05 Feb IRS guidelines on designating a housing allowance
The IRS guidelines on designating a housing allowance for clergy are detailed and specific. Here is a comprehensive overview:
Designation of Housing Allowance
Advance Designation Requirement:
- The housing allowance must be officially designated in advance of payment by the employing church or other qualified organization. This designation can be made in an employment contract, in the minutes of a church meeting, in a budget, or in any other official document that clearly identifies the amount as a housing allowance.
Official Action:
- The designation must be made through official action taken by the employing church or other qualified organization before the payment is made. This ensures that the amount can be identified as a housing allowance distinct from salary or other remuneration.
Expenses Included in the Housing Allowance
Eligible Expenses:
- The housing allowance can be used to cover expenses directly related to providing and maintaining a home. These include:
- Rent or mortgage payments
- Utilities (electricity, gas, water, etc.)
- Furnishings
- Repairs and maintenance
- Property insurance
- Real estate taxes.
Limitations:
- The amount excluded from gross income cannot exceed the lesser of:
- The amount officially designated as a housing allowance
- The amount actually used to provide or rent a home
- The fair rental value of the home, including furnishings and utilities.
Documentation Requirements
Recordkeeping:
- Clergy must maintain records to substantiate the actual expenses incurred for providing a home. This includes receipts, bills, and other documentation that can verify the amounts spent on eligible expenses.
Reporting:
- Any amount of the housing allowance that cannot be excluded (i.e., exceeds the actual expenses or fair rental value) must be included as wages on the clergy’s tax return. This should be reported on line 1a of Form 1040, with “Excess allowance” noted on the dotted line next to line 1a.
Limitations and Additional Considerations
Non-Qualified Designations:
- If the housing allowance is not properly designated in advance, or if the designation is made by an entity that is not the employing church or a qualified organization, the allowance cannot be excluded from gross income. For example, a state prison chaplain’s housing allowance designated by the state rather than the church was not excludable.
Exclusion for Retired Ministers:
- Retired ministers can exclude the rental value of a home or a housing allowance from their gross income if it is provided as part of their compensation for past services. This exclusion applies to the extent that the allowance is used for expenses directly related to providing a home.
Non-Excludable Expenses:
- Expenses that are not directly related to providing a home, such as food, personal items, clothing and servants, cannot be included in the housing allowance.
By adhering to these guidelines, clergy and their employing organizations can ensure that the housing allowance is properly designated and documented, allowing for the appropriate tax exclusions.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.