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Mid-Year Review of Housing Allowance Designations

Perhaps the most beneficial tax benefit available to a minister is the clergy housing allowance, which allows a minister to exclude permissible housing expenses from taxable income.

Now that that the current year is more than half over, it is a good time for churches and their ministers to review the housing allowance designations previously made for this calendar year. For the minister, only the amount actually expended for permissible housing expenses can be included when the time comes to file the minister’s personal tax return. Therefore, it is a good practice for a minister to check in the middle of the year to see how much has been expended on  permissible housing expenses, and ensure that the minister has retained documentation for those expenses. If the minister discovers that permissible housing expenses are likely to exceed the amount designated by the church as housing allowance, there still may be time for the minister to request that the housing allowance designation be increased by the church.

However, it is very important for the church and the minister to keep in mind that all clergy housing allowance designations must be made proactively, not retroactively. The church cannot go back and increase the housing allowance designation for any portion of the tax year that has already passed. Yet the church may increase a minister’s housing allowance designation for the remainder of the current tax year. For this reason, checking the status of actual housing expenses mid-year is important in order to allow sufficient time for a housing allowance designation increase to be effective for the remaining portion of a calendar year. All designations should be made in advance by the church’s board, and documented in writing, even if the writing occurs later as a memorialization of an oral designation.

Because churches must make clergy housing allowance designations proactively, not retroactively, the best practice is for the church’s board to approve housing allowance designations late in a tax year for the following tax year. This ensures that the designation is effective immediately at the beginning of the tax year. Nonetheless, as discussed above, the church board may increase the designation at any time during the year, but only for the remaining portion of the year. 

Sometimes a mid-year review reveals that a minister is not likely to use the entire housing allowance designation. If a minister, upon a mid-year review of actual housing expenditures, discovers that the permissible housing expenses are likely to be significantly less than the designation by the church for housing allowance, the minister should do adequate tax planning to ensure that proper funds will be available to pay the taxes that will be owed on the unused housing allowance designation, since this amount will be re-characterized as taxable income when the minister files his or her personal tax return. Consult with a tax professional if assistance with such tax planning is needed.

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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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