance for a minister.
This means that up to 100% of your salary from the church can be designated as housing allowance, once the proper calculations are made—which will be explained in the next section.
Keep in mind that when choosing this route, the board of directors must indicate the actual amount of your total salary in the board meeting minutes approving your housing allowance.
HOW TO CORRECTLY CALCULATE YOUR HOUSING ALLOWANCE
An essential part of establishing and maximizing your housing allowance is understanding how to calculate it accurately.
The IRS Ministers Audit Technique Guide describes the limits placed on a minister’s ability to exclude a housing allowance from gross income.
A minister may exclude no more than the lowest of the following amounts:
1. The actual cost of maintaining a home
2. The estimated cost of maintaining a home
3. The home’s fair rental value, including furnishings, appurtenances (i.e., garage), and the cost of utilities.
It is a pastor’s responsibility to calculate each of these amounts.
The next obvious question is, “What expenses can you include when calculating your housing allowance?”
In essence, your designated housing allowance may include all costs that are directly related to maintaining your home.
Some examples of qualified housing allowance expenses include:
• Monthly payments: mortgage and rent payments
• Taxes: real estate taxes, personal property taxes
• Insurance: homeowners, fire, flood, renters
• Home Improvements: new roof, home additions (i.e., garage, carport), fencing, landscaping, pool, deck, etc.)
• Maintenance and Repairs: drapes, curtains, blinds, throw rugs, wallpaper, paint, molding, shelving, artwork, bedspreads, sheets, linens, towels, knick-knacks, etc.
• Utilities: gas, electricity, water and sewer, garbage service, cable/satellite, internet, phone line, home security, etc.
• Miscellaneous: home cleaning supplies, brooms, mops, vacuums, light bulbs, home supplies, carpet/rug/drapery cleaning, landscaping services, lawn equipment and supplies, garden hoses, garden tools, etc.
First published on Start.Church. Used by permission.