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A Lesson on the Housing Allowance! Part One
By Raul Rivera
The Housing Allowance is one of the best tax saving benefits that exists for pastors. Every pastor in America, whether or not he or she is on salary at the church, needs to have a housing allowance designation set up at the church. By having an allowance set up at the church, the minister will be able to save thousands of dollars every year in taxes. In 1921, Congress enacted the Revenue Act for all ministers who had a house provided to them by the church. However, in 1954, it amended the act to include ministers who rented or owned their own homes. Then in 1960, the IRS issued new regulations, which carry the full force and effect of the law. The new regulations state that if the housing allowance is properly implemented by the church, any minister of that church can exclude home expenses from his or her income. These home expenses range from rent, principle and interest, taxes, appliances, repairs, furniture and much more, so long as those are expenses that provide the minister a home.
As mentioned earlier, it does not matter whether you own or rent a home. As long as you are a licensed or ordained minister, you can implement a housing allowance program and save big on tax
How Has the Housing Allowance Changed?
In 2002, Congress passed the Clergy Housing Allowance Clarification Act. The new act requires ministers to calculate their housing allowance using three different scenarios in order to make sure that it is calculated correctly. Though it has been around for several years, most ministers do not know about this change. Because they are unaware, most ministers have been calculating their housing allowances incorrectly, which can result in severe IRS penalties and interest. It is important to clearly understand how the Clergy Housing Allowance Clarification Act of 2002 requires a minister to calculate the housing allowance.
First, it requires that a minister calculate the estimated expenses of his or her home. Using our housing allowance statement, a minister must estimate the projected cost of every qualifying expense at the beginning of each year. It also requires a minister to calculate the fair rental value of the home, plus furnishings, utilities and garages. The final calculation is the actual cost of the home for the entire year. After these three scenarios have been calculated, the minister is supposed claim the lesser of the three figures and report it on line 14 of his or her W-2 form. These three costs have to be calculated by January 1 of each year in order for a minister to properly set the housing allowance in motion.
Sound confusing? It is confusing! The Clarification Act made it much more complicated and cumbersome than before, with more work to be done than ever before.