Managing the added expenses involved with reopening your church
The federal tax code provides clergy with a tax exemption on the portion of their compensation that their church employer designates as housing allowance. For federal tax purposes, housing allowance is limited to the lesser of:
Unfortunately, many ministers either fail to claim this tax benefit or do not claim enough. MMBB Financial Services can help you understand the details involved with calculating the housing allowance exclusion by using the Housing Allowance Worksheet that we’ve developed. It lists the possible expenses that you may have incurred for housing in the past year. The total of the expenses is the amount that should be considered when computing your housing allowance exclusion. We will work with you to maximize the value of the clergy housing allowance to which you are entitled.
The first piece of information that you need to include on the worksheet is the Tax Year, this is important because the amount of the housing allowance must be designated in advance of the tax year to which it will be applied. Next, you will list the amount you expect to spend for housing for the coming year; this amount is the total of eight items: (1) Payments (including pre-payments) on a mortgage loan to purchase or improve your home (including both interest and principal), (2) Real estate taxes, (3) Property insurance, (4) Utilities (electricity, gas, water, trash pickup, local telephone charges, internet fees), (5) Furnishings and appliances (purchase and repairs), (6) Yard maintenance and improvements, (7) Maintenance items (household cleaners, light bulbs, pest control, etc.), and (8) Homeowner association dues. The total of these items will give you the estimated housing allowance exclusion for the tax year. The Housing Allowance Worksheet is available at https://www.mmbb.org/our-services-plans/housing-allowanceadvantage/housing-allowance-worksheet/ or by calling 800.986.6222.
It is important to remember the housing allowance is considered compensation for ministerial services and must be designated by the church in advance of the tax year in which the allowance will apply. A minister cannot exclude more than the church designates. If audited by the IRS, it is the responsibility of the minister to document actual housing expenses. Therefore, it is extremely important to keep accurate records of all housing expenses. You may want to create a paper file or electronic file to keep track of your housing expenses. It is vital to retain all your receipts for payment of your mortgage, property taxes, utilities and homeowner’s association dues. You will also need to save your receipts for purchases, repairs and maintenance. Storing this information in one place will assist you when completing the Housing Allowance Worksheet and computing your housing allowance exclusion. Also, keep in mind that churches can change the designated housing allowance if a minister’s expenses are more than initially projected. One example would be if a major repair is needed such as a new roof that was not included when the original housing allowance was approved. As long as the change in the housing allowance is approved in advance of incurring the newly identified expense, it can be included as part of the housing allowance calculation.
Each year, usually in the fall, ministers need to complete the Housing Allowance Worksheet and present the dollar amount to be designated as housing allowance to their church board. This is typically when the minister’s annual compensation package is being considered and the housing allowance is part of that package. The Housing Allowance Worksheet helps to determine how much housing allowance and how much cash salary the minister will receive as part of the compensation package.
As many of you are aware, a federal judge in Wisconsin recently ruled that the housing allowance provided to clergy by the Internal Revenue Code is unconstitutional and violates the First Amendment’s Establishment Clause.
A similar ruling had been handed down in 2013 by the same Wisconsin judge, only to be overturned the following year by an appeals court. Now, the judge has once again ruled in favor of the Freedom From Religion Foundation (FFRF), which had challenged the constitutionality of the tax break for ministers.
Please know that MMBB is following this development closely and will keep members informed as changes occur.Back to Financial Resource Center
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