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Do I Report the Housing Allowance on my Tax Return?

By Raul Rivera

A very common question we get this time of year from pastors, treasurers, CFO's, and administrators has to do with the housing allowance. It is, "How do you report the housing allowance on the minister's tax return so that he/she can get a deduction?" 

My answer is usually, "You don't." 

The reason is that the housing allowance is an income exclusion for federal income tax purposes. In section 107 of the Internal Revenue Code, the housing allowance is income that you are allowed to exclude from your tax return.

The amount is equal to the lesser of the following:

1.  The actual cost of your home;

2.  The fair rental value of your home for the year, or;

3.  The total income you made, for the year, from your church or churches that compensated you.

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Let me give you an example.

Church ABC paid Minister X $50,000.00 last year. His total qualifying home expenses were $20,000.00. Of the $50,000.00 of compensation that he received from the church, he is allowed to exclude from his tax return $20,000.00. This means that on his tax return he reports only $30,000.00 of gross income. The $20,000.00 of housing allowance does not get reported on his tax return.  

Does the housing allowance get reported anywhere?

After the church correctly calculates the housing allowance, it needs to report it on box 14 of Form W-2. There are two main reasons why reporting it on Form W-2 is important.

  1. While the housing allowance does not get reported on the tax return to give you a deduction, If you have not applied for self-employment tax exemption, the housing allowance will need to be reported on Schedule SE so that self-employment taxes of 15.3% can be paid on the housing allowance. I will explain later.
  2. For the purposes of purchasing a home, reporting the housing allowance on line 14 will be considered earned income for banking purposes, which better positions you when a bank is considering approving you for a loan to buy a house.

Now that the housing allowance has been reported on box 14 of the W-2, reporting it on the tax return depends on the status of the pastor in regards to self-employment tax.

If the minister has applied to the IRS for self-employment tax exemption, then he/she will not have to report the housing allowance on the tax return at all.

However, if the minister has not applied for the exemption, he/she will have to report the housing allowance on Schedule SE.

One thing to know is that the minister is able to prepare an adjustments worksheet and deduct unreimbursed business expenses against the housing allowance. Sound confusing?

(Related reading: "3 Things Every Minister Should Know About Housing Allowance")

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Why the confusion surrounding housing allowance?

The confusion has to do more with the way a church perceives the housing allowance. It has been around since 1921 and has been amended three times to accommodate the number of ministers that either rent or own their own homes.

These three amendments have not been well understood by many pastors, leaders, CPA's, and tax professionals, resulting in many ministers either missing out on what the tax code has to offer (by paying more in taxes than they ought) or flat out getting into very serious tax trouble.

Let's look at some of the mistakes that churches make in the housing allowance.

  1. The church and board agree that the pastor shall have a housing allowance, but they never record it in board meeting minutes using the proper language. This mistake alone is big enough that it can completely nullify the housing allowance.
  2. The church pays a housing allowance set to a definite number. The church often either pays too much or too little.

Let me better explain:

Church ABC decides to pay Pastor B a salary of $20,000.00 and an additional housing allowance of $20,000.00. In a perfect world, he would only pay taxes on $20,000.00, but he is required to do an annual report to ensure that he can substantiate qualifying housing allowance expenses of at least $20,000.00.

Therefore, if he can only document $15,000.00 in qualifying housing allowance expenses, the remaining $5,000.00 has to be reported as regular income on his tax return. That could throw out of balance the quarterly 941 returns if the church did not allot for this last minute change.

On the flip side, if Pastor B is able to document qualifying housing allowance expenses that are greater than $20,000.00, he would not be able to benefit from the additional qualifying expenses because his church set a limit on his ability to take advantage of those expenses by officially stating it would pay a housing allowance of $20,000.00.

The pastor never fills out a housing allowance statement that substantiates the qualifying expenses. Many churches simply fill out box 14 of the W-2 based on the number they set at the beginning of the year without ever verifying it.

We make every effort to educate church leaders on the importance of properly reporting the housing allowance because one mistake can lead to serious discrepancies in annual reporting. Yet, it seems that on a countrywide basis the number of churches that improperly report it has increased.

Need more understanding?

If you want to know for sure that you are properly documenting the housing allowance, please call us at 877-494-4655. We will be happy to help you. You can also attend one of our conferences. We cover the housing allowance in detail.

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