Brian W. Fox
Graydon Head & Ritchey LLP
“Then my people will live in a peaceful habitation, and in secure dwellings and in undisturbed resting places.” Isaiah 32: 18
Churches and other religious institutions occupy a special place in the Internal Revenue Code. In fact, the Code allows ministers to exempt a portion of their income from federal taxation if that money was used for housing expenses. When considering the use of the housing allowance exemption, it is important to consider the following:
- Make it formal! To utilize the housing allowance exemption, the governing body of the church must make a formal decision to structure compensation packages to include a housing allowance prior to issuing payroll.
- You still may have to pay something! Typically, only a portion of the minister’s wages will be exempt, but the portion not utilized for housing expenses will be subject to federal income tax (even if some of that money was paid to the minister as a part of the projected untaxed housing allowance).
- A paper trail is a must! The minister must be able to verify with documentation (think: paper receipts and records) that the money claimed as housing allowance was actually used for allowable expenses.
- Every minister can use it! The housing allowance applies to every minister on staff at a church, not just the senior minister. Even the trendy young adult ministers can use it the exemption (unless, of course, they’re opposed to tax breaks).
- Housing means more than the structure! Under the Code, allowable “housing expenses” can include rent, house payments, taxes, mortgage interest, utilities, furniture, appliances, dishes, cookware, rugs, bedspreads, curtains, homeowner’s insurance, cleaning supplies, repairs, snow removal, lawn mowing, etc.
Unfortunately, many church leaders fail to take advantage of the strategic financial benefits available under the Code. Don’t make the same mistake!