I know it’s only August, but my wife has already decorated our house with autumn pumpkins.
It feels early to me, but in reality, the holiday season and end-of-year are rapidly approaching. Most of your churches are preparing as well, just maybe not with pumpkin décor. Christmas choir programs, student activities and, on the administrative side, budget planning for next year. During this time, one of the most important administrative actions a church needs to take is designating a housing allowance for its pastors.
A housing allowance is a portion of a minister’s compensation that is officially designated by the church, in advance, to cover eligible housing expenses. Under IRS regulation, “ministers for tax purposes” can exclude from their gross income (for income tax purposes only) the lesser of three amounts: the amount designated by their church, the amount spent to own/maintain their own home, or the fair rental value of their home (including furnishings and utilities).
Right timing
One key phrase here is “in advance.” The housing allowance must be designated prospectively. If a church waits until after the first of a calendar year to formally designate the allowance amount, compensation received and housing expenses paid, before the designation date cannot be used in their pastor’s calculation. For this reason, churches should take care of this before the start of the new calendar year. The pumpkins on your porch can be your reminder.
Typically, the church’s finance or personnel committee or other authorized governing body approves some form of resolution specifying the minister’s housing allowance for the upcoming year. The amount should be recorded in the meeting minutes and retained with the church’s permanent records. Most churches we come across allow their pastors to calculate and request their housing allowance, using a worksheet to estimate their housing expenses for the upcoming year. If you need an example of this worksheet, let me know — I keep a stack of them in my attic with our fake pumpkins.
Because housing costs can change unexpectedly, it is not uncommon for a pastor to request an amount be designated that exceeds their estimated expenses. Keep in mind, this does not automatically increase the tax benefit, since the minister may only list on their tax return the actual qualifying amount (mentioned in paragraph 2 above). However, a larger designation from the church can provide flexibility if expenses increase during the year.
Another reminder
Churches should also remember that housing allowance rules apply (albeit slightly different) for ministers who own their home, rent a home, or live in a church-owned parsonage. Even if a pastor lives in a parsonage, there are likely some ancillary expenses that fall on them — so a housing allowance designation can still be important. Regardless of who owns the house they reside in, pastors are encouraged to maintain careful records of all housing expenses (mortgage payments, rent, utilities, insurance, maintenance, furnishings, etc).
As you decorate your home for autumn, and as your church completes budgeting and compensation planning for the upcoming year, approving housing allowance designations should be a priority item on the agenda. Good administration today can prevent tax issues tomorrow and ensure that ministers receive the benefits available to them under the law.
If you or your church have any questions, our team is always happy to help.
The information contained in this article does not constitute legal and/or tax advice. The reader should consult qualified legal and/or tax counsel to determine how laws apply to specific situations.
EDITOR’S NOTE — This article was written by Curt Tucker, investment/admin director for the Arkansas Baptist Foundation, and originally published by the Arkansas Baptist State Convention
