Ministers' Most Asked Tax Questions

The minister's housing allowance is sec. 107 of the Federal tax code. It allows for special tax treatment of housing for religious ministers. This housing allowance either be a physical home provided by the church (like a parsonage) or a portion of ministers compensation (cash) designated as housing allowance. 

For a cash housing allowance, IRS requires that the amount be determined in advance of payment through official employer action. This can be reflected in board minutes, an annual budget, or an official memo. It can be helpful for this documentation to state that the housing allowance remains in effect until other employer action is taken. This way, the risk of forgetting to re-designate the housing allowance in the subsequent year is alleviated. 

Ministers should keep a copy of this documentation for their records. Documentation is an important step that is often overlooked. There are plenty of tax court decisions where ministers of modest incomes had their housing allowances reclassified as regular income for failing to properly document the housing allowance. 

A cash MHA may be changed at any time, but the change can only apply going forward.  For example, if a change to the cash MHA is made in July, it can't be backdated to April. It would be effective in July going forward. 

The limits are meant to be reasonableness checks, primarily on the cash housing allowance. The designated housing allowance cannot be more than either the fair rental value of the home or the actual expenses of owning the home. 

Put simply, the maximum housing allowance is the least of these three amounts (designated housing allowance, actual expenses, and FRV furnished including utilities). That's why it's important for ministers to document all 3 amounts in their tax documents. 

The housing allowance is also limited to one home per minister, and cannot exceed fair compensation for the minister's services provided. 

The key documentation is to be able to demonstrate the 3 amounts connected with the housing allowance limits. These are: 

1. The designated housing allowance itself

2. The fair rental value of the home (furnished and including utilities)

3. The actual expenses incurred in owning the home

The main problem ministers run into with documentation is the lack of it. It's not difficult to complete this as part of the tax return and include documentation with tax records, you just need to be deliberate about doing it.  

What ministers need to do here is to take a few minutes and make a reasonable and defensible estimate of rental value. 

Some sources suggest 1% of a home's market value can be a good estimate for rental value. Zillow.com also offers rental estimates, and local classified ads or Craigslist can provide a pulse on what similar homes rent for in your area.  If you have 2 or more sources pointing to a similar range in rental value, that's even better. 

Remember, fair rental value includes furnishings and utility costs. Utility costs are pretty straightforward to measure, and several sources suggest an additional 10% to 20% of the unfurnished rental value is a reasonable estimate for furnishings (if you aren't able to find a furnished rental as a comparison). A local Realtor might be able to help with an estimate too. 

The point is to make the effort and have a reasonable estimate documented. As mentioned before, the main issue with documentation is the lack of it. I wouldn't sweat over the last few dollars in either direction. There's not a single "correct" rental price for anything, but a reasonable range of defensible values. 

Think of it this way: if you go to list your home for sale and the Realtor suggests a price of $250,000, that doesn't mean your home could never sell for $251,000. It means $200,000 is probably too low and $300,000 is probably too high. The numbers to the left of the comma will be more scrutinized than the numbers to the right of it. 

First off, don't feel bad. All sorts of taxpayers are holding their breath at tax time too. The most helpful step I take with clients to avoid surprises is to run an initial projection for the next year when we file this year's taxes. Then, we check in later in the year to see if things are still on track. It's better to know where things are trending in September than to first find out where they landed in April.