Clergy Tax Guide

Tips for the Housing Allowance and Handling Business Expenses

If they own their own home, ministers can deduct certain expenses.
If they own their own home, ministers can deduct certain expenses.

Ministers who own their home can not only take advantage of the housing allowance by including mortgage payments as housing expenses, but also can deduct mortgage interest and property taxes on their itemized deductions. This is often referred to as a "double deduction" [source: Guidestone].

Once ministers pay off their mortgages, however, they can lose a good portion of this important tax benefit. But the Tax Court has ruled that a minister can obtain a home equity loan and include the loan payments as part of the housing allowance for tax purposes as long as the loan was obtained for housing-related expenses [source: Hammar].

We mentioned earlier that the housing allowance is subject to Social Security tax under SECA. However, retired clergy are considered unemployed and so do not have to pay the Social Security tax on this allowance [source: IRS]. Special rules also apply to traveling evangelists, theological students, teachers and administrators, and Cantors in the Jewish faith. You can check out Publication 517 for these details. Also, when calculating your state taxes, make sure to check the rules for your particular state. Most states allow clergy to exclude the housing allowance from taxable income, but some don't.

Aside from housing, clergy usually incur significant business expenses as a part of their job, such as maintaining a car for transportation, paying for continuing education, and obtaining books and resources. If clergy must rely on their salary to pay for these expenses, it will be an extra tax burden for them. Although clergy can declare these business expenses on itemized deductions, they cannot deduct the whole amount because it is subject to limits. Instead, churches can help their ministers avoid this tax burden by setting up an Accountable Reimbursement Plan. This would allow the minister to get reimbursed by the church for business expenses.

To use such a plan, the IRS requires that you incur these expenses while performing services as an employee, you account expenses to the church in a timely manner and you return unused allowance for expenses [source: IRS Topic 514]. Make sure the church outlines the rules for the plan in writing and you keep copies of all receipts as verifiable evidence [source: Hammar]. You will not need to include the Accountable Reimbursement Plan on your federal return, but both the church and minister should keep these records in case of an audit.