The Housing Exclusion is a tax loophole that allows clergy to write off unreimbursed housing-related expenses for income tax purposes. If you’re not setting a Housing Exclusion, you’re overpaying taxes. In a future post, I’ll cover exactly what expenses you can write off, but, you can’t write off anything if you don’t properly set the Housing Exclusion. The Housing Exclusion just saves the pastor money without costing the church a dime.
Here’s the steps:
- Estimate High: It’s up to the pastor to come up with the amount. Make a budget or estimate of what you think your unreimbursed housing expenses will be. I would then increase it by probably 25%. While there’s no penalty for setting the Housing Exclusion too high, the penalty for setting it too low is having to pay more than your fair share of taxes. Typically the Housing Exclusion is an annual amount so, if you are starting in July, you need to double that amount.
- Work Ahead: A Housing Exclusion needs to be approved before it’s paid out (i.e., before the first paycheck that it applies to). It can never be set retroactively.
- Get it Approved: You need some official body in the church to approve the Housing Exclusion. This could be the Board, at the annual meeting, or the Staff-Pastor Relations Committee.
- Get it in Writing: It must be in writing as well. You need something to show to your tax preparer and, if need be, the IRS. This could be a resolution signed by the Secretary and Chair or the minutes.
Just a quick note. Like I mentioned, you can’t set a Housing Exclusion retroactively but you can adjust it midyear. So, imagine you set a Housing Exclusion of $5,000 to start the year, but later plan on upgrading your family room with a new sectional, TV, and surround sound with estimated cost of $4,000. If you’re planning this purchase in April, have your Board approve a new Housing Exclusion of at least $10,000.
For Jan – Mar, you have a Housing Exclusion of $1,250 (5,000 x 25%). For Apr – Dec, you would have $7,500 (10,000 x 75%). If you jump the gun and make the purchase in March before the change in Housing Exclusion, you would only be able to write off $1,250 instead of the full $4,000. This difference in timing would cost you easily an extra $550 in taxes.
- Complete Guide to Housing Allowance by Amy Artiga: https://www.amazon.com/Pastors-Wallet-Complete-Housing-Allowance/dp/B085RRZNC1/ref=sr_1_1?dchild=1&keywords=amy+artiga&qid=1598726707&sr=8-1
- Housing Allowance Q&A: https://www.dakotasumc.org/media/files/CONFERENCE/5_Conf_Finance_Benefits/Finance/Housing_Allowance_QA.pdf
- IRS Publication 517: https://www.irs.gov/publications/p517
- The Pastor’s Wallet Blog: https://pastorswallet.com/