Minister's Housing Allowance Basics - Church Accounting Series - YouTube

Hello, welcome to today's installment of the FlockBase church accounting videos.

My name is Jerry Walker.

I am a CPA and have been since 1993.

I also have the privilege of serving as the volunteer treasurer at my church, which i've

been doing for about 20 years now.

I'm also the founder of FlockBase software and our primary mission at FlockBase is to

help churches, so we're hoping that you will find this information very helpful.

If so, feel free to share it with your friends, pastors, ministers, church treasurers, anyone

that you think might find this information helpful.

So, let's go ahead and get started with today's topic.

Today's topic is the minister's housing allowance, so I'm kind of excited to visit with you about

this topic today because it is a significant item that can save taxes for ministers.

So the first thing that we need to know about a minister's housing allowance is that it's

only eligible for ministers, so it's not available for non-minister employees, so you've got

to make sure that before you pay or receive a housing allowance that you qualify as a

minister and under the tax code there's a couple of criteria that you have to meet in

order to be considered a minister.

The first one is that you must be either licensed or ordained, so if you have a staff member

at your church who is doing minister type things but they're not licensed or ordained,

then they're not a minister for tax purposes and we cannot pay them a housing allowance.

The second criteria to be defined as a minister is that you must perform at least one of the

following things: you must either administer the sacraments of the church, be considered

a religious leader by the church, conduct religious worship, and/or have management

responsibilities in the church.

So obviously the senior pastor, as long as he or she is licensed or ordained, then they

will qualify.

Same thing with youth minister or music minister, as long as they're licensed ordained.

A children's minister could qualify as well, as long as they are licensed or ordained.

Okay, so I think we've got that settled.

We've got to meet those criteria of being a minister, and then we can be paid a housing

allowance.

Why would a minister want to be paid a housing allowance?

That is because the housing allowance is not subject to income tax, so that's a pretty

big deal.

You know, in other industries, you know, I'm a CPA and I pay for my housing expenses using

money that I've already paid taxes on, but a minister gets to pay for their housing expenses

using money that they have not paid income taxes on, so that's a big potential tax savings

for them.

Now the housing allowance is still subject to the Social Security and Medicare tax, so

the housing allowance doesn't completely avoid all taxes but it does avoid the income tax,

and and so that's where the savings comes in.

Now, of course, if you've opted out of Social Security as a minister, then you're not going

to be subject to that tax anyway, but opting out of Social Security is a different topic

for a different day.

One of the things I want to really make clear during my presentation today is that there

are three limits placed on the amount that you can exclude under the housing allowance

and this confuses a lot of people, so I'm going to try to be as clear as I can here.

The first limit is the amount properly designated, so you've got to get the amount designated

somewhere in the documentation of the church, so whether that's finance committee meeting

minutes, whether that's some sort of agreement between the minister and the church, whether

that's in the church budget.

There's various places it could be documented, but the amount must be documented, and it

must be documented in advance of being paid, so you can't make retroactive housing allowance

designation.

So if we agree upon a housing allowance today for a minister, that ONLY applies to future

paychecks, not the prior paychecks.

So, point number one, we can only exclude the amount properly designated.

That's the first limiter.

The second limiter is the amount actually spent.

So, let's say a minister designates $2,500 a month towards their housing allowance, but

they only spend $2,400 a month on actual housing expenses, so they've underspent by $100 a

month.

At the end of the year, that minister just simply claims the extra $1,200 as additional

income on their personal tax return.

It doesn't change the way the church reports it because the church is not responsible for

keeping track of how much the minister has spent on housing allowance.

That's the minister's responsibility.

So, number one is the lesser of the amount designated or the amount spent, but then there's

a third limiter, and this is the one that confuses and catches a lot of people off guard,

and that is the amount you exclude from your income under the housing allowance cannot

exceed the fair rental value of the house.

For example, let's say a minister designates $2,500 a month for housing allowance, spends

$2,400 a month on housing expenses, but the fair rental value of the house was only $2,300

per month.

Then the amount that the minister can exclude on their tax return from their taxable income

is only $2,300.

So there's that third limiter there, and I think the IRS and Congress simply wanted to

put a limiter on there to keep people from excluding extremely large amounts from their

income.

You know, if you think about it, let's say you were going to make a lot of improvements

to your house this year.

You were going to add a deck, you were going to add a pool, you're going to have a fence,

you're going to add a sun room, you're going to spend $150,000 on your house this year.

I don't think the IRS wants anybody excluding $150,000 a year off of their income under

the housing allowance, so they're trying to make it reasonable by putting that fair rental

value limitation.

For determining your fair rental rental value limitation, you could ask a realtor in your

area, probably look on some website like Zillow to get some fair rental values for houses

similar to your size in your neighborhood, and such as that.

The things you can exclude under your housing allowance are just the normal housing expenses,

like your mortgage payment or your rent, your utilities, insurance, property taxes, repairs

and maintenance, cleaning supplies, furnishings and appliances, landscaping and lawn maintenance,

security service, decor, HOA dues.

If it's to maintain your house, then it falls under the definition of eligible housing expenses.

Then the final topic I'll touch on is what if a minister lives in a church provided parsonage?

The value of that personage does not have to be included in the income of the minister,

and yet that minister could still receive a housing allowance if the minister is paying

for the utilities, or paying for the furnishings, or something like that.

I hope this information is helpful and I hope you have a wonderful day.

Hi, my name is Caley and I work in customer success for FlockBase.

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Have a blessed day!