Week 13: Minister's Taxes

1. My BEST ADVICE is: use TurboTax software each year
2. Ministers do NOT pay income taxes on housing expenses
a. LIMITATION #1: It must be DESIGNATED IN ADVANCE by the church
b. LIMITATION #2: It is also limited to the "Fair rental value of the house plus utilities
3. However, ministers DO pay Social Security taxes on housing
4. Ministers buying a house also get to take their housing interest as a regular deduction—so called “double dipping.”

Tax preparers can provide assistance by verifying that an individual meets the definition of a minister under IRC section 107 and by maintaining adequate documentation to ensure that valid housing-allowance claims are upheld. This information can also aid those serving on church boards or as advisors to churches. These preparers can enhance tax-law compliance by educating church leaders and employees on the requirements of IRC section 107 and by providing advice in cases where an employee’s right to a housing allowance is less clear.
Application of IRC Section 107
IRC section 107 allows a tax-free housing benefit for a “minister of the gospel” in two situations. First, the employer can allow the minister to live rent-free in a home (parsonage) owned by the church. The minister can exclude this benefit from gross income up to the home’s fair rental value. The value of the parsonage must be clearly distinguished from other compensation, and includes items such as furniture, insurance, utilities, and taxes.
If a parsonage is not provided to the minister, a nontaxable housing allowance can be provided so that the minister can rent or buy a home. This is the option used most frequently. It provides ministers with the freedom to choose their preferred type of housing. The allowance covers items such as mortgage payments (principal and interest), insurance, repairs, utilities, and other expenses to keep the home in working order.