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What Is the Deason Rule?

by Clay Harmon

After graduating from high school and earning my certificate for adulthood, I started my first semester of college in the fall after summer vacay. I remember sitting in the lecture hall of my first class, having just driven to school from my first apartment, thinking how I had finally grown up and was ready to grab life by its big ugly horns. Oh, how naïve I was.

Age is just a number, and adults are defined more by experience and responsibility than by whether they can buy a pack of cigarettes at the local drug store. As a dependent working once a week at a clothing store, bills and taxes were an abstract concept I heard about whenever my parents checked the mail or locked themselves in the den on April 14. As the years ticked by and these responsibilities fell into my lap one by one, the more intimidated I became. What if I screwed something up and the police came a-knocking to arrest me for tax evasion? What if I unwittingly destroyed my credit score? The paranoia was real.

These fears were unfounded. But I never lost respect for the sheer amount of rules and jargon involved with tax filing. One such rule, which is the inspiration for this post, is known as the Deason Rule. Keeping 18-year-old me in mind—a kid without a lick of sense, who was ill-prepared for both the freedoms and responsibilities of adulthood—I will explain this as simply as possible. After all, the worst thing that can happen while researching is to end with more questions than you started with.

The Deason Rule

If you’re a minister, you may have heard of the Deason Rule from a buddy. Or maybe you were using TurboTax and the program applied it without explanation, leaving you scratching your head and wondering why you were just now hearing about Deason and his rule. Well, the rule’s been around for a while—since 1964.

The Housing Allowance

This rule applies to those who receive a housing allowance. But what is a housing allowance? Certain professions, like ministers and members of the military, can receive compensation for basic living expenses. How much they receive depends on several factors, including location, scale of pay, etc. But it’s important because if you’re receiving a housing allowance, it is considered tax-exempt income.

This is how the housing allowance fits into the bigger picture. Say your compensation is $40,000 a year and you’re receiving $12,000 in housing allowance. That works out to the housing allowance equaling 30% of your compensation. Based on what I mentioned in the previous paragraph, this means 30% of your income is tax-exempt.

Time to introduce the Deason Rule. Let’s say you have $5,000 in unreimbursed business expenses. Maybe you bought new clothes for your sermons or purchased a subscription to Christianity Today. For the uninitiated, here is a definition of unreimbursed business expenses provided by Chron: “An unreimbursed business expense is any expenditure you make for your job that is both ordinary and reasonable and not reimbursed by your employer.” Normally, you would think all of these unreimbursed business expenses are deductible. But not so in this case.

Because 30% of your income (in the form of a housing allowance) is considered tax-exempt, it means 30% of your business expenses are not deductible. That 30% is what we call “allocable” toward 30% of your income. Is it starting to make sense?

An Accountable Plan

However, there is a workaround for the Deason Rule. While you still won’t be able to claim 100% of your income as deductible, that lost money can be reimbursed in the form of an Accountable Plan, set up by your church. A church’s Accountable Plan claims its professional clergy’s expenses and reimburses that individual’s expenses through the church.

By doing this, the church is stating that part of your reimbursement is included in the church’s expenses. Hopefully you have a better understanding of the Deason Rule. Now you may be wondering about the Accountable Plan and how you can set one up. In my next post, I’ll go into further detail on the Accountable Plan and how a church can legally reimburse ministerial expenses.

Disclaimer: This post is for informational purposes only and isn’t intended to be a substitute for tax advice from a certified professional.

Free Recorded Webinar: Common Errors in Pastoral Compensation

There is a big difference between pastors and typical employees, which leaves many stuck with a large amount due on tax day. This 35-minute webinar explores the fundamentals of pastoral taxation, the most common mistakes made, and some tips to help pastors know how to ensure theirs are done correctly.

During this webinar, we:

  • Review how a dual tax status works for pastors
  • Discuss how to leverage your housing allowance to lower your income tax
  • Explore exemptions for Social Security to find out if it is right for you
  • Explain common errors when withholding taxes and making quarterly payments

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