Calculating the Housing Allowance
The Clergy Housing Allowance is available to licensed, commissioned and ordained members of the clergy. In most churches, the annual amount is requested by the individual pastor and approved by the board in late December and then implemented for the new tax year beginning on the first paycheck of the new year.
If a pastor requests a mid-year change, careful consideration should be given to the annual amount requested. This is because the IRS does not allow retroactive designations and based on how housing is calculated, a pastor making a mid-year change might end up with less housing than they were expecting.
Housing amounts are calculated on a per paycheck basis using the annual request amount divided by the number of paychecks in one year based on your payroll schedule (monthly = 12, semimonthly = 24, biweekly = 26, weekly = 52).
Example: A pastor is paid on the last day of each month and previously had a perpetual housing designation of $30,000 (establish the prior year). He wants to increased the designated amount to $40,000 and the request is approved on February 10th. The per paycheck amount for February 28th would be $3333.34 ($40,000 divided by the 12 paychecks he receives in one year on a monthly schedule). The total housing at the end of the year for this pastor would be $39,166.74 ($3333.34 x 11, plus the $2500 from the January 31st paycheck) because the change was made mid-year. This will bring the employee close, but not quite to $40,000 because they made the election after some paychecks had already been paid.
The later the change is made, the fewer the paychecks that will be at the higher amount and the lower the annual housing allowance will be.
Need to Maximize your Housing for Tax Purposes?
If there is a critical need to maximize your housing allowance for the tax year, please reach out to your client manager to discuss the options.