AIEM Housing Allowances

AIEM Housing Allowances


Ross Williams

3/2/2015

Dear Clergy on Appointment in Extension Ministries,

We want to ensure that you understand and take advantage of an important tax benefit to ordained clergy.  Please read the e-mail below on how to set up a housing exclusion so that a portion of your income can be treated as tax-free.  While you may not be currently serving a “church”, you can still qualify for this favorable tax treatment subject to the rules below.  The most important rule is the requirement to have your organization formally designate a housing exclusion prior to the beginning of the period of earnings.  For example, if you wanted to designate a portion of your 2015 income as a “housing exclusion” your organization could adopt a resolution now for the period between the current date and the end of the year.  It cannot be claimed retroactively (from 1/1/5 through the current date).   For 2016 earnings, you would want your organization to adopt a similar resolution in December of 2015.

Please note:  there are references in this e-mail and the attachment to the "church".  For those on AIEM, those references also apply to your "organization."

Please let me know if you have any questions.
Sincerely,  Ross

The topic of clergy “Housing Allowances” can be a complicated one, involving specific rules and confusing terminology.  It is also an area that requires action prior to the processing of payroll in each new year.  So what follows is intended to be a comprehensive write-up based upon the many questions that I receive in this area.

The Basics:

1. Section 107 of the Internal Revenue Code permits a “minister of the gospel” to exclude a “Housing Allowance” from income. This Housing Allowance can take three different forms as described in more detail below.

2. United Methodist clergy that are ordained, commissioned, licensed as a minister of a local church or appointed to an extension ministry are “ministers of the gospel” and are therefore eligible for such favorable tax treatment.

3. It is the Disciplinary obligation of every United Methodist church to provide housing for its clergy. This obligation can be fulfilled either by providing a parsonage or a cash housing allowance.

Terminology:

A “Housing Allowance” is the exclusion from clergy income of the value of a parsonage, payments to clergy related to housing, and unreimbursed expenses that relate to housing. It is not an income tax deduction but instead these amounts are excluded from W-2 income reported by the church or salary-paying unit.
It is often referred to as one or more of the following:
a. Parsonage Allowance: The fair market rental value of a parsonage provided to clergy, along with costs to maintain the residence.
b. Housing Allowance: An amount paid to clergy, above and beyond salary, to be used for anticipated housing expenses.
c. Housing Exemption: An amount of salary that a clergy person designates as pertaining to unreimbursed housing expenses. Clergy that are provided a parsonage or a cash Housing Allowance may also designate a housing exemption if they anticipate additional, unreimbursed housing costs subject to the limitations below.

Rules and regulations:

1. Limitations: In the case of b. and c. above, the amount excluded from income is limited to the lesser of; (a) the amount designated as a housing allowance, (b) the amount of actual housing expenses, or (c) the fair rental value of the property (furnished and including utilities). The burden is on the clergy person to maintain documentation related to actual expenses incurred and the risk of audit and income adjustment is to the clergyperson (not the church).

2. Eligible Expenses: In the case of b. and c. above, most reasonable household expenses can be included in the exemption. For example: a down payment on a home, mortgage payments (including both interest and principal), home equity loan payments (assuming the loan proceeds are used for housing-related expenses), real estate taxes, property insurance, utilities, furnishings and appliances (including repairs), structural repairs, remodeling, yard maintenance and improvements, pest control, snow removal, maintenance items, and trash pickup. But the total of the expenses to be excluded from income cannot exceed the limits in the preceding paragraph (e.g. actual expenses, fair market rental value).

3. Housing Allowance Resolution: Clergy may not claim a housing allowance unless their local church (or other salary paying unit) has first established or designated a Housing Allowance. The preferred way to do this is for the church council or charge conference to adopt a housing allowance resolution prior to the first payroll of each calendar year (or prior to the arrival of a new pastor during the year) and record the resolution in the minutes of the meeting. However, to ensure that a housing allowance will always be in place for each calendar year, it is a good idea to have language in the resolution providing that the housing allowance will remain in effect in future years unless otherwise modified. The housing allowance resolution can be adopted or amended mid-year but it can only be applied prospectively to future income. That is why it is important for the housing allowance resolution to be adopted by the church council or annual charge conference prior to the first payroll in each calendar year (or prior to the arrival of a new pastor during the year).

4. Documentation: Clergy should keep detailed records of all housing expenses incurred, both to support their current year exclusion and to estimate future exclusions. Such records should include receipts, invoices, cancelled checks, and credit card receipts / statements.

5. True-up’s: Housing-related expenses can only be excluded for the year in which they are incurred. If the designated amounts in b. or c. above exceed the actual amount spent on housing, the “unused” portion of the allowance cannot be treated by clergy as tax exempt. This “true-up” can be handled in one of two ways:
  • In mid-January, a clergy person can report the actual amount spent on housing to the Treasurer so that any unused allowance can be treated as taxable income on their W-2, or;
  • The Treasurer can issue the W-2 with the agreed-upon allowance and the clergy can report any “unused” allowance as other income on Form 1040, line 21.
6. Social Security Tax: Clergy must calculate and pay Social Security tax at the self-employment rate on (a) the fair rental value of a Parsonage, (b) any Housing Allowance paid and (c) any additional amounts excluded from income via a Housing Exclusion.

Housing Allowance Q&A's:

Click for a Q&A document prepared by GCFA addressing Housing Allowances. The pages at the end of this document contain sample forms. Also, the following link will take you to GCFA's "tax packet”; which contains additional tax information for churches and clergy: http://www.umc.org/gcfa/tax-packet 

Please let me know if you have any questions.
Sincerely,
Ross