The Minister’s Housing Allowance
A substantial tax benefit is provided to qualifying ministers based on Section 107 of the Internal Revenue Code (IRC). It consists of only one sentence which currently states that:
"In the case of a minister of the gospel, gross income does not include: 1) the rental value of a home furnished to him as part of his compensation; or 2) the rental allowance paid to him as a part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
The basis of this exclusion from taxable income is deeply rooted in our nation’s tax history. In 1954, the provision was expanded to include the "cash" rental allowance paid in lieu of a provided dwelling. As recently as the Clergy Housing Allowance Clarification Act of 2002, Congress reinforced and clarified the provisions by adding language to the code about the fair rental value.
The proper designation of a cash housing allowance can result in significant tax savings for the qualifying minister. Here are the recommended steps for the minister to take in order to maximize the exclusion:
Review your current year housing expenses and then complete this worksheet from ECFA. Once your worksheet is completed, review “The Minister’s Housing Allowance” page on this site. You will then be ready to submit your request to your church Finance Board or Board of Elders.
Remember that if you own your home and you receive as part of your pay a housing or rental allowance, you may exclude from gross income the lowest of the following…..
The actual housing expenses you incur during the year
The amount designated and recorded by your church’s leadership board or,
The fair rental value of the home fully furnished, plus utilities.
You may also find this excel spreadsheet useful in helping you track your full year expenses so you can determine your Housing Allowance amount.
Here’s a handy information sheet when claiming the Housing Allowance as a retiree from Servant Solutions.
Frequently Asked Questions
What is a housing allowance?
Section 107 of the Tax Code has one sentence that defines the substantial tax benefit provided to qualifying ministers: "In the case of a minister of the gospel, gross income does not include: 1) the rental value of a home furnished to him as part of his compensation; or 2) the rental allowance paid to him as a part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities." The 1954 revision expanded the provision to include the “cash” rental allowance paid in lieu of a provided dwelling (e.g. parsonage). In 2002, Congress reinforced and clarified the provisions by adding the fair rental value language.
How long has the clergy housing allowance been a part of the U.S. tax code?
It was made a part of the Tax Code in 1921. It has been revised only twice in the last 100 years – in 1954 and again in 2002. It is not a stretch to say that this benefit for qualifying ministers has become a “fabric of the Code” since it is deeply rooted in our nation’s tax history. The allowance has been challenged in recent years, but it was upheld in March 2019 by the Seventh Circuit Court of Appeals as being constitutional and continues to be a part of the Code. Because the challenging group decided not to pursue an appeal of the decision to the Supreme Court following the Seventh Circuit’s ruling, it seems a reasonable assumption that this benefit will continue to be an important part of clergy compensation and benefits planning for years to come.
Who is eligible to receive a housing allowance?
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Tax regulations limit the housing allowance exclusion to the amount paid for the home provided "as remuneration for services which are ordinarily the duties of a minister of the gospel." Importantly, the minister must be credentialed (e.g. commissioned, licensed or ordained) and performs “ministerial services” (serves communion, conducts religious worship, demonstrates management responsibility in the local church or denomination and is considered a religious leader by the church or denomination) to qualify for the allowance. Bi-vocational ministers may have a housing allowance, but only from their ministerial income. Also, the IRS generally does not differentiate between your church-employed status and your church-retired status for housing allowance purposes.
How is a housing allowance established? Must it be approved in advance?
Establishing a housing allowance each year involves the following actions:
The minister determines the amount of his/her annual salary amount that will be paid to him/her in each calendar year as a housing allowance and submits the request to the appropriate church board by the November or December meeting of that board.
The church board charged with approving a minister’s annual housing allowance receives the request and approves the amount in a resolution no later than its December meeting since the request will be paid during the new calendar year.
What is the advantage of declaring a housing allowance for a minister?
The most significant advantage of declaring a housing allowance is that it helps the minister to save in paying income tax. This savings can involve hundreds (and perhaps thousands) of dollars each year. The tax savings can be used for multiple purposes: make additional contributions to a retirement plan, offset healthcare costs, cover other living expenses, etc.
May a housing allowance be approved based on a church’s fiscal year that is not the calendar year?
No. The IRS says a minister’s housing allowance request must be approved strictly on the calendar year basis. This is due to the minister’s tax return being based on the calendar year.
Note that the church should never inform a minister what his/her housing allowance amount will be. This determination lies only with the minister.
Ministers living in church-provided parsonages may have part of their cash compensation designated as a tax-free housing allowance to cover the cost of furniture purchase and repair as well as other expenses related to the maintenance of the home which are not reimbursed by the church employer. Such an amount must be designated in advance as discussed above.
Tax regulations specify that for the housing allowance to be excluded from federal income taxes it must be designated in advance of payment by official action of the employing church or integral agency. The designation must be in writing and should be contained in the minutes of the board or committee charged with approving housing allowance(s). The designation does not need to be attached to the tax return or reported to the IRS except upon specific inquiry from them.
