Monday, November 19, 2012

Are you messing up on your housing allowance?

Oddly, when I have written on what I see are housing allowance abuses, I am often accused of being against the tax code provisions that allow us to take a certain amount of our income as a housing allowance and to be free from paying income tax on this.

I like the housing well enough to have taken it for every single year I have served as a pastor. But one can easily mess up in doing so and get into some difficulty with the IRS.

The Georgia Baptist Convention has many staff. I love them all but my favorite has always been Keith Hamilton, D.Ed.Min, CFP, CRPC who is a genuine servant of GBC churches and particularly ministers. He keeps us informed about such things as the housing allowance and has a number of articles on the same.

Avoid Common Housing Allowance Tax Mistakes is a recent one (revived from 2009) that lists common mistakes churches and ministers make in their housing allowance.

1. The minister only pays Social Security self-employment on his housing allowance.
If a minister lives in a parsonage, the SECA tax must be paid on the fair rental value of the parsonage as well as on the housing allowance.

2. The minister fails to provide the church with an estimate of housing expenses for the coming church year.
The IRS requires the church to have a legal basis for establishing a minister's housing allowance. An annual estimate helps protect the church from any questionable legal opinion in establishing the allowance.

3. The minister does not keep adequate receipts.
In an IRS audit, the minister - not the church - must provide actual receipts to prove that he spent his housing allowance on housing expenditures. Keep all receipts for seven years to provide documentation for the IRS.

4. The minister's housing allowance claim is too large.
The housing allowance a minister is allowed to claim on an income tax return is limited to the lesser of the
(1) fair market rental value of the home (including furnishings, utilities, garage, etc.); or
(2) the housing allowance amount the church officially designates; or
(3) the actual amount of expenses the minister uses to provide a home.
The housing allowance will always be the lower of these three items.

5. The minister waits too long to request an increase in the housing allowance.
The church or church-approved committee may amend a housing allowance anytime during the church year. In such a case, then the minister should request the increase before incurring additional housing expenses. The housing allowance may not be amended at the close of the church year.

6. The housing allowance exceeds reasonable pay.
The church or church-approved committee can designate up to 100 percent of a minister's salary and other taxable income from the church as a housing allowance.

7. The minister claims a housing allowance on a second home.
The housing allowance can only be claimed on a minister’s primary residence, not a second home. The primary residence is the place where the minister is currently living and spending the majority of nights.

 [And if you followed the link you might have noticed that Keith says this of the Housing Allowance: No one in the entire tax code of the IRS is treated like a minister for tax purposes. Contrary to popular belief, the average minister pays more than his fair share of payroll taxes. To help offset the additional taxes, the IRS allows a church to designate part of a minister's salary as a housing allowance.]

15 comments:

RLBaty said...

The closing note states in part:

("Contrary to popular belief,
the average minister pays more
than his fair share of payroll taxes. To help offset the
additional taxes, the IRS allows
a church to designate part of a minister's salary as a housing allowance.")

I don't think that is an accurate representation of what the tax scheme is for "ministers".

In the long ago, there was quite a fuss about ministers and their Social Security issues. Some wanted to participate; some didn't. Some didn't want to bother the church over such things. After different schemes were considered, the ministers were accommodated by allowing them to participate in the Social Security system via SECA instead of FICA; with an option not to pay Social Security taxes at all.

Ministers don't pay more than their "fair share" of Social Security taxes any more than other self-employed folks pay more than their fair share.

Also, by using the SECA instead of FICA scheme, the ministers, like other self-employed folk, only pay the Social Security tax on their net earnings; quite unlike the regular employees who are taxed on their gross wages.

I think trying to tie the housing allowance issue to the Social Security tax issue is a classic "red herring". The two should be completely separate issues; especially from a constitutional standpoint.

Now, about those "basketball ministers", William...! :o)

William Thornton said...

The paragraph in justification of the HA is about the best that can be done.
While I don't think it is inaccurate, in the sense that ministers are self-employed and pay the SECA tax rate, their payroll taxes are higher than the working Joe who looks at his pay stub and sees only half of that amount deducted and thinks that his employer pays the other half. Naturally, such employees ignore the fact that their employer considers their compensation to be the whole amount and adjusts their take home pay accordingly, but who's against a comforting, though false, feeling?

What Robert probably does not know, and it is irrelevant to his argument against the housing allowance, is that SBC leaders advise churches to compensate their ministers "in lieu of Social Security" with additional cash pay, subject to income taxes of course. We cannot have this both ways, though I doubt that the average SBC church has a line item in their pastor's compensation for this "in lieu of" item.

And, Robert, I just need a little time to get up to speed on the basketball stuff. Stay tuned.

Tim Bonney said...

When I was in the ABC/USA some churches did indeed pay a "social security offset." But all that is really is additional taxable salary. And, as you say, just makes people feel a bit better but the church is going to pay you what they can afford to pay you.

In the UMC most churches have a parsonage. But, at least in Iowa, if they do pay a housing allowance that amount is mandated by the Conference. This helps prevent a pastor from being over compensated for housing. Each conference sets their own amount and policies on housing.

RLBaty said...

William,

I am anxious to see what you come up with regarding "basketball ministers"; perhaps with emphasis on how the Baptists exploit the housing benefit in the non-church institutions they control.

(Kinda interesting how Ken Starr went from Pepperdine to Baylor.)

I think I understand how it is that churches may typically negotiate compensation to take into account the Social Security matter; making any complaints related thereto even less relevant. I hear some churches even take into account the fact that the preacher has expenses for food, clothing, entertainment, etc.

