How Much of the Pastor's Compensation Can Be Designate Housing Allowance?

[KMK]

Without sending up a red flag to the IRS?

Here in Southern California, many pastors' salaries are entirely gobbled up by Living Expenses. According the tax law, the entire compensation could be considered a Housing Allowance. But would that encourage an audit?

 

[Charles Johnson]

Without sending up a red flag to the IRS?

Here in Southern California, many pastors' salaries are entirely gobbled up by Living Expenses. According the tax law, the entire compensation could be considered a Housing Allowance. But would that encourage an audit?

If a pastor pays his entire salary toward his mortgage, I find myself wondering how he buys food and clothes (maybe the wife has a second income?). I would base it off of how much he actually does spend on housing.

 

[Eyedoc84]

It has to be “reasonable”. I would guess with really high housing and moderate salary, reasonable might be 100%. Or if the pastor has a second source of income to cover non-housing expenses. As long as it could be justified in an audit.

 

[Zach]

While Charles is correct, and your initial question rightly raises the concern about what might prompt an audit, my understanding of the law is that you can claim the value of what it would cost to rent your home in addition to major documentable home repairs and furnishings. It's my understanding that a signed letter stating the rental value from a licensed realtor and documented receipts from eligible repairs, maintenance, and purchases should suffice. But if you have questions I would encourage you to work with a tax professional on what kind of documentation is required.

 

[iainduguid]

You can claim up to 100%. For example a bivocational pastor might designate his entire church salary as housing allowance, while his other income is what he covers the rest of his costs with (I've done that before). The limitation is (as I understand it) that it has to be actually all spent on housing (including furniture, utilities etc) and it has to be no more than a reasonable rental cost for his furnished house plus utilities would be. If you are designating $50k as housing allowance, you are unlikely to be audited, even if that's 100% of your salary, not least because the IRS has very little to gain even if you are cheating. I doubt a letter from a realtor is necessary; I've never had one. If I was audited, I might need to pursue that.
If you are designating $3million as your housing allowance, you had better have a very nice house and keep receipts. But even then, if you can justify it there's no problem with the IRS, just with your church and presbytery (I hope).

 

[fredtgreco]

You might have to do a little research, but I believe there was a court case with Rick Warren years ago that created a "safe harbor" of sorts at 50% of compensation.

 

[ZackF]

Doesn’t the irs provide guidelines based on family size?

 

[KMK]

You might have to do a little research, but I believe there was a court case with Rick Warren years ago that created a "safe harbor" of sorts at 50% of compensation.

That 50% mark is what I hear also, but don't remember where.

 

[KMK]

From the IRS website:

"A minister who receives a housing allowance may exclude the allowance from gross income to the extent it's used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, and other expenses directly relating to providing a home. The amount excluded can't be more than reasonable compensation for the minister's services.

If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses directly relating to providing the home, you must include the amount of the excess in income."

I am assuming 'utilities and other expenses directly relating to providing a home' are included for those who own their home as well.

 

[ZackF]

Jake might know a bit about it.