How much of a minister’s compensation may be designated as housing allowance?
The Tax Code contains no specific percentage or dollar limitation as to how much can be designated as housing allowance. In the case of bi-vocational, part-time ministers and supply pastors, a reasonable designation may be up to 100 percent of the cash compensation. However, it should be noted that a minister’s cash housing allowance cannot exceed “reasonable compensation.” This applies where a minister received compensation disproportionate to the amount of service provided.
May housing allowance resolutions be adopted or amended during the year?
Absolutely! This makes it possible for ministers who move to a new church during the year to enjoy this benefit. Additionally, a minister’s housing allowance approved ahead of a new calendar year may be amended…up or down…at any time during the year if it is needed. If the amended request is larger than the originally-approved amount, it’s important to note that the larger number must be approved by the appropriate church board before any of the additional funds are spent. The IRS rules say all housing amounts must be given approval prospectively – meaning ahead of being spent. Hence, the need for the board to approve a new calendar year’s request each December at the latest to cover any housing expenses that may be incurred in the early days of each January.
Is there anything churches can do to help newly-hired clergy to not have to rush their request for their housing allowance for the balance of the year?
Yes. They can approve a “safety net” housing allowance resolution. This resolution basically states that until a minister can submit a housing allowance request for the balance of the year, each paycheck issued to the minister will be X% (e.g. 60%) for salary and X% (e.g. 40%) for housing. As the minister prepares the request, (s)he will arrive at the grand total desired for housing – then subtract the total amount paid on paychecks received to the date of the request – and request the difference for the board’s approval.
May clergy exclude from gross income the entire cost of owning, renting and/or furnishing a home?
As indicated above, up to 100 percent of compensation may be designated as housing allowance, but this does not necessarily mean this is the amount which can be excluded from income taxes. IRS Publication 517 provides a definition of how much parsonage allowance can be excluded for ministers: "If you own your home and you receive as part of your pay a housing or rental allowance, you may exclude from gross income the smallest of the following three outcomes:
• The amount actually paid in a year to provide a home;
• The amount officially designated as a rental allowance; or
• The fair rental value of the home, plus furnishings, utilities and garage.”
Hence, you must include in gross income the amount of any allowance paid to you that exceeds the smallest of the three possible numbers. (Example: The smallest amount of the three possibilities in a calendar year is $28,000 of actually paid expenses. If the approved allowance was $30,000, you must report the difference of $2,000 as income on your tax return for that year.)
As you can see, the church employer cannot cause the minister to exclude "too much" by over-designating the amount of housing allowance. However, it can cause the minister to pay substantially more taxes than required by overriding the minister’s request and under-designating the annual allowance. Thus, a board should rarely, if ever, override a minister’s request and approve a smaller amount.
The liability for determining the appropriate amount of housing allowance that can be excluded belongs to the minister. The church has no responsibility beyond determining that the compensation is reasonable for the services performed.
Is there a maximum amount that a minister may request for an allowance each year?
Federal law and the tax code says the maximum amount that may be requested for an allowance is the annual dollar amount that results from the following formula: The fair market rental value of the home (including garage) plus furnishings plus utilities.
If your annual request is less than the total value that results from calculating the formula stated above, it’s wise to add a small “cushion” of dollars to your yearly request. This will help cover unanticipated expenses that can easily arise during any year. Don’t make it an excessive cushion; remember, unused housing dollars must be reported as taxable income on your tax return.
How is this annual value best determined?
Consult with a real estate agent or appraiser and request this value be given to you in writing. Be certain this is an “arms-length” transaction. Don’t use a family member or best friend to determine this value. It may cost you a few dollars to get this information, but it will be well worth it should the IRS ever ask you justify any year’s allowance that you’ve excluded from income taxation.
What housing expenses may be included in the approved housing allowance?
Any expense to provide or maintain the home may be included in the housing allowance. You may legitimately include the following:
1. Rent, principal payments, or down payments plus the cost of buying the home;
2. Taxes and mortgage interest (even if these are includable as itemized deductions);
3. Utilities (heat, electric, basic telephone, water, etc.);
4. The purchase of furniture, appliances, dishes and cookware, and decorating items
including rugs, pictures, curtains, bedspreads, sheets, towels, etc.;
5. Insurance on the home and contents, HOA fees, home security system, etc.; and
6. Miscellaneous expenses including improvements, repairs and upkeep of the home and its contents, snow removal, lawn mowing, light bulbs, cleaning supplies, etc.
IRS regulations specifically state that expenses for groceries, paper products, personal toiletries, personal clothing, and maid service cannot be used. Hence, the list of what may be included in an allowance is much longer than those few things that don’t qualify.
What housing expense records should ministers keep each year?