I also have the experience of encountering "ministers" who become a little indignant when they get characterized as a "hireling" (i.e., employee).

They seem to like the idea of being "self-employed" and not like the "hirelings" (i.e., employees), and then they turn around and try to complain about paying Social Security through the self-employment scheme. I, for one, am unimpressed with their antics.

William Thornton said...

Robert, I encounter ministers who become a little indignant about lots of things.

...but I digress.

Anonymous said...

“I like the housing well enough to have taken it for every single year I have served as a pastor.”

But the sad thing is that many ministers that are more than happy to receive this, let’s say, entitlement, are more than glad to restrict the (needed) entitlements of others. Of course, the ministers will cite “need.” “Others don’t need ‘it’,” they, conveniently but incorrectly, bemoan, while never even considering if need applies to themselves. When one can look to leaders in the secular culture and find compassion in greater abundance for the needy than is typically found in the evangelical culture, it makes perfect sense that questions like “Does the SBC have a future” are posed, even if the responses to such are largely irrelevant to the problem. If it is about clergy housing allowances, let’s talk about it, endlessly; but if it is about people on the edge of existence, let’s defer that conversation to a better time ... for time might be running out on this (largely un-needed) tax break ... entitlement.

Forget the man in the corner box under a paper blanket, his time has already run out. The teen with the drug problem, well, he’s going nowhere. But some will protest such insensitivity, “But, are they saved?” From those doing the ”protesting,” we can only hope.

Too many pastors making too much money, flaunting their affluence and increasing their influence among too many that are readily open to mostly meaningless religious talk, yeah even that which is piously couched as theological orthodoxy. Take this perk away or GREATLY curtail it for it gets in the way of too many ministers by reducing their capacity to faithfully discharge their responsibilities.

Peter Reilly CPA said...

I don't think there is anything in the legislative history of the housing allowance, which is pretty thin to indicate that there is any connection to the self-employment tax.

Peter Reilly CPA said...

I don't think there is anything in the legislative history of the housing allowance, which is pretty thin to indicate that there is any connection to the self-employment tax.

William Thornton said...

Those fellow ministers who are informed enough on the housing allowance to understand its tax benefits invariably justify its existence as a balance to clergy having to pay the full SECA tax rate while employees only pay half.

If nothing else this allows the minister some help in explaining his tax break to laypeople in his church.

RLBaty said...

William,

I think what it does is allow ministers to mislead folks about the merits of the housing allowance and the nature of the Social Security system and its history regarding ministerial participation therein.

Shame on them!

I look forward to a more vigorous, public, informed discussion as the FFRF suit continues. It's past time for that discussion to take place.

Otherwise, it appears the "ministers" continue to enjoy the benefit that comes from having an uninformed public and executive and judicial branches of government willing to continue the patronage.

In such circumstances, the "righteous" have no platform upon which to stand and condemn the plaintiffs bringing the issue before our judiciary branch of government; though some have adopted that technique.

Again, shame on them!

RLBaty said...

Oops!

I wrote:

"Otherwise, it appears the 'ministers' continue to enjoy the benefit that comes from having an uninformed public and executive and judicial branches of government willing to continue the patronage."

"Judicial" there should have been "legislative" as in (EMPHASIS added),

"Otherwise, it appears the 'ministers' continue to enjoy the benefit that comes from having an uninformed public and executive and legislative branches of government willing to continue the patronage."

Sorry for any confusion.


Anonymous said...

William,

I am surprised to see you joining with RL Baty and Peter Reilly to seek to harm all those rich pastors (Every post by RL Baty shows his baited breath, hardly able to wait until he can get at those evil pastors, which seems to include all pastors). Oh, and of course in the process, this will hurt all the not-so rich pastors, including the large percentage who are bi-vocational.

I really don't get it.

Anonymous said...

RL Baty, in all seriousness, I want to apologize for what some Christian(s) must have done to you in the past. I am truly sorry. Please do not confuse those actions with Christ's love for you. He died for you and loves you and it grieves Him when we Christians act in ways that cause others to not see His love as it is (even actions like the confrontational words I used in my last post).

And I guess I know different pastors than you. Most of the pastors I know could make much more money doing something else and are really not in this thing to make ridiculous salaries. I am sorry on behalf of the ones that have driven you to feel the way you do about pastors. May God forgive all of us.

Sincerely.

Anonymous said...

"I really don't get it."

OK, some are not paid well and the housing allowance helps, even if not needed. I get that.

Does the lowly paid fulltime Walmart worker get a housing allowance?

Don't know about you, thus don't know if the following applies, but the white middle-aged and older southern conservative religious male is a very, very large group wishing to lessen the safety net for many, many needy people: Advocate for their need first and perhaps there might be some room for others to advocate for your perceived and generally unnecessary entitlement. Otherwise, please be quiet. Selfish sounding ministers really are an embarrassment to the faith.

William Thornton said...

Is there some reason that

(a) a CPA with deep techincal knowledge of the minister's housing allowance may not simply write on current court cases on the HA. Peter Reilly favors a military style cap. Why is this not a reasonable solution to a tax issue that is sometimes embarrassing for we clergy?

(b) Robert Baty is keen on the elimination of the HA for principled church-state reasons. Why is this deserving of the slaps you give towards him? Although he has been strident in his position, he has been nothing if not courteous in his comments here and elsewhere.

Some of my anonymous fellow ministers might learn a lesson from either of these men...though I suspect both are quite savvy with regard to how some men-of-the-cloth might act at times.

That's enough of this ad hominem nonsense. Care to address any of the substance?