Clergy are permitted to exclude from their taxable income the costs of maintaining their primary residence. This housing allowance is not included as taxable income on pastors’ W-2s. There are rules for determining, documenting and reporting a housing allowance that need to be followed.
- Clergy need to determine the cost of maintaining their primary residence for the upcoming calendar year or for the remainder of the year if their employment commences during a year. The housing allowance amount is the lesser of:
- Amounts actually paid for housing and related expenses.
- The fair rental value of the home furnished, plus utilities.
- The amount actually paid or declared by the congregation as the housing allowance.
- The clergy housing allowance amount must be requested in writing and approved by official action by the employer. In a congregation, the housing allowance is generally approved by the congregation council or the finance committee. A record of the action to approve should be in writing.
- The housing allowance is not subject to federal income tax, but it is subject to self-employment tax (SECA). On the W-2, it is not reported in Box 1. It is typically reported as an information item in Box 14.
- A housing allowance operates prospectively; in other words, it is declared ahead of when the expenditures are made. It can be modified if significant expenses not anticipated earlier are identified, but the allowance must always be changed ahead of the expenditures.
- Clergy need to maintain records of their costs, including receipts, in order to document the housing expenses in the event of an IRS audit.
Clergy should consult with Clergy Financial Resources to resolve any questions pertaining to their individual housing allowance.
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
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