The Internal Revenue Code provides churches the ability to designate, and for ministers to receive, a housing allowance. Housing allowances are also known as parsonage allowances or rental allowances. Although these allowances provide great tax benefits, many churches and ministers fail to take advantage of them. Here are some things churches should know about these allowances:
- A housing allowance is a portion of a minister’s salary that is designated for that minister’s housing needs and excluded from the minister’s gross income for income tax purposes. The amount that can be excluded is the lesser of:
(a) the amount designated as the housing allowance
(b) the amount of actual housing expenses, or
(c) the fair rental value of the property (furnished, plus utilities).
- The housing allowance is an exclusion from income, not a deduction.
- In order to designate a housing allowance, a church must follow certain formalities. The housing allowance must be approved by the church board in writing and must be designated before the beginning of the calendar year.
- The housing allowance only works prospectively, not retroactively.
- Eligible housing allowance expenses can include the following: down payment on a home, mortgage payments, home equity loan payments, rent payments, real estate taxes, property insurance, utilities, appliances and furniture, remodeling expenses, homeowners’ dues, pest control and maintenance, and trash pick-up.
- The housing allowance is limited to only one home.
- The housing allowance only applies to federal income tax. It does not apply to social security taxes.
Housing allowances can be great tax saving tools for ministers. While there is no cost to a church, such allowances can save ministers a significant amount each year. Deciding to set up a housing allowance may raise many additional legal issues and questions. If your church is considering setting up a housing allowance for a minister, please contact the attorneys of Dalton & Tomich, PLC.