The Ordination Housing Allowance: The Most Ignored Tax Strategy for Churches

As their ministry grows, it's highly crucial for pastors and church leaders to be good with money. The ordination housing allowance is a specific tax break that lets ministers keep some of their income tax-free for housing. People often forget about it, yet it's one of the best ways to save on taxes.

Churches with 900 to 2,500 members can earn the largest tax breaks and feel less stressed about money if they know how to use this allowance correctly and stay away from frequent blunders. This resource goes with the Tier 2: THE FOUNDATION PLUS PLAN to assist churches navigate through this tough time securely.

What is the Ordination Housing Allowance, anyway?

The "parsonage allowance," also called the "ordination housing allowance," is a tax law that permits ordained ministers to keep a portion of their remuneration that is specifically put aside for housing costs out of their taxable income.

Included are things like rent or mortgage payments, electricity, property taxes, repairs, furniture, and maintenance.

The allowance lowers the amount of money that is taxable, so pastors pay less in federal income taxes on this component of their remuneration.

What is the real purpose of the housing allowance?

1. Name in Official Records

Each year, the church's governing body or financial committee must officially set the housing allowance. This is commonly done in the budget or a letter concerning compensation.

Before the start of the tax year, this amount must be fair and determined.

1. Keeping and using records

Pastors use the money to pay for housing expenditures that are eligible all year.

So that the IRS may review them, you should keep accurate records of your charges, like bills, receipts, and mortgage statements.

1. How Taxes Work

The designated housing allowance is not taxable by the federal government, but it is taxable by Social Security and Medicare.

The exclusion amount can only be the smaller of the two:

• The real expenses of housing,
• The church set aside a certain sum of money, or
• The fair rental value of the residence, which includes utilities.

Why do people typically neglect or misuse this tax strategy?

Many churches and pastors don't get these benefits because they don't understand them or make mistakes when administering the church:

• Lack of Official Designation: If the church doesn't officially record the housing allowance, it will be hard to remove it off of tax returns.
• Bad Expense Tracking: Pastors can't say why they didn't include housing expenditures if they don't keep proper records of them.
• Overestimating Allowance: If you say you have more than the fair rental value or genuine expenses, the IRS might come after you.
• Not Getting Help from Professionals: Many churches don't receive legal or tax advice to help them follow intricate standards, which could lead to problems in compliance.

What Pastors and Churches Should Do

For churches:

• Every year, make an official decision about how much each qualifying minister will get for housing.
• In the minutes of the board meeting or in formal communications about remuneration, make this option clear.
• Teach pastors and those who work in finance about the rules and forms they need to follow when giving housing allowances.

For Ministers:

• Keep a close eye on all the costs that come with housing.
• To avoid asking for too much, compare your total housing costs to the specified allowance and the fair rental value.
• If you need to file taxes correctly, talk to tax experts who know a lot about church ministry tax law.

How the Foundation Plus Plan Helps Your Church with Housing Allowances

The FOUNDATION PLUS PLAN helps churches with 900 to 2,500 members with crucial legal and tax issues:

• Help with writing and keeping track of official housing allowance designations.
• How to keep records and get the most out of tax breaks in a legal way for pastors.
• Checks of pay packages to make sure they satisfy IRS laws and receive the biggest tax savings feasible.
• Ongoing legal and tax education to keep your church up to date on changes in the law.

In the end, make the most of the Ordination Housing Allowance.

The ordination housing allowance is a legal and useful way to save your church and its pastors hundreds of dollars each year. If you do it well, it can benefit your church's mission and the health of its pastors by giving them money.

With aid from the FOUNDATION PLUS PLAN, your church may be sure that it follows the laws and gets the most out of this tax plan.

Links Inside

• How to Pay Pastors
• Churches can get legal audit services
• Church Governance Resources

Links to Other Websites

• IRS Publication 517 - Social Security and Other Tax Benefits for Clergy
• IRS Guidance on Housing Allowance
• Church Law & Tax - Housing Allowance Rules

Notice

This blog post is just meant to give you information and not legal or tax advice. Talk to a certified lawyer or tax professional for guidance that is specific to your church and your situation.