Church Administration Matters

Transcription

1 Church Administration Matters Greg Hickle Minnesota District Secretary/Treasurer Housing Allowances Housing Allowances are perhaps the most common and sometimes the least understood of the benefits that ministers receive. Here are highlights of the rules concerning Housing Allowances: 1. A Housing Allowance can only be established for a person who meets the qualification of a minister determined by the IRS. [If the person carries credentials of any sort with The General Council of the Assemblies of God, they will qualify as a minister for Housing Allowance purposes. In addition, a person carrying a Local Church Credential who has been granted the right to perform sacerdotal duties by the Senior / Lead Pastor is also eligible for a Housing Allowance.] 2. A Housing Allowance can only be established out of ministry income. Income earned by a minister for secular employment is not eligible for a Housing Allowance (the income typically must be paid by a tax exempt organization). 3. A Housing Allowance must be established and recorded in the minutes of the church / ministry organization before any expenses are incurred by the minister for that Housing Allowance. [It is best to do this the last month of every year.] NOTE: It is possible to amend a Housing Allowance during the year. Such an amendment must be recorded in the minutes and can not be applied on a retroactive basis, so make any adjustments before you spend any additional money. (IE: only the expenses paid after the amended Housing Allowance can be related to that portion of the Housing Allowance.) EG: Everywhere Assembly establishes a housing allowance of $ 1,000 per month for Pastor Anyone, in December However, in May 2009 they amend the Housing Allowance to be $ 1,500 per month. The total Housing Allowance is $ 16,000 [$ 1,000 4 months + $ 1,500 8 months]. Any expenses paid during January April in excess of the $ 4,000 of Housing Allowance for that period can not be used for the additional Housing Allowance of $ 12,000 for May December. 4. A Housing Allowance is not included in a pastor s income for income tax purposes. So, Box 1 (and Box 16) on the W-2 should be total compensation minus the Housing Allowance. EG: Pastor Perfect is paid total compensation of $ 40,000 by her church. The Board established a Housing Allowance of $ 12,000. Box 1 (and Box 16) of her W-

2 Church Administration Matters Page 2 of 7 2 would show $ 28,000 ($ 40,000 - $ 12,000). It is best, though not required, to report the Housing Allowance in Box 14 of the W-2 as Housing Allowance $ 12,000. While a Housing Allowance that is actually used for housing related expenses is not subject to income tax, the entire amount of the Housing Allowance must be added to your earned income when computing Self-Employment Taxes on your Form 1040-SE. I realize this can be confusing, so if you have any questions on this, please do not hesitate to get in touch with me or Mark Ericson. 5. The amount that a minister can attribute the Housing Allowance is limited to the smallest of the following amounts: a. The amount declared in the minutes of the church / organization for that year; or b. The amount the pastor actually spent on housing related items; or c. The fair market rental value of the home, including all furnishings, utilities and maintenance. [In a typical year, this will be larger than the amount actually paid. However, in a year when you have purchased or sold a home or done some remodeling, it is possible for this amount to be lower than the amount actually spent.] Following are three scenarios that illustrate this limitation: A. Housing Allowance established by the Board Amount actually spent on housing related expenses Fair market rental value of home $ 28,000 26,867 36,000 The minister could exclude only $ 26,867 from his income. He would add $ 1,133 ($ 28,000 - $ 26,867) to his W-2 income listed on Line 7 of his Form B. Housing Allowance established by the Board Amount actually spent on housing related expenses Fair market rental value of home $ 28,000 29,153 36,000 The minister would only exclude $ 28,000 from her income. No reporting would be necessary on her Form C. Housing Allowance established by the Board Amount actually spent on housing related expenses Fair market rental value of home $ 28,000 29,153 27,500

3 Church Administration Matters Page 3 of 7 The minister could only exclude $ 27,500 from his income. He would add $ 500 ($ 28,000 - $ 27,500) to his W-2 income listed on Line 7 of his Form These are the only limitations on the amount of a Housing Allowance. [Some have heard that a Housing Allowance was limited to 50% of your income that is not accurate.] 6. A Housing Allowance that is declared but is not supported by expenses paid for housing related items must be added back into your income (see the above examples). It is the minister s responsibility to document the expenses paid for housing related items to determine if there is an excess housing allowance that must be reported as additional income. 7. A Housing Allowance should be added to your wages from Line 7 of Form 1040 when calculating your Self-Employment taxes on Form 1040-SE. A Housing Allowance is not subject to Income Tax, but it is subject to Self-Employment Tax. 8. The proper reporting of a Housing Allowance is the sole responsibility of the minister. The Board has no obligation to determine the reasonableness of a minister s housing allowance or if it was reported correctly by the minister on his tax return. If the minister does not properly report the Housing Allowance, only he is subject to penalty by the IRS. 9. A Housing Allowance should be included in your income when calculating your tithe. PARSONAGE ALLOWANCE Some people think that if a pastor lives in a parsonage there is no housing related allowance available to them. That is not correct. While the amount will most likely be significantly lower for a minister living in a parsonage, the minister is most likely eligible to designate some of their compensation as a Parsonage Allowance. A pastor living in a parsonage has the same limitations on the amount that is excludable for income tax purposes Designated Parsonage Allowance Amount actually spent on housing related expenses Fair Rental Value of the Parsonage. The Fair Rental Value of the Parsonage is a bit different for a pastor living in a parsonage. Here is how I would approach this area --- Add the Parsonage Value as determined by the Board for the Fair Market Value of what they provide --- typically rent and utilities; in some cases they may pay for lawn care and snow removal as well --- to any additional amount designated by the Board as Parsonage Allowance for the pastor. Illustration: A pastor s cash salary is $ 18,000. The Board establishes a Fair Market Value of $ 26,400 for rent and utilities, which the church provides for the

