Ministers have a special tax benefit for the amount of housing allowance they receive. They can exclude from gross income for income tax purposes the rental value of homes furnished by churches as part of their compensation. This is also allowed for the portion of a retired minister’s pension that is designated as a rental allowance by the national governing body of a religious denomination having complete control over the retirement fund.
Many ministers receive a compensation agreement that specifies how much is paid for the housing allowance (when the church does not provide a house). The ministers that own their own home can exclude the fair rental value of the home (furnished, including utilities) or the amount designated by the church, whichever is lowest.
The housing allowance is subject to self-employment tax (Social Security and Medicare taxes) unless they filed a timely election on form 4361 by the second year they have earnings from religious activities. If the housing allowance received is greater than the fair rental value (see above), the excess is subject to income tax.
A minister is entitled to deduct mortgage interest and real property taxes paid on a personal residence, even if the amounts expended are derived from a rental allowance that is excludable from the minister’s gross income.
The church should approve the housing allowance before the year begins, probably near the end of the previous year. Retroactive designations are not valid. If it is discovered the church did not designate the housing allowance in the prior year, it is still possible to designate a housing allowance for the rest of the current year.
U.S. District Court Judge Barbara Crabb in Wisconsin ruled in November 2013 that the housing allowance tax benefits are unconstitutional. That was appealed to the 7th U.S. Circuit Court of Appeals. It might even go to the U.S. Supreme Court. The same district court judge ruled in 2010 that the National Day of Prayer was unconstitutional, but that ruling was overturned in 2011.
For now, the housing allowance tax rules stay in place. About 44,000 ministers, priests, rabbis, imams and others are waiting for a final resolution of the matter. If the ruling stands, it seems they might suffer about a 10 percent reduction in pay.
Did you hear? “Even a stopped clock is right twice every day. After some years it can boast of a long series of successes.” — Marie Von Ebner-Eschenbach (1830-1916).
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.