Clergy Tax Tips – Housing Allowance Answers
In the next few weeks, as you begin thinking about our favorite subject, clergy taxes, we’re going to address some commonly asked questions. If you’re puzzled about some aspect of your housing allowance or clergy tax situation, ask us and we’ll try to answer as best we can in this forum. Answers to general clergy tax questions in this format are, by no means, an exhaustive treatise, they are meant to help clarify some commonly held misconceptions.
How much housing allowance can I claim on my tax return in a given year?
The clergy tax code imposes three limitations here. Ministers may only claim the lower of these three:
(1) the amount of the housing allowance designated by the church.
(2) the fair rental value of the minister’s furnished home, plus utilities.
(3) the amount spent that year to buy, rent, furnish, improve and maintain the primary residence.
A real estate agent can be helpful in figuring out the fair rental value of an unfurnished home. But, one problem with these calculations has always been in determining the fair rental value of a furnished home. We discuss this at length in our “Tax Free Money for Minister’s” webinar. Certainly the fair rental value of a furnished home is significantly more than an unfurnished home, there’s no argument there.
However, the IRS has not provided official guidance on how to determine the fair rental value of a furnished home, even though it’s been directed to do so. With this in mind, we’ve notified the IRS as to how we’re treating this situation on our minister’s tax returns and thus far have experienced no difficulties.
When can I change my housing allowance limits?
The Housing Allowance designation can be changed or amended anytime throughout the year but, never retro-actively. This means that the new designation applies only to the money remaining to be paid for that year. If you anticipate extra costs in the months ahead for a home purchase, repair, addition, etc. you may adjust your housing allowance designation before you incur the expense. You may even designate the entire amount of your salary as housing allowance, if necessary, and is often very appropriate to do so.
How much can my employer designate for housing allowance? My church board believes that $40,000 is the limit.
We can’t be more emphatic about this; there are no official limits, except those numbered and mentioned above in the first question. The Tax Code Regulations and Rulings impose NO LIMITS on housing allowance designations. In some cases, including part-time ministry, semi-retired ministers, particularly high housing costs,and the situations already mentioned above, it may be acceptable and even advisable for 100% of a ministers salary to be designated as housing allowance.
For more detailed strategies visit our “Tax- Free Money for Ministers” webinar. There’s no investment other than an hour of time from the convenience of your home or office computer. We’re sure you’ll go away with very valuable tax saving tips that you can start implementing immediately!