What is the CHAE and why does it exist?
CHAE is an attempt through the Federal Tax Code to be fair and equitable in the tax treatment of clergy. Some clergy have a home and all its utilities and furnishings provided to them by their congregations. Others are simply given a check and are “on their own” to provide housing. In an attempt at fairness, since it would be difficult assess the value of housing, furnishings, and other items provided in-kind to some, the decision was made to exclude from Federal Income Tax the amount clergy spend on qualified housing costs.
Where is the CHAE documented?
Section 107 of the Internal Revenue Code provides that clergy may exempt from income for Federal Income Tax purposes the amount that is spent to “rent or provide” a home.
Who is eligible to take the CHAE?
The IRS has established that “ministers of the gospel” that have been ordained, licensed, or commissioned to perform sacerdotal functions.
What is the responsibility of the church?
Once the church has established the pastor’s compensation, there should be a discussion with the pastor to determine what portion of the cash compensation should be established by resolution as the CHAE.
How is the CHAE established?
A congregation must establish a dollar amount of the CHAE prior to you receiving the funds. As it is an allowance and not a reimbursement, you are responsible for documenting housing costs to the IRS on audit.
What is your responsibility as a member of the clergy?
You must account for all qualified housing/furnishing costs and be prepared to submit documentation if audited. You are also responsible for reporting any unused portion of the allowance on your tax return.
What types of expenses qualify as CHAE?
Whatever is necessary to rent or provide a home qualifies. Some examples are: rent, utilities, home or renters insurance, furnishings, cleaning supplies, lawn care, decorator items, linens, snow removal, etc. The only two items specifically not allowed are food and domestic servants.
How is it reported?
As it is recognized as exclusion, it should be excluded from Box 1 on the W-2 that is provided to you. It is your responsibility as a member of the clergy to report any unused portion of the exclusion as an “excess housing allowance” when you complete your tax return for that year.
What are the limits on the CHAE?
You are limited to the lowest of three ceilings:
What effect does the CHAE have on Social Security?
All members of the clergy are considered to be self-employed for Social Security purposes. Therefore, the full amount of the CHAE as well as the fair market value of any housing items provided in-kind (e.g., utilities paid by the church, rent-free parsonage, furnishings, etc.) must be included in the self-employment wage base when you compute your self-employment tax.
If there are any other areas that you would like to discuss or questions you’d like us to address, please send us an email.
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