Can a Pastor Claim His Entire Salary as Housing Allowance?
Pastor James is preparing his budget for the upcoming year. His church has asked him to designate how much of his $25,000 annual salary he wants to allocate as a housing allowance. Can he designate the entire salary for housing allowance? How should he calculate the amount to claim?
Understanding the Housing Allowance
The housing allowance is a portion of a minister's compensation designated for housing expenses. It is excluded from federal income tax but not from self-employment tax. Here are the key points to understand:
Exclusion from Federal Income Tax: The housing allowance is excluded from federal income tax but not self-employment tax.
Compensation for Ministerial Services: The housing allowance must be part of the compensation for ministerial services.
Three Limitations: The housing allowance must be the lesser of:
The designated amount,
The actual amount expended, or
The fair market rental value.
Prior Designation: The housing allowance must be designated by the church before payment is made, not retroactively.
Calculating Eligible Housing Expenses
Pastor James can include the following expenses when determining his housing allowance:
Rent or Mortgage Payments: Including down payments or the cost of purchasing a home.
Taxes and Interest: Payments on the home.
Utilities: Heating, electricity, basic telephone, water, etc.
Furniture and Appliances: Including dishes, cookware, and decorating items like rugs, artwork, curtains, bedspreads, sheets, towels, etc.
Home Insurance: Insurance on the home and its contents.
Repairs and Upkeep: Expenses for repairs, improvements, and maintenance of the home and its contents, such as snow removal, lawn mowing, light bulbs, cleaning supplies, etc.
Pastor James' Housing Expenses
Pastor James has the following annual housing expenses:
Rent: $18,000
Taxes and Interest: $0
Utilities: $3,000
Furniture: $1,000
Insurance: $500
Repairs/Upkeep: $500
Total Housing Expenses: $23,000
Designating the Housing Allowance
Pastor James can designate up to $23,000 of his $25,000 salary as a housing allowance based on his actual expenses. If his expenses increase, he can adjust the amount accordingly, even up to 100% of his salary. However, the amount must be designated before it is paid to be claimed.
Conclusion
Pastor James should inform his church that he can designate $23,000 of his salary as a housing allowance for the upcoming year, based on his estimated housing expenses. If his expenses increase, he can adjust this amount accordingly, ensuring it is designated before payment.
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