Careful records of all housing expenses should be kept to determine whether expenses are greater or lesser than the annual designation. Original receipts, invoices, canceled checks, charge card receipts, etc. are all essential. To simplify the recordkeeping, some ministers find it helpful to have one charge card or bank account dedicated solely to household expenses. Others may use a spreadsheet program and scanner or adopt a “manila envelope” system of collecting all applicable receipts and invoices for each month of the year.
Having a record system to track your expenses will be a big help in estimating your next year’s housing allowance request. It will eliminate significant “guess work” from your annual request.
What reporting requirements are associated with a housing allowance?
Qualifying payments for a housing allowance are excluded from federal income tax. However, it’s important to note that these amounts are to be included in the computation of self-employment Social Security/Medicare taxes (SECA) on Schedule SE unless the minister is retired or (s)he has opted out of Social Security and have an IRS-approved Form 4361 in his/her personnel file. Generally, housing allowance payments also are exempt from state income tax.
Box 1 of the minister’s Form W-2 should not include any portion of the church-designated housing allowance. Rather, it should be reported in Box 14 of Form W-2, or the church treasurer should provide a letter by each January 31st to the minister indicating how much was paid as designated housing allowance in the previous year. A copy of this letter should be maintained in the minister’s personnel file.
Housing expense details, receipts, and records are not to be submitted to the employer. They are handled differently than professional business expenses and remain confidential. It is the minister’s obligation to determine how much of the annual designation can be excluded and to report any unused portion of the designated amount as additional taxable income on the annual tax return.
Retired clergy will receive a Form 1099-R for their retirement distributions. When reporting retirement payments made as “housing allowance,” the Form 1099-R carries the statement “taxable amount not determined” since it is the individual minister’s responsibility to determine the amount qualifying as an exclusion from taxes.
Is there additional Schedule SE information about housing allowance that’s beneficial to know?
Clergy who live in a church parsonage are required to include the fair rental value of the parsonage (including the cost of utilities and furnishings provided) along with their salary amount and the housing allowance amount found on Form W-2, Boxes 1 and 2, respectively. Though perhaps this requirement will not be welcome news during one’s active ministry, it will result in a higher Social Security benefit for the minister when (s)he enters retirement and begins claiming those monthly benefits.
What if I leave the ministry in the future to enter a non-ministry occupation? Is it wisdom to leave my account with Servant Solutions until retirement?
If you keep your ministry credentials in good standing into and throughout retirement, it is worth keeping your account with Servant Solutions. The reason? You’ll be able to apply all…or a portion…of your annual retirement distribution toward housing expenses in that stage of life. This means you will pay no federal or state taxes on those funds that pay for your housing expenses in retirement. The same rules and laws apply in retirement as when serving in active ministry.
Additionally, when clergy (whether active or retired) pay off their mortgages, a housing allowance is still permissible. However, the amount claimed each year cannot exceed the actual cost of maintaining the home (e.g. real estate taxes, homeowner insurance, repairs, furnishings, etc.).
Can I designate my retirement income as Housing Allowance?
If you are an eligible retired Minister for Tax Purposes, you may designate all or a portion of your retirement income as a housing allowance. There is no need to notify Servant Solutions in advance, as the amount you claim is determined by you and your tax advisor. A housing allowance can be designated only when it relates to contributions made because of earnings from service as a minister (if funds consist of a combination of ministry and non-ministry contributions/rollovers, then a tax basis must be established for retirement disbursements). Ministers must comply with other IRS rules about the housing allowance. Please contact Servant Solutions with questions about your specific circumstances.
As a retiree, how do I claim the Housing Allowance when filing my taxes?
Retired Ministers who are receiving distributions from their Servant Solutions 403(b) Retirement Plan will receive a Form 1099-R, which discloses the total annual withdrawals. The form 1099-R will reflect the “Taxable amount not determined” box in section 2b as “checked.” This serves to notify your tax preparer and the IRS that some, or all, of your box 1 gross distribution amount is eligible to be non-taxable.
It is the individual minister’s responsibility to determinate amount qualifying as an exclusion from taxes. To the extent that a minister has verifiable housing expenses, he/she can lower the taxable withdrawals from the Servant Solutions 403 (b) Retirement Plan.
I would like to transfer my 403(b) account to a separately managed IRA or 401(k). Will I still be able to claim the Housing Allowance?
Moving funds outside of a church-sponsored 403(b) plan will result in forfeiture of the Housing Allowance benefit.
The Housing Allowance exclusion is a feature specific to church-sponsored 403(b) plans only. Therefore, the only retirement distributions that are eligible to be designated as a Housing Allowance are those paid through church-sponsored 403(b) plan. As a result, if a minister transfers his/her Servant Solutions Retirement Plan to a separate retirement account (IRA, Roth IRA, 401(k), etc), he/she will forfeit his/her eligibility for the Housing Allowance and future distributions from the respective retirement account will be fully taxable.
I am a widower of a qualified minister – am I eligible to claim the Housing Allowance on 403(b) distributions?
No. A surviving spouse or beneficiary is not eligible to claim a Housing Allowance based upon the ministerial service record of another individual.