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Threat to the Housing Allowance Is Over—For Now

Federal court dismisses Warren case.

Background. Section 107 of the tax code states that "in the case of a minister of the gospel, gross income does not include … the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home." This language requires very little explanation. The portion of a minister's church-designated housing allowance that is used to pay for housing-related expenses is nontaxable for federal income tax reporting purposes. Stated differently, ministers may exclude from taxable income the lesser of (1) the church-designated housing allowance, or (2) the actual amount of housing-related expenses paid during the year.

Unfortunately, in 1971 the IRS imposed an additional limitation on ministers who own their homes—the nontaxable portion of a church-designated housing allowance may not exceed the annual fair rental value of the minister's home (furnished, ...

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Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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Posted:
  • October 1, 2002

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