Urgent Housing Allowance Update for 2012
By Raul Rivera
A question that often goes unasked and unanswered is, “Who actually qualifies for the housing allowance?” Most people automatically assume that if they have been ordained or licensed then they qualify. While that is true in most cases, it is important to know that the law does not automatically qualify you just because you are ordained. You have to meet certain requirements in order to be able to take advantage of the tax benefits provided by the housing allowance.
I have looked at the housing allowance programs of many churches. While most churches strive to execute it with excellence, a great many of them are either deficient in their documentation or they do not experience the full benefits that it provides their ministers. Let me answer three important questions that will bring clarity to the housing allowance and enable you to take full advantage of its benefits.
Question One: Are you a minister who qualifies?
In essence, the IRS has set forth guidelines to determine if a minister qualifies to have a housing allowance.
For a person to qualify for the housing allowance as defined in section 107 of the IRC, he/she must be an ordained, licensed, or commissioned minister of a church. There are certain activities that the minister will have to perform to be considered a licensed minister who qualifies for the housing allowance. They are as follows:
1. Performing sacerdotal functions. This means that you actively minister on a regular basis.
2. Conducting religious worship.
3. Performing administrative duties and teaching at a theological seminary, as long as the school is under the direct control of a church (Rev. Rul. 62-171).
4. Performing the ordinary duties of a minister as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia.
5. Be licensed in accordance with the church’s requirements. There are eight legal steps each church should take to ensure you are ordained. We teach those steps at all of our conferences.
Under these guidelines all pastors and associate pastors will qualify for the housing allowance, as well as most worship leaders, youth pastors, and other ministers.
But what about lay pastors who do not serve in a traditional ministerial role? Almost every church has ministers who do not serve in a traditional role. These people are ordained or licensed by their church or some other church, but are not necessarily employed by a church. They serve in the church and occasionally preach at the church when asked, they serve in altar calls, they pray, counsel, and lead prayer meetings. From time to time, they receive compensation from the church for preaching or performing some other ministerial duty. These ministers QUALIFY! I am amazed at the number of churches that do not designate such ministers’ pay as a housing allowance. Great stewardship takes the time to ensure that every minister of the church gets a housing allowance program designated regardless of his or her employment status at the church.
Question Two: How does my church create a housing allowance the right way?
The housing allowance is created through a board meeting in which the board passes a resolution to adopt a housing allowance plan for a minister. If a church has more than one minister, it will have to create an individual housing allowance plan for each one. The resolution has to have the following key pieces of information:
1. The date of the meeting.
2. The housing allowance needs to be implemented as a permanent housing allowance unless revoked;
3. The minister’s name must be clearly declared as qualifying for the housing allowance;
4. A statement requiring the minister to substantiate his qualifying housing allowance expenses. He/she must calculate his/her actual home expenses and his/her rental value. Our Compliance Kit software program makes it easy to calculate the qualifying housing allowance expenses.
5. A statement that shows the maximum amount of the minister’s total income that is designated towards his/her housing allowance. This is a tricky one. That is why we discuss it thoroughly at our conferences. Many CPA’s erroneously believe that the housing allowance cannot be more than 50% of the minister’s income. The reality is that up to 100% of the minister’s income can be designated as a housing allowance so long minister properly substantiates the qualifying housing allowance expenses.
Question Three: How does the housing allowance lower my taxes?
A properly executed housing allowance lowers your taxes in three different ways. In fact, it can lower a minster’s taxes to the degree that he/she may even get a refund. Below are the three ways a housing allowance can lower your taxes.
1. Federal Income Tax: The grand total of the housing allowance is exempt from federal income tax. It is not exempt from self-employment tax, though. Many ministers are not aware that the tax code on individuals is divided into two types of taxes. The first one is federal income tax and the second one is the self-employment tax (FICA and SECA). The housing allowance is exempt from federal income tax but not self-employment tax, which is currently set at 15.3%. Therefore, if a minister’s total take home pay in 2012 is $55,000.00 and $25,000.00 of his total take home qualifies as housing allowance, then he only pays federal income tax on the remaining amount of his total take home pay (55,000-20,000=35,000.00).
2. Double Dip Deduction: The double dip rule was added to the tax code in 1986. The regulation of section 107 allows a minister to count the interest and the property taxes he/she pays on his/her home as housing allowance. However, section 265 was added to allow a minister to also deduct the interest and property tax as an itemized deduction. Let me explain. If the total of minister X’s take home pay is $55,000.00 and his qualifying housing allowance is $20,000, his adjusted gross income is $35,000.00. However, he can now take the interest and property taxes he already claimed in his housing allowance and report it again on Schedule A and get another deduction. Minister X’s interest and property tax is $14,000.00. Bottom line: he gets to deduct another $14,000.00. His total income ends up being $21,000.00.
3. Earned Income Credit: This is a real good one if a minister has also applied for and received self-employment tax exemption. If you have already applied for the self-employment tax exemption then this is for you. If not, please call us at 770-638-3444 and one of our consultants can give you all of the details. Many ministers are not aware that the housing allowance can work in a minister’s favor when it comes to the earned income credit. For tax year 2012, a family with children can earn up to $50,270.00 and still qualify for the earned income tax credit. That said; let’s look at Minister X whose take home pay is $55,000.00. His housing of $20,000.00 reduced his adjusted gross income to $35,000.00, and though his total take home pay is above the earned income tax credit threshold, the housing allowance combined with his self-employment tax exemption brought his income back down to a level that qualifies him to get the earned income tax credit. For 2012, the maximum credit is $5,891.00. Wow! Many pastors will miss out on this awesome credit only because they lack this knowledge.
Let us help you get it right
The housing allowance and self-employment tax exemption, when done right, are the most powerful tax savings plans in America. Every year many people improperly take tax deductions or pay too much in taxes. Give us a call and let one of our consultants develop a 2013 action plan that will give you peace of mind and allow you to have the best ministry year ever.