Ideally, clergy should keep careful housing expense records to determine whether expenses are greater or less than the annual designation. Records are also important for estimating a reasonable housing allowance for the next year. Original receipts, invoices, canceled checks, charge card records, etc. are all essential. To simplify record keeping, some pastors find it helpful to have one charge card or bank account dedicated solely to household expenses, while others simply use the “shoebox” method of collecting all applicable receipts in one handy place.
While there is no list of allowance expenses provided by the IRS, it is understood that most reasonable household expenses can be included in the housing allowance. Some of these items include:
- down payment on a home
- mortgage payments (including both interest and principal)
- home equity loan payments (assuming the loan proceeds are used for housing-related expenses)
- real estate taxes, homeowners’ association dues
- property insurance
- furnishings and appliances (including repairs)
- structural repairs
- yard maintenance
- pest control
- snow removal
- maintenance items
- trash pickup
Note that the personal gifts, clothing, and food may not be included in the housing allowance. Also, housing-related expenses can only be included in the housing allowance for the year in which they are incurred for your primary residence.
The amount that can be excluded from federal income tax is the lesser of:
(a) the amount designated as the housing allowance
(b) the amount of actual housing expenses, or
(c) the fair rental value of the property (furnished, plus utilities).
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.
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