The Pastor’s Housing Allowance – Part 1
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In my opinion, the most important tax benefit that pastors get to take advantage of is that of the housing allowance. Because it is so vitally important, let’s break this down into a few bite-sized pieces.
What is the housing allowance? Here is the definition from the Internal Revenue Code (IRC), Section 107: “In the case of a minister of the gospel, gross income does not include – (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as a part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
So, what is Section 107 talking about? It is explaining that pastors are allowed to designate a portion of their income to be used for the payment of housing-related expenses and that this amount will not be counted as salary for federal income tax purposes (dependent on the details below).
How does it work?
At the beginning of each fiscal year, before you receive your first paycheck, you can elect to designate a portion of your annual salary towards your housing allowance. This amount should be excluded (not deducted) from your gross income on your W2 and 1040 for income tax purposes.
While you can designate any percentage or amount of your annual income as being your housing allowance when you actually file your taxes, you will be required to “claim” the dollar amount that represents the least of the following three options:
1. The amount actually designated as housing allowance.
2. The amount actually spent on housing-related expenses.
3. The amount of the fair-market rental value of a pastor’s home,
fully furnished, with utilities.
Copyright Date: From How to Not Be a Broke Pastor - Copyright 2017, BROKEPASTOR, LLC
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