The Clergy Housing Exclusion, also known as the parsonage allowance, refers to a specific tax advantage available to members of the clergy, allowing them to exclude from their taxable income either the rental value of a home provided to them or the rental allowance paid to them as part of their compensation package. This provision aids in reducing the tax burden on clergy members by offsetting housing-related expenses.
Legal Framework
Authorized under Section 107 of the Internal Revenue Code (IRC), the Clergy Housing Exclusion ensures that clergy members are not taxed on the value of the home provided by their religious organization or on the portion of their salary designated for housing expenses.
Qualifying for Clergy Housing Exclusion
Eligibility Criteria
To qualify for the exclusion, an individual must:
- Be a duly ordained, commissioned, or licensed minister.
- Perform ministerial services as defined by the IRS.
- Have the housing allowance designated in advance by the employer.
Types of Exclusions
- Parsonage Provided by Employer: The fair rental value of the home furnished can be excluded from the gross income.
- Housing Allowance: The amount paid to the clergy member for housing-related expenses, which may include rent, mortgage payments, utilities, and furnishings, can also be excluded, provided it is the lesser of three amounts: the amount actually used to provide a home, the amount officially designated as a rental allowance, or the fair rental value of the home.
Example Calculation
Suppose a clergy member receives a housing allowance of $20,000 and incurs the following expenses:
- Rent payments: $15,000
- Utilities: $3,000
- Furnishings: $2,000
The clergy member can exclude $20,000 from taxable income, as it matches the total expenses incurred for housing.
Historical Context
The provision for Clergy Housing Exclusion dates back to the early 20th century, with significant legislative clarity provided in the 1954 Internal Revenue Code revision. This exclusion aims to reflect the special nature of ministerial work and the often inseparable tie between their residence and their religious duties.
Applicability and Special Considerations
Record-Keeping
Clergy members must maintain detailed records of their housing expenses to substantiate the exclusion claimed. This includes receipts, invoices, and a clear designation of housing allowance made in official documentation.
Limitations and Controversies
The exclusion is subject to certain limitations, such as:
- A cap imposed by the Tax Cuts and Jobs Act of 2017 on the exclusion for homeowners who do not itemize deductions is not applicable to the housing allowance.
- Legal challenges have arisen over the constitutionality of this exclusion, questioning its alignment with the separation of church and state.
Related Terms
- Ministerial Services: This term encompasses a wide range of religious duties performed by clergy, including but not limited to preaching, conducting worship services, and providing spiritual counseling.
FAQs
Is the housing allowance subject to Social Security and Medicare taxes?
Can rented property qualify for clergy housing exclusion?
References
- IRS Publication 517 - Social Security and Other Information for Members of the Clergy and Religious Workers.
- Internal Revenue Code Section 107 - Housing allowance of ministers.
Summary
The Clergy Housing Exclusion or parsonage allowance is a beneficial tax provision that allows clergy members to exclude housing-related expenses from their taxable income. Governed by specific eligibility criteria, this exclusion requires meticulous record-keeping and adherence to pre-designated allowances. While supportive of clergy financial needs, its implications and constitutionality continue to evoke debate.
