The IRS guidelines on designating a housing allowance for clergy are detailed and specific. Here is a comprehensive overview:

Designation of Housing Allowance

1. Advance Designation Requirement:

   • The housing allowance must be officially designated in advance of payment by the employing church or other qualified organization. This designation can be made in an employment contract, in the minutes of a church meeting, in a budget, or in any other official document that clearly identifies the amount as a housing allowance.

2. Official Action:

   • The designation must be made through official action taken by the employing church or other qualified organization before the payment is made. This ensures that the amount can be identified as a housing allowance distinct from salary or other remuneration.

Expenses Included in the Housing Allowance

1. Eligible Expenses:

   • The housing allowance can be used to cover expenses directly related to providing and maintaining a home. These include:
     • Rent or mortgage payments
     • Utilities (electricity, gas, water, etc.)
     • Furnishings
     • Repairs and maintenance
     • Property insurance
     • Real estate taxes.

2. Limitations:

   • The amount excluded from gross income cannot exceed the lesser of:
     • The amount officially designated as a housing allowance
     • The amount actually used to provide or rent a home
     • The fair rental value of the home, including furnishings and utilities.

Documentation Requirements

1. Recordkeeping:

   • Clergy must maintain records to substantiate the actual expenses incurred for providing a home. This includes receipts, bills, and other documentation that can verify the amounts spent on eligible expenses.

2. Reporting:

   • Any amount of the housing allowance that cannot be excluded (i.e., exceeds the actual expenses or fair rental value) must be included as wages on the clergy’s tax return. This should be reported on line 1a of Form 1040, with “Excess allowance” noted on the dotted line next to line 1a.

Limitations and Additional Considerations

1. Non-Qualified Designations:

   • If the housing allowance is not properly designated in advance, or if the designation is made by an entity that is not the employing church or a qualified organization, the allowance cannot be excluded from gross income. For example, a state prison chaplain’s housing allowance designated by the state rather than the church was not excludable.

2. Exclusion for Retired Ministers:

   • Retired ministers can exclude the rental value of a home or a housing allowance from their gross income if it is provided as part of their compensation for past services. This exclusion applies to the extent that the allowance is used for expenses directly related to providing a home.

3. Non-Excludable Expenses:

   • Expenses that are not directly related to providing a home, such as food, personal items, clothing and servants, cannot be included in the housing allowance.

By adhering to these guidelines, clergy and their employing organizations can ensure that the housing allowance is properly designated and documented, allowing for the appropriate tax exclusions.

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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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Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
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