Posted by Christina K. Bell
This past Sunday while reading my church bulletin, I was intrigued by an article that discussed how a Wisconsin-based Freedom from Religion Foundation had filed a suit to challenge the constitutionality of a tax deduction that clergy are allowed to claim on their housing expenses. The deduction, or housing allowance amount, may be excludable from a minister’s federal income tax. I immediately went to the IRS site for further research. The housing allowance also aids the church by increasing the value of a minister’s modest salary. Since church organizations are exempt from filing a federal form 990, not many tax- related questions for these nonprofit organizations arise but questions regarding a minister’s housing allowance are ones I receive a few times a year. Questions generally focus on eligibility and the church’s responsibilities.
The IRS has a four test rule that an individual must meet to be defined as a minister. The five test rule means the individual must meet all four separate tests. The tests are as follows:
- Must be licensed or ordained
- Authority to administer the sacraments of the church (wedding, funerals, communion, etc.)
- Authority to conduct religious worship
- Controlling, conducting and maintaining religious organizations that are under the authority of a religious body that is a church or denomination
Once the church determines who is eligible, they have one responsibility. That responsibility is to have the Board pre-approve and document the housing allowance amount before they disburse it to the individual. Churches may report the amount of housing allowance disbursed to ministers on their W-2 as other income in box 14 for 2011 however; they are not required. Furthermore, it is the minster’s responsibility and not the church’s, to track the use of their allowance and to report any unused funds to the IRS as taxable income. That being said, many ministers will ask their church finance office questions regarding their unique tax benefits for income, social security and Medicare taxes. A great resource to give them is the Minister’s Audit Technique Guide located on the IRS’s website.
I encourage all churches who are allowing their ministers this benefit to be aware and in compliance.