Important Year-End Reminder for Clergy
Updated: Mar 10, 2020
Written by attorney Richard C. Baker
It’s that time of year again and high on the list among the things that a church should be considering at year’s end is the housing allowance for its ministers for the next calendar year, 2020. The housing allowance is a very important tax benefit for ministers but, without proper attention, can be lost or diminished for a specific year.
By way of review, in cases where the church does not provide a parsonage, the IRS’s Code allows a church to provide for a housing allowance to both ministers who own their residences and to those who rent. This housing allowance enables ministers to exempt a part of their pay from federal income taxes, which their church has set aside in advance as a housing allowance.
However, to be effective there are several conditions that must be met. First, the designated amount for housing must be from funds actually paid by the church for ministerial services and applied toward that minister’s housing expenses. Additionally, the amount of the designation cannot be more than the fair rental value of the home including utilities and furnishings.
Finally, because a designated housing allowance is only effective after it is officially adopted by the church’s governing board, the resolution must be formally adopted in writing before the end of 2019. The resolution should be specific as to the amount of the minister’s total compensation and the amount to be designated and for what period of time (usually a calendar year.) Since the resolution needs to be enacted in advance, if the governing board does not get around to enacting the housing allowance until sometime in the next year, the minister will only be able to take advantage of the allowance from the time of enactment and thereafter for the remainder of the year.
Recently this allowance was under attack in court by the Freedom from Religion Foundation who wished to eliminate such an exemption for pastors, but in early 2019 the Seventh Circuit court determined it was actually constitutional.