When you receive a call, many times you are given the choice between a housing allowance or access to a parsonage (or manse). Today we will be discussing the housing allowance and its potential taxability. First, while the housing allowance may be excludable from federal income tax, it cannot be excluded from the Clergy’s self-employment tax calculation (unpaid Social Security and Medicare Tax).
However, while Clergy may get hit with the 15.3% SE tax on housing, they can save on income tax. A member of the Clergy can exclude their housing allowance if the housing allowance is the smaller of:
1. The amount officially assigned by the church as housing allowance; as long as the church has officially designated these amounts before they are paid,
a. This is if your housing expenses meet or exceed this amount. See number 2 below.
2. The amount the Clergy member actually paid to provide a home. Include amounts paid for rent, mortgage payments (principal, interest, insurance, property tax, etc.), appliances, furnishings, repairs, utilities, and down payments.
a. Once you total these expenses, if you are left with any remaining housing allowance, the excess will be subject to income tax.
3. The fair rental value of the home, including furnishings, utilities, garage, etc.
a. If your housing allowance is larger than this amount, the difference is taxable.
4. The minister’s reasonable pay.
a. If a church tries to pay you more in housing than your salary, the difference is taxable.
Remember, the taxable amount of your housing is calculated by the lesser of the amounts listed above. When negotiating a call or a housing allowance contract, it is important to consider all of these factors. Before you accept any housing allowance contract, please contact Jacobson Clergy Tax Service at (609) 375-8295, or through our website. We are always happy to help.