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The Best Way To Set Up The Housing Allowance

By Raul Rivera

Chances are, after you read this you will likely need to make changes to your housing allowance. This year, ministers by the thousands will have deficient or illegal housing allowance designations that will cause them to pay too much in taxes. I will make my point by sharing the story of two pastors.

Pastor Monique and her housing allowance

Pastor Monique shepherds a flock of about 120 members.  Ever since her husband passed away, Pastor Monique has led the congregation and this year the church was able to pay her $43,000.00.  The board decided to pay her a salary of $29,600 and a housing allowance of $13,400.00.  Therefore, each week they cut her a salary check of $569.23 and a housing allowance check of $257.69.  This went on for one full year.  The church board of directors approved the compensation agreement and all seemed well.  However, Pastor Monique wondered if this was the best way to do her compensation. She found out when it came time to do her taxes. 

Pastor Lawrence and his housing allowance

The last two years, Pastor Lawrence has shepherded a flock in Des Moines, Iowa.  This year his church made major changes to the way they paid his salary.  The church approved to pay him a salary of $50,000.00.  However, this year they chose not to pay him a salary check and a housing allowance check.  Instead, the church created a housing allowance designation of up to 100% of his salary.  What this means is that they wrote special minutes that designated up to his entire salary, for housing.  Every week, they wrote a check for $961.54.  He got to keep all of it, but in keeping with the most recent changes to the law, they limited his housing allowance to the least of the following:

1.  100% of his salary

2.  The actual cost of providing him a home

3.  The rental value of his home, plus furnishings

At first he was not sure how these new changes would make it better for him.  But as soon as his qualified tax preparer finished his taxes, he was glad he had made the changes.

Pastor Monique's tax return

When Pastor Monique's tax return preparer did her taxes, Pastor Monique was shocked.  She owed a lot more money than she expected.  She had four children, which allowed her to qualify for the Child Tax Credit, the Making Work Pay Credit, The Earned Income Credit and the Additional Child Tax Credit.  Naturally, she was expecting a refund of some sort.  The bad news is that instead of getting a refund, she owed $2,041.00Why did she owe so much?

Pastor Lawrence's tax return

When Pastor Lawrence took his papers to his tax return preparer, he was not sure if he would get a refund.  Last year he had owed $3,254.00.  This year, he would be happy if he broke even.  It took 3 days for his preparer to finalize his tax return.  When Pastor Lawrence sat down with his preparer, he about fell off his seat.  "Are you serious?"  "Don't mess with me...I'm not into games when it comes to my taxes!" were the words that came out of his mouth.  This year he did not owe any money.  Instead, he got a refund of $9,015.00.

It just does not seem fair

Doesn't it seem unfair that Pastor Monique, a widowed mother of 4 making less money than Pastor Lawrence, would have to pay $2,041.00, while Pastor Lawrence would get a refund of $9,015.00?  While it may seem unfair, there is nothing like a story such as this one to drive home the point that "ignorance never goes unpunished."  In this case, it is what her church board and tax preparer did not know that hurt her, while in Pastor Lawrence's case, it was what his church board and tax preparer DID know that brought him great joy. 

Let us teach you how

I love to teach.  Anyone who has ever attended one of my conferences can testify to one thing: I have a strong passion and love for taking complex tax and church administrative issues and breaking them down to simple and easy-to-understand steps.  It is what keeps me working long hours studying to stay ahead of the curve so I can ensure that you never miss out on the latest and best strategies for your church.  Consider registering to one of our compliance and empowerment conferences.  It will change your whole view on how to do church. 

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