Whether it is through resignation or retirement, a Church may agree to pay severance pay when a Minister leaves a position. In almost all cases, this severance pay is considered taxable income to the pastor or minister. The question then arises- could you designate this severance pay as housing?
This is actually a question of some debate. As of 2020, there has not been an IRS ruling or tax court case that directly addresses this situation. On one hand, it could be argued that if severance pay is taxable income then it is payment for work, and therefor eligible for the housing allowance. On the other hand, it could be argued that the Minister does not need to do ministry-related work in order to receive the severance pay, so just like other non-ministry work the housing allowance would not apply. Neither argument has been tested before the IRS or tax court.
As always, you will want to consult with your tax professional before attempting to claim deductions that are not explicitly supported by written tax laws or court cases. The last thing you want to do is ending up in a lengthy audit or court battle with IRS over the deduction!
Do you have a specific Clergy tax question? Clergy Financial Resources is here to help. We offer pro-advisor solutions free to all of our 1040 clients and at a separate fee for non-clients. Visit our website at https://www.clergyfinancial.com/resources/proadvisor/ for more details.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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