It’s January, and time for ordained ministers to consider how to allocate their compensation “package.” This is very important to handle correctly, or else ministers will pay more income tax than they really owe.
RumboughWith regard to housing, the rule is that the minister claims the lesser of the three following amounts: 1) actual expenses; 2) the amount approved by the church; or 3) fair rental value of the home, plus allowable expenses. As long as a minister keeps accurate records, it is better to overestimate than underestimate.
At year end, the minister compares what he received from the church as housing allowance with the other two amounts. If he received too much, he simply claims the overage as income. However, if he receives too little, he cannot subtract from income. The IRS will allow a mid-year adjustment to the housing allowance. This only applies going forward, not in arrears, so if a minister sees that more income should be allocated to housing, make sure the church is notified as soon as possible. The initial package and any mid-year changes need to be approved by the church, and documented in the church’s business meeting minutes.
Regarding mileage, the best way to handle is for the minister to turn in his miles and have the church reimburse him. If the church just gives the minister an allowance periodically, the minister may have to claim some unreimbursed miles in a manner that will not give him the full deduction. This also goes for any other ministry-related expenses the minister incurs.
Churches also need to be aware that ministry-related expenses should be considered the same as business-related expenses, and not added into the minister’s salary “package.” This may mislead the church congregation into thinking the minister makes more money than he actually does.
Make 2012 the year that your church’s budget accurately reflects your minister’s salary and expenses. If you need help with this, contact your local Baptist association office, or the South Carolina Convention.
– Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at 800-723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.