A Powerful Tax Break For Ministers
By Laura Archambault
If you’re like most pastors I know, you’re not exactly in this job for the money. And we love your sacrifice, but we also want to make sure you and your family are provided for.
One of the best ways to do this is properly claiming your housing allowance. A housing allowance significantly lowers the amount of your income you must pay in taxes. However, establishing it properly and calculating it on your own can be confusing.
Before we go on, we need to clarify the term “housing allowance.” This refers to a portion of your income that you are “allowed” to exclude from your income tax, and it’s a benefit exclusively for ministers. So if you were picturing a housing stipend, it’d probably be better to think of a housing deduction: the portion of your income used for housing is excluded from the gross income and is considered tax-free.
Great! Now that we’ve cleared that up, let’s cover how to calculate and report it correctly.
There are three things every pastor or minister should know about the housing allowance to use it for their full advantage. Keep reading- if you get your housing allowance set up now, you can use this powerful tax benefit for the entire 2022 tax year!
1. How to properly set up your housing allowance
The board must approve the housing allowance of directors before it comes into effect.
At a board meeting, your board of directors will need to vote to approve what they will offer you for your housing allowance. Once that has been decided, this amount and the agreement must be recorded in the board meeting minutes.
Also, please note that a housing allowance is only proactive, not retroactive. This means that if you get your housing allowance approved in June, you will not be able to include the previous months of January through May.
This topic is always helpful to go over in your annual board meeting.
Looking for a tool to help you lead board meetings and keep proper records?
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2. How to correctly calculate your housing allowance
At the end of the tax year, you can calculate how much of your gross income is able to be excluded from income taxes.
When calculating your housing allowance, you need to select the least of the following:
- The amount used to provide a home,
- The amount designated as a housing allowance,
- And the fair rental value of the home, including furnishing, appurtenances, and the costs of utilities.
Even though the board needs to approve the housing allowance, it is the pastor’s responsibility to calculate all of the amounts.
This can be an overwhelming process if you’re handling this by yourself. We have a Compensation Suite to help minimize the stress of calculating. If you prefer someone else to do it all together, we also offer a housing allowance service.
The following expenses can be included when calculating your housing allowance:
- Monthly payments, such as mortgage and rent
- Taxes, including real estate taxes, personal property taxes
- Insurance, like homeowners, fire, flood, renters
- Home improvements, such as a new roof, home additions (garage, carport), fencing, landscaping, pool, deck, etc.
- Maintenance and repairs. This includes: drapes, curtains, blinds, throw rugs, wallpaper, paint, molding, shelving, artwork, bedspreads, sheets, linens, towels, etc.
- Utilities. Gas, electricity, water, sewer, garbage service, cable and satellite, internet, phone line, home security, etc.
- Miscellaneous. This includes, but isn’t limited to: home cleaning supplies, brooms, mops, vacuums, light bulbs, home supplies, carpet cleaning, landscaping services, lawn equipment, and garden tools and supplies.
Insider’s tip:
There isn’t anything in the tax code, treasury regulations, or other IRS publications that limits the amount a church can designate as a housing allowance for a pastor.
The housing designation does not determine how much a minister will be able to exclude from gross income. To meet the legal requirement, your housing allowance needs to be designated in advance of payment for your services as a minister to the church.
When the board designates your housing allowance at 100% of your compensation in advance of payment, you can use the actual expenses paid to have a home.
So, the end result is the maximization of your housing allowance benefit. At the same time, please recall that the amount you can report is limited to the lowest of the three amounts mentioned above in key factor #2.
3. How to report your housing allowance
The IRS has noted that the housing allowance doesn’t need to be reported on a minister’s Form W-2.
However, we have found that there are benefits in reporting your housing allowance on your W-2.
One benefit is banking and major buying purposes. When you apply for a loan to purchase a home or car, banks want to know whether your income is acceptable to make the payments. Many banks will deny the loan request if the income reported on the W-2 isn’t enough.
Because of this, including the housing allowance in box 14 on the W-2 helps substantiate the pastor’s total income and can assist in getting a loan approved.
Another benefit is self-employment tax reporting. This is one of those points that gets a little more complicated. Although the housing allowance can be excluded from income tax, it is still subject to self-employment tax if you have not opted out. Reporting your housing allowance on Form W-2 makes it easier to report your income on Schedule SE (Form 1040) for self-employment taxes.
You deserve the best
Understanding how to use the housing allowance can save you thousands of dollars. As a pastor’s kid and a founding member of a scrappy little nonprofit, I know firsthand what thousands of dollars can mean for you and your family! As a servant of the Lord, you deserve the best provision, and we want you to take advantage of this great tax benefit for ministers.
We share this information to empower pastors and ministry leaders to do just that. Remember, the housing allowance must be properly set up, calculated, and reported.
It is a lot of information to process, so if you want help, we’re here. If you have any further questions about how to implement the housing allowance in your taxes, give us a call at 770-638-3444.
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