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Clergy Housing Allowance

Ministers who own their home can not only take advantage of the housing allowance by including mortgage payments as housing expenses but also can deduct mortgage interest and property taxes on their itemized deductions. This is often referred to as a “double deduction.

Once ministers pay off their mortgages, however, they can lose a good portion of this important tax benefit. But the Tax Court has ruled that a minister can obtain a home equity loan and include the loan payments as part of the housing allowance for tax purposes as long as the loan was obtained for housing-related expenses.

Housing allowance is subject to Social Security tax under SECA. However, retired clergy are considered unemployed and so do not have to pay the Social Security tax on this allowance.  For additional guidance, please refer to Publication 517. Also, when calculating your state taxes, make sure to check the rules for your particular state. Most states allow clergy to exclude the housing allowance from taxable income, but some don’t.

Generally, any expense to provide or maintain the home can be used to justify the housing exclusion. Regulations do specifically state that expenses for groceries, paper products, personal toiletries, personal clothing, and maid service cannot be used. You may legitimately include the following:

(1) rent, principal payments, or down payments plus the cost of buying the home;
(2) taxes and mortgage interest (even if these are includable as itemized deductions);
(3) utilities (heat, electric, basic telephone, water, etc.);
(4) the purchase of furniture, appliances, dishes and cookware, and decorating items including rugs, pictures, curtains, bedspreads, sheets, towels, etc.;
(5) insurance on the home and contents; and
(6) miscellaneous expenses including improvements, repairs, and upkeep of the home and its contents, snow removal, lawn mowing, light bulbs, cleaning supplies, etc.

As indicated above, up to 100 percent of compensation can be designated as a housing allowance, but this does not necessarily mean that this is the amount that can be excluded from income taxes. IRS Publication 517 provides a definition of how much parsonage allowance can be excluded for ministers: “If you own your home and you receive as part of your pay a housing or rental allowance, you may exclude from gross income the smallest of the following:

• The amount actually used to provide a home,
• The amount officially designated as a rental allowance, or
• The fair rental value of the home, including furnishings, utilities, garage, etc.

Contact Clergy Financial Resources to help you with the next steps.

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Maple Grove, MN 55369

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (763) 425-8778 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com

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