A Tax Benefit for Qualifying Ministers
The minister’s housing allowance is a tax benefit that may allow qualifying ministers to exclude part of their income from federal taxes when that money is used for housing. In simple terms, it can help reduce taxable income when paying for a home and related housing costs.
Eligible housing expenses may include:
- Rent or mortgage payments
- Utilities
- Property taxes
- Homeowners insurance
- Furnishings
- Repairs and upkeep
This benefit can create meaningful tax savings and support wise financial stewardship.
Who May Be Eligible
In general, this benefit applies to ministers who meet both of these conditions:
1
You are a credentialed minister
This typically means you are:
- Ordained
- Licensed
- Commissioned
2
You perform ministerial duties
These often include:
- Leading worship
- Preaching or teaching
- Administering sacraments
- Conducting weddings or funerals
- Providing spiritual leadership
Not every church employee qualifies. In many cases, retired ministers receiving eligible retirement distributions related to ministerial service may also qualify.
The Key Rule to Know
The amount a minister may exclude from federal income tax is the lowest of these three amounts:
Actual housing expenses
The amount officially designated in advance
The fair rental value of the furnished home, plus utilities
This means the amount designated is not always the same as the amount excluded. Good planning and recordkeeping are important.
What Needs to Happen First
To use this benefit properly:
- The minister should estimate housing expenses for the year
- The request should be submitted to the appropriate church authority
- The housing allowance must be approved in writing
- The approval must happen before the funds are paid
- The minister should keep records of housing expenses throughout the year
Housing allowance designations are generally handled on a calendar-year basis.
A Benefit That May Continue into Retirement
Eligible retired ministers may be able to apply housing allowance treatment to qualifying retirement distributions tied to ministerial service.
This can continue to provide meaningful tax savings in retirement. Because eligibility may depend on how retirement funds are held and distributed, it is important to plan carefully.
Housing Resources
Frequently Asked Questions
What is a minister’s housing allowance?
A minister’s housing allowance is a tax benefit that allows qualifying ministers to exclude part of their compensation from federal income tax when it is used for eligible housing expenses.
Who is eligible?
In general, qualifying ministers are credentialed ministers who perform recognized ministerial duties.
Does every church employee qualify?
No. This benefit is generally limited to ministers who meet IRS standards for ministerial status and duties.
Does the allowance have to be approved in advance?
Yes. It must be officially designated in writing before payment.
How much can be excluded?
The excludable amount is the lowest of these three: actual housing expenses, the amount designated in advance, or the fair rental value of the furnished home plus utilities.
Can retired ministers use housing allowance?
In many cases, yes. Eligible retired ministers may be able to apply housing allowance treatment to qualifying retirement distributions connected to ministerial service.
Can Servant Solutions give tax advice?
Servant Solutions provides educational guidance and helpful resources, but ministers should work with a qualified tax professional for advice on their specific situation.
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.
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.
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.
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:
- Rent, principal payments, or down payments plus the cost of buying the home;
- Taxes and mortgage interest (even if these are includable as itemized deductions);
- Utilities (heat, electric, basic telephone, water, etc.);
- The purchase of furniture, appliances, dishes and cookware, and decorating items including rugs, pictures, curtains, bedspreads, sheets, towels, etc.;
- Insurance on the home and contents, HOA fees, home security system, etc.; and
- 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.
Do I need to set a new housing allowance amount every year?
Not necessarily. You need to determine what it is and then document in the board minutes that this is the housing allowance that we have determined for our pastor’s compensation in perpetuity, unless changed. It can be set as a specific dollar amount or as a percentage of pastoral compensation. But no, you don’t have to. It might be wise to revisit it every year just to see if it needs to be updated.
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.).
I understand that the new FAFSA no longer takes into account my housing allowance. Is that a benefit to ministers (and therefore, to their children) who are requesting aid for college?
The FAFSA (Free Application for Federal Student Aid) is used by students to apply for government aid, including grants, loans, and work-study programs. Many states and colleges also use the FAFSA to award their own financial aid. Since much of this aid is needs-based, the FAFSA collects detailed financial information from students and, if applicable, their parents, spouses, and other “contributors.” This information is used to calculate the Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC), which in turn influences the amount of aid a student can receive.
Yes, the changes to the FAFSA may be beneficial for ministers and their children seeking financial aid for college. The new FAFSA no longer includes certain types of untaxed income, such as housing allowances for clergy, in the Student Aid Index (SAI). Servant Solutions encourages you to consult your tax advisor to ensure that you are taking full advantage of this tax savings provision.
All contributors must agree to allow the IRS to directly import their federal tax information to the FAFSA. The “direct data exchange” is intended to make it easier for families to fill out the form, since they won’t need to dig up their tax returns and manually enter the information. This means that housing allowances paid to clergy will not be factored into the calculation that determines eligibility for federal student aid, potentially resulting in more favorable aid packages for those applying.
Can housing withdrawals from Servant Solutions satisfy my required minimum distributions?
Yes. At age 73, the IRS says you have to take out at least a minimum distribution from your retirement savings and then pay taxes on it. But if you take it out as housing allowance, you still don’t pay tax.
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.