Clergy Tax Savings Tips – Reduce Audit Potential and Save Tax
If you’re a minister receiving housing allowance, your tax deduction for unreimbursed professional expenses could be significantly limited if you’re not using an Accountable Plan for ministerial expenses.
This is because of the “Code Section 265 Proration Rule,” often called the “Deason Rule,” which denies any deduction for unreimbursed professional expenses which are allocable to tax exempt income, such as clergy housing allowance.
There is a great way to overcome the “Deason Rule” and one that will help you avoid the limitation: Have the church set up an Accountable Plan for your professional clergy expenses. The common myth is that this arrangement will cost the church extra money. This is not true. It costs the church nothing and increases the minister’s tax savings in most cases, and often times, it saves the minister a lot.
Under such an arrangement, the church and the minister(s) designate part of the minister’s pay package for ministry expenses. The minister is reimbursed for those expenses and any unused money designated for ministerial expenses in this way can be returned to the salary package.
To give you an idea of how this works, look at this scenario:
A minister receiving a $40,000 salary, $30,000 housing allowance, and incurs $6,000 in business expenses for the tax year. Applying the Code Section 265 Proration rule, $2,580 of this minister’s un-reimbursed professional expenses are not deductible. This translates into $877 of extra income TAX for the minister that could have been avoided with an Accountable Plan.
It costs nothing for the church and potentially saves the minister a lot of tax while reducing audit potential. Every minister and church should have an Accountable Plan, just make sure it’s set up properly.