AIEM Housing Allowances
AIEM Housing Allowances
Dear Clergy on Appointment in Extension Ministries,
We want to ensure that you understand and take advantage of an important tax benefit available to ordained clergy. Please read the information below on how to set up a housing exclusion so that a portion of your income can be treated as tax-free for federal, state and local purposes. 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 employer 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 2019 income as a “housing exclusion” your organization must adopt a resolution prior to 1/1/19.
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 employer.
Please let me know if you have any questions.
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 each year. So what follows is a summary based upon the many questions that we receive on this topic.
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 further 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 eligible for the Housing Allowance.
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.
A “Housing Allowance” is the exclusion from clergy income of: a) the value of a parsonage, b) payments to clergy related to housing, and c) 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 employer. The exclusion only applies to federal, state and local taxes. The Housing Allowance is included when calculating self-employment taxes.
A Housing Allowance 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. This designation is available to clergy even if they are provided a parsonage or a cash Housing Allowance (subject to the limitations below).
Rules and regulations:
1. Limitations: 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 employer) 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. A sample Housing Allowance Resolution is available here: nyac-clergy-housing-allowance-resolution.pdf
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 remains 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 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 must 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 Church 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. Self-Employment Tax: Clergy must calculate and pay self-employment 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.
For clergy appointed 75% or greater to an NYAC church the value of a parsonage (estimated at 25% of salary) or any cash Housing Allowance paid is added to base salary to determine pension contributions for each eligible clergy person. This is why it is important to accurately provide such information on Clergy Compensation Reports collected annually at your Charge Conference.
Clergy Couples can each claim a housing allowance but the combined total may not exceed the fair rental value of their home or the actual expenses, whichever is less. In some circumstances, each of the two clergy persons may live in separate homes and be provided with separate housing allowances (for example: appointments in two different locations, each with a parsonage, and with each salary paying unit requesting that the clergy person live in the parsonage). In these situations, the clergy couple should have a solid reporting position that the two housing allowances may be excluded from gross income for income tax purposes. The clergy couple should maintain documentation of the reasons for and professional necessity of maintaining two separate homes, and ensure the amounts claimed for each home are reasonable.
Retired clergy can receive up to 100% of their United Methodist pension benefits as a tax-free housing allowance, subject to the three limitations set forth above. Each year the Annual Conference adopts a Housing Allowance resolution stating that all of the pension payments received by the clergy person from the Wespath qualify as a housing allowance for retired clergy.
Housing Allowance Q&A's:
A Q&A document prepared by GCFA addressing Housing Allowances is available here: http://www.nyac.com/files/forms/housingallowanceq-and-as.pdf
At the end of this document are 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.gcfa.org/services/legal-services/gcfa-tax-packet/
Please let me know if you have any questions.