Ministers have unique rules related to their payroll and income taxes. About a third of my clients are religious ministers.
In my graduate accounting work I completed a research paper on the history and current state of the minister's housing allowance. I've also made presentations on tax topics to district meetings, church boards, and similar groups.
If you have questions about minister's taxes or would be interested in a group presentation, contact me anytime.
These are a few of the more common questions I get from religious ministers.
If you have other questions contact me anytime.
The minister's housing allowance (Sec. 107 of the Federal tax code) allows for special tax treatment of housing for religious ministers. This can either be a physical home provided by the church (like a parsonage) or a portion of compensation (cash) designated as housing allowance.
If a parsonage is provided to the minister, then the MHA is effectively the rental value of the parsonage.
For a cash MHA, 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. 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 very modest incomes had their housing allowances reclassified as regular income for failing to properly document.
A cash MHA may be changed at any time, but the change can only apply going forward. For example, if a change is made in July, it can't be backdated to April.
The limits are meant to be reasonableness checks, primarily on the cash MHA. The rental value limit was added to the tax code to align the economic value of the two options for MHAs. The actual expense limit ensures that a cash MHA doesn't exceed actual housing costs. The MHA is also limited to one home per minister, typically a primary residence.
There are three dollar amounts involved with the limits: the cash MHA itself, the rental value of the home, and the actual expenses. A minister may claim the least of these three values as their MHA amount. It's important to maintain documentation with tax records showing each of these three values to support the minister's tax position in case of an audit.
One final limit is that an MHA can't exceed fair compensation for the minister's services. This one is less of an issue with the cash MHA, but it could come into play with a physical home. Hypothetically, if a part-time church minister were to receive a lakeside mansion as a parsonage. The home may be worth more than fair compensation for the services provided.
Detailed records are a must to support the minister's tax return and to help establish future cash MHAs. I have a simple document that records the relevant details that I include with clients tax records.
At a minimum, ministers should document the following:
The main issues with documentation arise when there isn't any, or when estimates are completely unreasonable. Everyone accepts that there will be some subjectivity with estimates of fair rental values. The key is to have things documented and fairly estimated, and not to panic about the last two percentage points in the estimate.
First off, don't feel bad. All sorts of people who aren't ministers are holding their breath at tax time. The most helpful step I take to prevent surprises with my clients is to check in before tax season. This lets us see if things are on track or if adjustments are necessary. It's better to know where things are at in September than to find out in April.