Minister Housing Allowance (MHA) is a tremendous benefit to pastors, missionaries, and other clergy. A significant portion of your compensation can potentially be excluded for income tax purposes. However, it is easy to spend excessive time unnecessarily tracking the smaller expenditures which may produce little or no additional tax savings.
Do you need to spend time keeping track of every little item related to MHA (cleaning supplies, minor repairs, etc.)? Or should you simply document your major expenses such as rent/mortgage, utilities, and larger repairs?
It is possible the benefit received by worrying about and tracking information on these smaller items is not worth your time.
Examples:
If you file as SINGLE:
If you make $36,000 a year and your MHA portion is $12,000 and you are deferring $2,000 into your retirement account pre-tax
And your standard deduction is $12,400 (tax year 2020) (assuming no other details related to your tax situation) your income tax would be about: $600* *(this does not include SE tax b/c MHA does not reduce that tax).
Projection: each additional $500 designated as MHA would save you $50 in taxes until the point where you reduce your $600 income tax liability to $0.
Note: Deferring $500 more into your retirement account (pre-tax) would not only save you a similar amount in income taxes, but would save some SE tax as well.
If you file as MARRIED WITH 2 KIDS (both kids under age 17):
If you make $72,000 a year and your MHA portion is $20,000 and you are deferring $2,000 into your retirement account pre-tax And your standard deduction is $24,800 (tax year 2020) (assuming no other details related to your tax situation) your income tax would be: $0* *(this does not include SE tax b/c MHA does not reduce that tax).
However, you would not be fully benefiting from the refundable portion of the child tax credit.
Projection: each additional $500 designated as MHA would increase your refundable portion of the child credit by $60 until the point where you max out the refundable portion of the child tax credit.
Note: Deferring $500 more into your retirement account (pre-tax) would not only produce a similar result with the child tax credit, but would save some SE tax as well.
Remember, your MHA is the LESSER of what is stated on your W2, what you actually spent providing a home, or the fair rental value (furnished) + utilities. So, even if you make a huge down payment, make an extra principle payment on your mortgage, or had a major remodel, it is very possible you will still be limited by Fair Rental Value (furnished) + utilities and not be able to get that higher MHA number you had hoped for.
These are very basic assumptions for two hypothetical situations in order to give you a general idea of the potential tax savings gained from the time spent adding up an extra $500 of household items for MHA. There are many other factors and circumstances that could be different for you. It is possible you are already getting the max benefit by simply counting your rent/mortgage plus utilities without worrying about ‘the rest of it’. It is also possible that an extra $500 in MHA would provide a greater benefit than the examples above. You need to discuss your specific tax situation with a professional tax advisor.
-Brad
Read more about me. I enjoy helping individuals with their taxes, businesses (including nonprofits and churches) with tax or accounting and other finance related questions, and I also enjoy helping people resolve tax debt, liens, levies, or other tax help you may need. I live in Lake Nona in Orlando, Florida, but I serve clients all across the country. Schedule an appointment if you need assistance and take a look at the resource page.
*The blog posts (as well as the YouTube channel) are my personal opinions and thoughts about a wide range of topics. They are not meant to apply to individuals specifically and should never be relied on as tax or investment advice. You should contact a professional for specific advice before taking action.