4 Church Administration Matters Page 4 of 7 parsonage. The Board designates an additional $ 4,800 for a Parsonage Allowance. The Pastor s taxable income in boxes 1 and 16 of her W-2 is $ 13,200 ($ 18,000 - $ 4,800). The total Parsonage Allowance for the pastor is $ 31,200 ($ 26,400 + $ 4,800). Presuming the pastor spends all $ 4,800 on housing related expenses, she must compare the $ 31,200 to the Fair Rental Value of the Parsonage, including furnishings and utilities to determine if this limitation applies. See the discussion below regarding determining Fair Rental Value of a House / Parsonage. HOUSING RELATED EPENSES What types of expenses can be included in calculating a Housing or Parsonage Allowance? The general rule is anything that is spent on utilizing the house as a residence. (For a Parsonage Allowance this is limited to those expenses that the church does not pay the pastor or for which it does not reimburse the pastor. The table below shows the kinds of expenses that might be typical for either a Housing Allowance (HA) or Parsonage Allowance (PA): Expenses HA PA Mortgage or rent payments on principal residence Homeowners Insurance Personal Property insurance (aka renters insurance) Umbrella Liability insurance Structural Maintenance and Repair indoor or outdoor Landscaping, gardening and pest control Major appliances (refrigerator, furnace, etc.) Household appliances (microwave, TV, etc.) purchase or repair Furniture and home decorations purchase or repair Utilities (gas, electric, water, trash collection, etc.) Telephone service (base charge) Other services (Internet connection, cable, etc.) Mobile Home space rental Down Payment on purchase of a primary residence Real estate commissions, escrow fees, etc. Homeowner s Association dues / Condominium fees Maintenance Items (cleaning supplies, light bulbs, toilet paper, pest control, etc.) This is not an exhaustive list, but provides a good sense of the types of expenses that can be considered for Housing / Parsonage Allowance purposes. THOUGHTS ON ESTABLISHING A FAIR RENTAL VALUE Let me state again that the limitation of Fair Rental Value of your home / parsonage does not come into play very often, but it can and does happen. The typical times it

5 Church Administration Matters Page 5 of 7 would come into play is when you have spent a lot on new appliances or furnishings (furniture, carpet replacement, etc.) or you do some significant remodeling or landscaping projects. This whole area is a bit challenging. Richard Hammar says, Unfortunately, while the [Clergy Housing Allowance Clarification] Act [of 2002] imposes a fair rental value limit, it does not explain what this means. The IRS has provided no help. Its audit guidelines for ministers instruct agents that determining the fair rental value of a home is a question of all the facts and circumstances based on the local market (2009 Church & Clergy Tax Guide). First of all let s identify what should be included in this calculation. The IRS Tax Code says a housing allowance cannot exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities. So the Fair Rental Value would include the following items: Monthly rent for a comparable house in your community / neighborhood; Furnishings and Utilities The larger question is how to determine these values since the IRS has provided no direction for that determination. It is important that you maintain written documentation of how you arrived at the Fair Rental Value you use in your tax records. The first question is what does fair rental value of the home, including furnishings mean? There are two schools of thought on this: 1. This is the rental value of a fully furnished house or 2. This is the rental value of the house plus the rental value of the furnishings in the minister s home. While this may seem to be splitting hairs, the two positions could yield significantly different amounts. It would seem to me that a fully furnished house is going to have just the bare necessities, while the furnishings a minister has in their home would likely be more substantial and perhaps most expensive. Add to this the fact that most houses are not furnished when rented and you have a bit of a dilemma for establishing a fair rental value, including furnishings. So, here are the two approaches for this: House Rental Value, including Furnishings 1. Obtain the cost to rent a fully furnished comparable home in your neighborhood from a realtor, newspaper ads or a property management company.

6 Church Administration Matters Page 6 of 7 2. Obtain the cost to rent a comparable home in your neighborhood from a realtor, newspaper ads or a property management company. Then, obtain the cost to rent all of the furnishings that you have in your home from a furniture rental company (you may be able to get some figures online). Finally, add these two figures together to arrive at a fair rental value, including furnishings. [While some believe the IRS will not be in favor of this approach, it does seem to me to be a logical approach for determining the fair rental value of a house, based on the fact that you will be unable to find a fully furnished house for rent that would truly be comparable with your house.] Utilities This is the easy part. The actual expenses you paid for your house / parsonage is the value of utilities. You should make sure you include all utility costs that are eligible for inclusion in a Housing Allowance: Gas Electric Water Sewer Telephone Internet connection Cable connection Trash collection So the Fair Rental Value of your house would be the total of the amount determine for House Rental Value, including Furnishings and Utilities. One last thought... Housing Allowance Reduces Job-related Expense Deduction The Tax Court has upheld the IRS so-called Deason Rule, which states that a minister can not deduct the entire amount of their unreimbursed job-related expenses on Schedule A of their Form Those expenses must be reduced by the percentage of housing allowance compared to total compensation. The following example illustrates this situation: Taxable Compensation $ 20,000 Non-taxed Housing Allowance 15,000 Total Ministry Compensation $ 35,000 Unreimbursed job-related expenses $ 1, 648 Less: Non-deductible portion - ($ 15,000 / $ 35,000) $ 1,

7 Church Administration Matters Page 7 of 7 Amount deductible on Schedule A $ 942 Of course the deductible amount is still limited to the amount that exceeds 2% of the minister s Adjusted Gross Income. REMINDER: Even though a Housing Allowance is not taxable for income tax purposes, it is subject to self-employment tax.