When Should A Pastor Request A Housing Allowance?

by Monday, March 29, 2021
Picture of a house with blog post title: When Should A Pastor Request A Housing Allowance?

Any time you want tax-free housing!

While that answer is true, here is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance, that will provide a bit more depth: 

Timing

Timing is very important when it comes to the housing allowance. A housing allowance can only be paid prospectively, not retroactively. That means you cannot go back in time. You can only take a housing allowance after it has been designated; any expenses incurred prior to the official designation are ineligible.

That is why leaving the designation open-ended is a good idea. Then you don’t have to worry about missing out on the housing allowance because you forgot to get it officially designated on time. You know you will always have it available to you and you only need to worry about the amount rather than the timing.

Many churches designate housing allowances by the calendar year since that is how most pastors file their taxes. If that is how your church does it, you should make sure to request your allowance in December of the prior year so that there is time for it to be officially designated before the start of the new year. 

Nonetheless, you can actually request a housing allowance at any time during the calendar year. The IRS has no restrictions on timing other than requiring the designation to be provided in advance of payment. So, if you enter the ministry or change churches in August, you should request your housing allowance immediately instead of waiting until the next January.

Changing Your Housing Allowance

Also, you can change your housing allowance at any time. If your housing situation changes dramatically mid-year, you can request a new housing allowance designation that will reflect that. For example, you purchase a home in June after having lived in a cheap apartment. You should request a higher housing allowance at the end of May in preparation for your move. 

The higher housing allowance amount would only apply to your expenses in June and thereafter. All of your housing costs up until the new designation would still only qualify for the lower, previous designated allowance. In this kind of situation, you would have to calculate your housing expenses for the two separate time periods, January through May and June through December. If you found at the end of the year that you had excess housing allowance from the second half of the year, you would not be able to use it for expenses from the first half of the year. 

Backdating A Housing Allowance

Sometimes, a church will fail to designate a housing allowance in a timely manner and they may want to backdate a resolution or pass one retroactively to allow a pastor to have previous expenses covered. That is illegal. Wrong. Bad. Not allowed. A SIN!

Knowing falsification of such a document is a crime under the Sarbanes-Oxley Act. There is no exemption for churches and pastors under the act and penalties range from fines to imprisonment. Aside from the Sarbanes-Oxley Act, such behavior is subject to civil or criminal penalties under the tax code. Just don’t go there. Pay the taxes and learn your lesson for next time.

If you want to learn more about the clergy housing allowance, pick up a copy of The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance on Amazon today!

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
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I Just Passed The CERTIFIED FINANCIAL PLANNER™ Exam & Why I Did It

by Monday, March 15, 2021
Picture of balloons with blog post title: I Just Passed The CERTIFIED FINANCIAL PLANNER™ Exam & Why I Did It

About seven years ago, I decided I wanted to be able to help people with money. I had begun listening to Dave Ramsey to stave off the boredom of spending 12 hours a day alone with an infant and it was life-changing. I didn’t know much about money because my parents didn’t know much. All I knew was to work hard and save because eventually you always need money. 

I also knew that finances have a profound impact on your life and your relationships. My mom was a single parent with six kids in southern California, so I had experienced firsthand the levels of stress and anxiety that can come from financial struggles. In listening to Dave Ramsey, I realized that helping someone get control of their finances can change their life, their marriage, their family, and their future for generations to come. I wanted to do that.

Two Avenues For Financial Advice

I began to research and discovered that there are basically two ways to provide people with one-on-one financial advice: as a financial coach or a financial advisor. They share a lot of similarities, but financial coaching is basically unregulated while financial advisors are subject to a lot of regulations because they work with investments and manage money for people. I’m really more interested in the people than the money, so I thought I would become a financial coach. After all, it would be a lot easier to get started without having to jump through hoops for regulators.    

There was one problem, though. To discuss investments, you have to be registered as a financial advisor. While I didn’t want to manage investments, I felt that I wouldn’t be able to serve people adequately without being able to discuss investments. They are kind of an important part of personal finance, even if they aren’t your focus. So, I resigned myself to the fact that I would have to become a registered financial advisor and take on all of the regulatory burdens that come with it. 

Now, this wasn’t a path I was heading down because I needed to make money, but rather because I wanted to help people. Regular, everyday people like my friends and family, who wouldn’t normally be able to afford personalized advice from an expert. I decided that I wanted to develop a level of expertise that I could charge $500/hour for, but offer it to people who could only dream of being able to pay that much. 

What Is The CERTIFIED FINANCIAL PLANNER™ Designation?

In the financial advisory space, the CERTIFIED FINANCIAL PLANNER™ designation is the gold standard. There are numerous designations and certifications available, but the hardest and most respected is the CFP® designation, so that’s what I set my sights on. It was a pretty ambitious goal for a stay-at-home mom with no financial services experience. 

Education

There are four requirements for certification. The first is education, which consists of seven college-level financial courses. To fulfill that, I enrolled in the University of Alabama’s Family Financial Planning and Counseling program as soon as both of my kids were in school full-time. Little did I know that they would be coming home full-time halfway through the program. In spite of it all, I completed my Master’s in December 2020 (and am now officially a homeschool mom to boot!). 

Examination

The second requirement is an examination. You have to understand, this isn’t just a test like the final exams you took in college. This is a big, scary test. In 2019, only 62% of the people who took the test passed. They have to limit the number of times you can take it (5) because some people take it multiple times without being able to pass. It’s that hard.

Why? There are two reasons. First, it covers a ton of material (7 classes, remember?). Second, the question writers aim for the top of Bloom’s taxonomy. That means knowing the material and how to apply it is not enough, you have to be able to evaluate and analyze the information, which makes it seem very subjective. I know very intelligent people who have failed this test.

I studied hard for months and up until recently, passing felt absolutely impossible. 

But on Friday, March 12, 2021, I passed on my first attempt. YAY!!!

Experience

Passing the exam is a big accomplishment, but it’s not enough for me to be able to call myself a CERTIFIED FINANCIAL PLANNER™ certificant. I need to have real-life experience as well. The requirement is either a 2-year apprenticeship doing financial planning under another CFP® professional or three years doing related work. I’ve already been at it for two years now, but it will still be several more years before I fulfill the experience requirement because I only work part-time (remember those two kids at home with me?). I’ll get there, though, because I love the team that I’m working with over at Guide Financial Planning.

Ethics

The final requirement is a commitment to a very high ethical standard and submission to a thorough background check. I think this one will be easy since Jesus has been my role model for a number of decades now. My background check will be pretty boring for them since I haven’t had a run-in with the law since I was 19 and curious to see how fast my car could go on an open, empty stretch of highway somewhere between San Diego and Sacramento. 

This is an important requirement, though, because most people place the financial industry right down at the ethical bottom along with used car salesmen and Congress. I came across a statistic recently that 65% of people don’t trust the financial services industry to do what’s in the best interest of their clients. I want to help change that statistic and while I would ascribe to high ethics no matter what, I appreciate that the CFP® designation values and requires it.  

 

What’s Next For Me

Does passing the exam make me a financial advisor? No. Because I haven’t met the experience requirement yet, there are a few more (much easier) hoops that I have to jump through in order to be registered as a financial advisor and legally able to provide financial advice for a fee. That’s next on my list and I’ll get it done soon. Until then, I will continue to build my expertise and serve you through this blog. 

This has been a long, hard journey and more than once I have been asked or asked myself, Why are you doing this? It’s not like I have to go through this much trouble just to register as a financial advisor and it’s not like I need it to support my family. However, I have a strong conviction of the Lord’s direction for my life and if I’m going to do this, I’m going to do it with excellence. Whenever I start to doubt, I receive emails from my readers that remind me that I’m on the right path. This has been exhausting, but it is all worth it. Because YOU are worth it. 

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What To Do If Your Clergy Housing Allowance Exceeds Your Actual Expenses

by Monday, March 1, 2021
Picture of blue couch against a white wall with blog post title: What To Do If Your 2018 Clergy Housing Allowance Exceeded Your Actual Expenses

As we all know, nothing went quite as expected in 2020. In fact, for most of us, nothing went anywhere close to expected! Maybe you were planning on doing some work on your home and things got shut down because of COVID-19. Perhaps you were planning on spending some money on items for your home, but COVID-19 made you tighten your budget. Or things just didn’t go according to plan and it had nothing to do with COVID-19! (But we’re blaming everything on COVID-19 these days, right?)

While altering your plans is always annoying, it is a bit more significant for pastors when it comes to housing expenses. At the beginning of the year, you have to carefully estimate your yearly housing expenses in order to avoid paying taxes on them with the clergy housing allowance. You meticulously calculate your anticipated rent, utilities, home purchases, and big projects.

And then something like this happens. The whole world hits pause. Your plans get tossed by the wayside and your expenses were lower than the housing allowance that your church gave you. You should have been paying taxes on some of that money and you didn’t.

Now, what do you do?

Excess Housing Allowance Is Taxable Income

What the housing allowance is is a provision that allows you to exclude your housing expenses from gross income for federal tax purposes. At the beginning of the year, you tell your church how much of your income you plan to use for housing and that amount is not reported to the IRS as income.

However, if you don’t use it all for housing by the end of the year, you need to let the IRS know and pay federal income taxes on the rest. Let’s see what that looks like in real life.

Say your church pays you $60,000 a year. You designate $25,000 of that as a housing allowance so your church only reports to the IRS that you had $35,000 of taxable income.

If you only spend $22,000 on housing for the year, you have an extra $3,000 that you should have paid taxes on but didn’t. You need to add that extra $3,000 of housing allowance back into your income and pay taxes on it. Not doing so is tax evasion and will get you into trouble if the IRS audits you.

How To Report Your Excess Housing Allowance

So, how do you report it as income in order to pay taxes?

Add it in with your other wages on line 1 of your Form 1040. Then, on the dotted line next to it, write, “Excess allowance” and the amount. Here is an example:

Picture of Form 1040 with "Excess Housing Allowance 3,000" written on line 1 for clergy.

Yes, it is as simple as that. Now it is added in with your wages for when your taxes are calculated.

That’s how to include it for income taxes, but what about SECA, your Social Security and Medicare taxes? Well, you don’t have to worry about that at all. Because you always have to pay SECA taxes on your housing allowance, claiming too much won’t make any difference in what you have to pay. You are already paying the full amount on Schedule SE.

What You Can Do Differently For Next Year

Now, while ending the year with excess housing allowance may have made your heart skip a beat and worried you a bit, it wasn’t that bad, was it? With such an easy way to correct it, it’s often better to err on the side of claiming too large an allowance than too small.

Too many pastors don’t claim a large enough housing allowance and end up needlessly paying extra taxes. The best way to avoid that and limit your tax bill is by overestimating your yearly housing allowance.

There is one thing I need to note, though. There is a potential downside to overestimating your housing allowance.

Things To Watch Out For

Your housing allowance lowers your gross income for federal tax purposes and there are some important things that are limited by your gross income. The biggest one that most pastors need to watch out for is the refundable portion of the Child Tax Credit. Claiming too much of a housing allowance can actually limit the amount of money you can get. This article explains why. Contributions made to retirement accounts are also calculated and limited based on income. There is a chance that by overestimating your housing allowance you could negatively affect the amount of money that you can save for retirement.

Make sure to look into those two things before blindly following my suggestion that overestimating is better than underestimating. Remember, just because you read something on the internet doesn’t mean it’s necessarily best for your unique situation.

Now that you’ve fixed last year’s housing allowance, what about this year’s? Is it already approved by your church with an accurate estimate or overestimate?

If not, you’d better get on it! The housing allowance cannot be used retroactively, so every day you procrastinate is another day that you are paying taxes on your housing allowance unnecessarily. If you need to make a change, make one. The IRS does not limit the amount of changes you make to your housing allowance or the timing of them, as long as they are done proactively.

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
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