Sunday, August 13, 2006

Terms of call: housing allowance (part 1)

When it comes to the housing allowance, the first thing to know is this:

If you're not ordained, everything you're about to read is irrelevant.

Since your tax status and employment status are different when you are ordained, you're able to designate a portion of your salary package as your "Housing Allowance" (according to IRS Code Section 107). If you don't know already, this should be one of the most exciting aspects of the terms of call-- maybe even more than the cash salary.

Why? Because, the housing allowance is tax-sheltered. The housing allowance is considered an "exclusion" for tax purposes (not a deduction), so it never enters the equation for computing gross income. So you will never pay income tax on your housing allowance.

Further, if you own your home, you are still allowed (through itemized deductions) to deduct interest paid on your mortgage and property taxes when you file your federal income taxes-- even though the interest was paid through the tax-sheltered housing allowance. In this way, the housing allowance represents a legal "double-dip" into a reduction of tax burden.

Still further, there is more to the housing allowance than just the money paid for mortgage or rent. A housing allowance includes a lot of aspects related to the house, all of which are legitimately tax-sheltered as well. Here is what is legally included in the housing allowance:
  • The principle + interest on a home mortgage, OR rent on a leased home (including apartments, condos, or houses)
  • Real estate taxes
  • Costs of maintenance and repairs
  • Insurance on the home and/or the contents of the home (i.e., renter's insurance or homeowner's insurance)
  • Cost of all utilities, including electric, gas, local telephone, water, basic cable TV, and trash pickup
  • Home furnishings and appliances (both the purchase and repair of them)
  • Maintenance items, such as cleaning supplies, pest control, and light bulbs
  • Yard maintenance and improvement costs
  • Neighborhood or homeowner's association dues
As you can see, the scope of the housing allowance includes a lot of things that you wouldn't necessarily assume are part of the cost of housing. Nevertheless, all of these are legitimate inclusions.

Another important thing to know is that this is no limit of percentage when it comes to a housing allowance. In other words, it is possible for a housing allowance to be most or all of the amount of compensation, as long as the costs do not exceed the legal limits of what may be included (see the list above). The limit, however, comes with the costs themselves. (I'll discuss that in part 2 on housing allowance.)

Now that you know what a housing allowance is, next time I'll talk about how to calculate and negotiate it with your new church.

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