The minister's housing allowance allows for special tax treatment of housing for religious ministers, and it's been in the tax code from the very first days of the income tax. This housing allowance may either be a physical home provided by the church (like a parsonage) or a portion of ministers compensation (cash) designated as housing allowance.
The minister's housing allowance must be setup 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.
The short answer is that withholding is not required for ministers. Employer withholding is required for employees, but the IRS classifies ministers as dual-status taxpayers (IRS Publication 517). Ministers are considered employees for income taxes but are considered self-employed for Social Security and Medicare (SECA) taxes.
This leaves ministers with a few options to address their tax responsibilities:
If taxpayers fail to adequately prepay their tax obligations, interest and penalties will be assessed by the tax authorities. I help my minister clients to project their taxes for the year and choose one of the options above to meet their tax obligations.
Yes. The financial limits have come about through years of legislative twists and turns, but are intended to be reasonableness checks (primarily on a cash housing allowance). There is an abbreviated and illustrated legislative history available in the Ministers Resources portion of our website.
The dollar amount of a cash housing allowance cannot be more than:
- the fair rental value (FRV) of the home (including furnishings and utilities), or
- the actual expenses of owning & maintaining the home
The maximum housing allowance is the least of those three amounts (designated amount, FRV, or actual expenses). This is why it's important for ministers to document all 3 amounts in their tax records.
The housing allowance is also limited to one home per minister, and cannot exceed fair compensation for the minister's services provided.
What's important here is to make a reasonable estimate of rental value. We're not looking for a single price bullseye, but you do need to hit the dart board and document how you got there.
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 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 takeaway here is to be deliberate and have a reasonable estimate that's documented. When you hear about a minister having IRS issues with their housing allowance, it's usually because they had poor (or no) documentation.
A cash MHA may be changed at any time, but the change can only apply going forward because the allowance must be designated in advance of payment as discussed above. For example, if a change to the cash MHA is made on July 1, it can't be backdated to April 1. The change would be effective from July 1 going forward.
In addition to the records all taxpayers need to keep, ministers need to be able to demonstrate the 3 amounts connected with the housing allowance limits. These are:
1. The designated housing allowance itself (from your employer)
2. The fair rental value of the home (furnished and including utilities)
3. The actual expenses you incurred in owning the home (mortgage, utilities, insurance, etc)
The main problem ministers run into with documentation is a lack of it. It's not difficult to complete this documentation and keep it in your records. You just need to be deliberate about doing it. It's like getting your sermons written for Sundays - probably a lot easier to do on a Thursday than on Sunday at 6am.
The first thing ministers need to understand with retirement plans is that their tax picture is very different from other taxpayers. The intersection of the Ministers Housing Allowance and the Minister's dual status with the IRS creates a unique tax scenario unlike other taxpayers.
Generally, a tax-deductible employer sponsored retirement plan (like a traditional 403b) is the most tax advantageous option available to a minister. These contributions are excluded from income tax as well as Social Security and Medicare taxes (Rev. Rul 68-395). Other retirement plans (like Roth plans, IRAs, etc.) are not as beneficial for ministers. That being said, do not make any changes to your retirement plans without first discussing matters with a tax advisor who understands ministers income taxes. If you have questions, contact me anytime.
First off, don't feel bad. There aren't very many taxpayers who aren't holding their breath at tax time. The most helpful step I take with clients to help 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 heading in September than to find out where they landed in April.
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Luke Speltz CPA, CMA | 5235 Bulldog Avenue | Van Meter, Iowa
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