Too many clergy are still not taking full advantage of the federal income tax exempt housing allowance. Churches and clergy are yet confused regarding how to maximize this tremendous tax benefit. Some church officers arbitrarily “assign” an amount when in fact IRC Section 107 allows clergy to allocate “up to the amount used to provide or rent a home, and that the amount is not more than reasonable pay for your services.” 

Regulation provides that ordained, licensed or commissioned clergy are entitled to a federal income tax exempt housing allowance as part of their compensation for services rendered. Prepare your housing allowance worksheet and present it to your church for signature and inclusion in your annual compensation planning. Remember, it is NOT additional income.  It is the first assignment of your compensation allocation.

“Planning Tip” -  If you anticipate a large expenditure in the allowable categories later on in the year, you may amend your current year housing allowance, thereby reducing the taxable salary portion of your package

For example: Total Compensation: $50,000 of which 25,000 is designated as salary and the remaining $25,000 as housing. If the anticipated housing increases to $35,000 then the salary portion reduces to $15,000.  Please note that it does not change the value of the total package. It  just reduces the taxable income. This can be effected just by an amended housing allowance. The impact is reduced federal taxes and state (if applicable).

  What the Exclusion Includes

       It includes anything spent to provide a home for the ordained minister and his/her family. 
         1.  Rent or principal payments, cost of buying a home and down payments.
            2.  Taxes and interest of home.  (These expenses are deductible again as an itemized deduction referred to as “double dipping”).
            3.  Insurance on the home.
            4.  Repairs and upkeep of the home.
            5.  Furniture, appliances, vacuum sweeper,
            6. TV, washer, dryer, beds, home insurance , home insurance, furniture repairs and purchases, etc.
            7.  Decorator items, curtains, rugs, pictures, etc.
8.  Utilities (heat, electric, non-business telephone, water, cable TV), sewer charge, garbage removal,   lawn mowing, cleaning supplies, brooms, light bulbs, cable TV, etc.

The housing allowance is still the biggest benefit in the tax code for clergy.  It is wholly exempt from federal income tax and also exempt in some states such as New Jersey, North Carolina, Maryland, Delaware, New York and any other state where the state taxable income is based on the federal adjusted gross income.

The  Freedom From Religious Foundation, Inc. (FFRF), a Wisconsin based organization, is still fighting hard to strike down the clergy federal income tax exempt housing classification citing unconstitutional preference for religion but so far they have not prevailed; however, stay tuned because they are relentless. I would suggest that clergy take full advantage of this great benefit while it is still available.  To research this ongoing saga, research the FFRF and the housing allowance. (www.churchlawandtax.com/cltr/2017...