Q: Some churches pay part or all of a minister’s housing expenses directly. Can such payments be treated as a nontaxable housing allowance?
A: It could be argued that by agreeing to pay for a minister’s housing expenses, a church is, in effect, designating a housing allowance (in advance) in the amount of the expenses it paid. But the Tax Court has reached the opposite conclusion. A minister received a weekly “living allowance” from his church. He kept no records reflecting how these allowances were spent. In addition, his church paid his housing expenses (including mortgage payments, utilities, and furnishings).
The court ruled that the weekly allowances were taxable and could not be classified as a nontaxable housing allowance. It observed:
[The minister and his spouse] have not substantiated that any of their weekly allowances were used “to rent or provide a home.” In fact, the record reveals that [the church] directly paid for such expenses. Moreover, the regulations require that prior to payment of a rental allowance, the employing church must designate the rental allowance in an employment contract or other appropriate instrument so as to clearly identify the portion of the minister’s salary that is the rental allowance. As [the minister and his spouse] had no written agreement with the church concerning this matter, they have failed to comply with the regulations. Accordingly, for the years in issue, we hold that the weekly allowances received by petitioners must be included in their gross incomes. Pollard v. Commissioner, 48 T.C.M. 1303 (1984).
Based on this case, a key takeaway is that a church that pays a minister’s housing expenses directly should designate in advance the amount it pays as a housing allowance, in addition to any other housing allowance it declares.
Adapted from the 2015 Church & Clergy Tax Guide.
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