After a few quiet years, a new case is challenging the constitutionality of the minister’s housing exclusion. With recent legal challenges to the housing exclusion, many church leaders are asking: “What’s happening with the housing allowance?”
Under the current law, here are the three major housing exclusion traps to avoid:
- Trap #1: Wrong workers claiming a housing exclusion.
Being a minister does not automatically entitle someone to this tax benefit. Generally, there are four factors that need to be considered: Does the individual perform sacerdotal functions such as marriages or funerals? Are they considered to be a religious leader by a church or association? Are they conducting religious worship? Are they carrying out management responsibilities in the control, conduct, and maintenance of the local church or an association of churches? For a qualified minister, these functions would be written as part of their official job description. There needs to be a legitimate reason for appointing a housing allowance besides providing a tax break. When in doubt about qualifications, bring in a professional who is experienced in ministerial taxes.
- Trap #2: Wrong amounts excluded from tax.
This happens when a pastor fails to exclude the correct housing exclusion limitations. Firstly, for church-provided housing, the lowest of either the actual housing expenses or the amount prospectively and officially designated needs to be applied. In the instance of minister-provided housing, the same two amounts must be considered, as well as the fair rental value of the furnished home plus utilities. The failure to apply these limitations could result in underreported income and underreported taxes due.
- Trap #3: Wrong action by the employer related to the housing exclusion.
In order for a minister to receive a housing allowance, it must be properly designated from the minister’s salary by the church or other employer. The top two mistakes occur when no official action is taken by the employer at all, or the action is not done in a timely fashion. The allowance itself must be officially designated by the church in writing and approved by a governing body. It must also be made ahead of time by the employer. Any payments for housing made prior to a designation are fully taxable for income tax purposes. It is helpful to carefully word your housing allowance resolutions to remain in effect until a subsequent resolution is provided.
Tune in for more discussion of the developing story here: