Tag Archives housing allowance

I recently had a friend run some reports on my website to see how people are finding me. One of the most popular things that people search for, I learned, is “minister housing allowance calculator.” Now, I’ve written a lot about the clergy housing allowance, how to take one in retirement, what to do if you take too much, and things like that.

But people weren’t looking for articles about the minister housing allowance. They were looking for a calculator. They were saying, “C’mon, Amy, don’t just tell me how to do it. Give me the tools to actually do it!”

And I’m so obedient that I did just that. You asked for it, and now you have it:

The Pastor’s Wallet Housing Allowance Calculator

You can follow that link to try it out or just click on it from the menu at the top of this website.

How To Use The Minister Housing Allowance Calculator

It’s pretty easy to use. There are a bunch of categories of expenses that are covered under the pastoral housing allowance. All you have to do is input how much each category costs for you. Not every category will apply, so just use the ones that fit your situation. This is what it looks like:

For example, if you live in a parsonage, you won’t have anything to put into the Mortgage Payment or Rent categories. If you do live in a parsonage, only add in the expenses that you pay yourself. If your church pays your water bill, you can’t claim that as a part of your cash housing allowance.

At the bottom, there will be a total that shows your anticipated housing expenses for the year. It’s pretty hard to anticipate everything exactly and claiming too small of a housing allowance can lead you to pay taxes unnecessarily. So, it is commonly recommended to request about 10% more than your expected expenses to cover surprise expenses. The Pastor’s Wallet Minister Housing Allowance Calculator calculates that for you too.

Minister Housing Allowance Limitations

This calculator helps you calculate your housing expenses for the year. However, you may not be able to claim the whole amount as a clergy housing allowance. It is important to remember that the housing allowance is limited to the least of:

• the amount actually used to provide or rent a home;
• the fair market rental value of the home (including furnishings, utilities, garage, etc.);
• the amount officially designated (in advance of payment) as a housing allowance; or
• an amount which represents reasonable pay for your services.
  
  

So, before requesting your housing allowance based on your anticipated expenses, you need to figure out if they are lower or higher than the fair market rental value of your home. You can read all about how to do that here.

Then, once you figure out how much you can claim you need to get it officially designated. If your church doesn’t have it in writing somewhere that you’re getting a housing allowance, then you’re not getting one. Everything they give you will be considered taxable income. Do your calculations and then make sure your church makes it official.

Try out the calculator and let me know what you think. I hope you find it helpful!

Is there anything else you wish I had on this website? Let me know in the comments or by emailing amy@pastorswallet.com.

The ministerial housing allowance is the biggest tax benefit available to pastors. It allows you to exclude your housing costs from gross income for your federal income taxes. Thus, all of your housing expenses, from your mortgage payments to your light bulbs, are income tax-free. (You still have to pay self-employment taxes on them, though.)

Ministerial Housing Allowance Limitations

There are nevertheless limits to how much can be excluded with the housing allowance. Your clergy housing allowance is limited to the lesser of:

• the amount actually used to provide or rent a home;
• the fair market rental value of the home (including furnishings, utilities, garage, etc.);
• the amount officially designated (in advance of payment) as a housing allowance; or
• an amount which represents reasonable pay for your services.

While each of these criteria is important, today we are only going to address the fair market rental value of the home, which is the most difficult of the above to calculate.

Calculating Fair Market Rental Value

The IRS does not spell out how they want it calculated, but there are two different methods that the tax courts have allowed people to use when doing so. The first is the comparable fair rental value and the second is the comparable sales method.

Comparable Fair Rental Value Method

The comparable fair rental value is the most common and should be fairly simple if your home is generic. You simply ask, what would a stranger pay to rent your house with all of your furnishings included? A local real estate agent should be able to tell you this. You can also look at rental listings for comparable homes in the local  newspaper or from a website like craigslist.com.

For the rental value of your furniture, you could simply add a little extra (be realistic!) or consult with a furniture rental company. However, the rental value that the IRS is interested in is that of the furnished home, not the total of the rental value of the house and the rental value of the furnishings as calculated separately.

Also, it is important that you use local comparisons. Housing costs are significantly different in California and Kentucky, so you need to make your calculations based on your specific real estate market.

Comparable Sales Method

The next method you can use to calculate the fair market rental value of your home is the comparable sales method and it has two steps. The first is to figure out how much your house would be worth if you were to sell it. You can talk to a local real estate agent, check public real estate sales records for comparable homes, or consult a website like zillow.com or redfin.com. Remember, those websites give estimates based on local comparisons, so the more unique your house is, the less accurate their estimates will be.

The second part of the comparable sales method requires you to determine the rate of return on an investment that a stranger would require on a similar property. If a real estate investor came and bought your house from you, what rate of return would they need to make it worthwhile for them? That’s called the capitalization rate.

The capitalization rate will vary based on your local real estate market. Again, your best source for this kind of information is a real estate agent experienced in rental properties. In one tax court decision, the judge applied a capitalization rate of 13%. Because of this, 13% is commonly quoted and used for calculating the fair market rental value for housing allowances.

Be aware, however, that the court case was completely unrelated to the housing allowance. The property in question was used for a gas station, which carries significantly higher risks than a home. Therefore, I would caution against using 13% as a rate of return based solely on the aforementioned court case. A knowledgeable real estate agent will be able to tell you if 13% is a reasonable number for your local market.

Once you’ve determined your home’s sales value and a reasonable capitalization rate, multiply them to get the fair market rental value. For instance, if your home is worth $250,000 and your local capitalization rate is 12%, the fair market rental value that you should use for your housing allowance calculations is $30,000.

Bear in mind that these are rental values for your house and furniture. On top of that, a renter would still have to pay utilities just like you do. So, you would add the cost of utilities to the $30,000 calculated above to arrive at your maximum allowable housing allowance.

Record Keeping & Calculation Frequency

It is important to keep a record of the fair market rental value that you calculated and the method that you used. If the IRS audits you, they may require it to ensure that you did not claim an excessive housing allowance. Without records to back up your claims, they may reassess your tax liability and you would owe both back taxes and penalties.

At this point, you may be thinking: These calculations are time-consuming and tedious. Do I really have to do them every single year?

In an ideal world, yes, you would do them every year. However, even the US Tax Court agrees that it’s a pretty big burden to put on pastors. They had initially ruled in a 2000 court case that it would be too much work for pastors to be forced to calculate the fair market rental value of their homes. However, Congress went ahead and changed the law in 2002 to include the fair market rental value in your housing allowance calculations.

If it’s too much for you to calculate every single year, your second best option is to calculate the fair market rental value every few years. In the years that you don’t calculate it exactly, just increase the amount by the rate of increase in rental prices in your area. So, if the fair market rental value of your home was $24,000 in 2017 and rents went up 4% in your area, then $24,960 would be a fair estimate of the fair market rental value for 2018.

Remember, it is not your church’s responsibility to calculate the fair market rental value of your home or parsonage (for SECA purposes). It is YOUR responsibility. You are the one receiving the tax benefit. I hope this guide makes it a little bit easier for you.

Though it took five months, the Seventh Circuit Court of Appeals has finally ruled in favor of the clergy cash rental housing allowance (the parsonage allowance was not at issue), declaring it to be constitutional. Here at Pastor’s Wallet, we have been following this story for over a year.

Background

The drama actually began back in 2013 when the leaders of the Freedom from Religion Foundation (FFRF) sued the US government because they believed the ministerial housing allowance to be a violation of the separation of church and state. The judge agreed with them, but it didn’t last long.

An appeals court found that the FFRF lacked standing in the case. Basically, they had no right to sue because they had not been harmed by the clergy housing allowance.

Determined as ever, the FFRF leaders tried to claim a ministerial housing allowance. As expected, they were denied. However, that denial gave them standing to take the issue to court. And so they did.

In October of 2017, the FFRF brought their case back to court and it was tried by the exact same judge. To no one’s surprise, the judge again ruled in favor of the FFRF, declaring the housing allowance to be unconstitutional.

Once again, it was appealed. A three-judge panel of the US Court of Appeals for the Seventh Circuit in Chicago heard the arguments last October, and they have just now issued a ruling. Their decision: the clergy housing allowance does not violate the US constitution.

How The Clergy Housing Allowance Is Constitutional

Our American legal system relies heavily on precedent and case law. That means that not everything is spelled out exactly in our laws. Rather, judges look at previous cases and rulings to guide them on how to decide matters. There were two different Supreme Court cases that they really focused their attention on in coming to a decision regarding whether the cash housing allowance violates the Establishment Clause, or the separation of church and state, as FFRF claimed.

The first case was Lemon v. Kurtzman, which provides three tests to see if something violates the First Amendment’s separation of church and state. The first test is that the law must maintain a secular legislative purpose. The court noted that other non-religious workers also receive employer-provided housing exempt from federal income taxation. Also, the cash allowance is designed to ensure equal treatment among ministers, regardless of where their housing comes from. They found that the way the cash housing allowance is set up in the tax code avoids “excessive entanglement with religion” for the government. The Treasury Department argued that all three of those constitute secular legislative purposes, and the judges agreed.

The second test is that its principal or primary effect cannot advance or inhibit religion. The judges cited a Supreme Court ruling that a tax exemption based on a housing allowance is not a government subsidy. Based on this, the housing allowance passed the second test.

The third test is that the law cannot foster an excessive government entanglement with religion. The Court of Appeals stated that applying housing exemptions to ministers the same way they do for secular employers and employees would, in fact, cause excessive entanglement. The current clergy housing allowance rules do not, and therefore they should remain.

The other past court case addressed is Town of Greece v. Galloway. This case establishes that the Constitution’s separation of church and state must be interpreted by reference to historical significance. The court recognized a lengthy tradition of tax exemptions for religion (even Joseph established one in Egypt back in Genesis!), especially in regard to church-owned property. Such exemptions have never been seen as an establishment of religion and so the appeals judges didn’t see them as such either.  

The Future Of The Clergy Housing Allowance

While this is a great victory for pastors everywhere, it does not mean that the war on the housing allowance is completely over. The FFRF can still take the case to the Supreme Court. Even if they try, though, there is no guarantee that the Supreme Court will hear the case, as they only hear about 1% of the cases presented to them each year.

The FFRF has also indicated that they may lobby members of Congress to repeal the clergy housing allowance. As a counter-measure, you could write to your congressional representatives in support of the housing allowance and encourage your friends and family to do the same.

In light of everything that is going on, this is my advice to you regarding the pastoral housing allowance:

1. Enjoy it while you have it.
2. Pray that you can keep it.
3. Come up with a Plan B in case it all goes away.

The ministerial housing allowance is one of the greatest tax benefits available to pastors and now is the time to get yours approved for 2019.

A federal judge has ruled that the cash housing allowance for clergy is unconstitutional. What happens next and what does this mean for you?