Setting Up a Housing Allowance

A housing allowance is the greatest tax benefit available to ministers. It is also one of the least understood.

It is simply a portion of a minister’s compensation that is so designated in advance by the minister’s employing church. See this article on Is Designating all Salary as Housing Allowance Permissible?

It is very beneficial for ministers because an allowance for housing is excluded from federal income tax. However, it is not exempt from the minister’s self-employment tax...more on that later.

In order to qualify for the exclusion from federal income tax, two very important conditions must be satisfied:

• The allowance must be board approved before it was paid (A housing allowance is NEVER retroactive)
• The minister actually spent the allowance on eligible housing expenses during the year

Your church must designate a housing allowance before any payment is issued. This designation should be in writing to avoid problems of proof should the allowance ever be challenged. This can be through a board approved resolution (properly documented in the minutes), written in the minister's compensation package, or even listed in the church's budget. The best and safest method is the "board approved resolution".

The housing allowance designation should be reviewed and adjusted before the beginning of each new budget year.

Your church does not have anything to do with the second condition. The minister has the responsibility of tracking actual housing expenses and determining the fair rental value of the housing.

Housing Allowance Expenses and Taxes:

A housing allowance may be used for any expense relating to renting a home, purchasing a home, and maintaining a home. Some of the eligible expenses are:

• mortgage payments/rent
• utilities
• mortgage interest and insurance
• home insurance
• property tax
• see more details in the Compensating Ministers series Book 2: Housing Allowance

In regards to taxes, if a minister lives in a church-provided parsonage, the minister is not subject to income taxes on the use of the parsonage.

However, the fair rental value of the parsonage (plus utilities if paid by church) is added when figuring his self-employment tax. (The minister is responsible for determining the fair rental value of the parsonage.)

The same goes for a housing allowance paid to ministers that own or rent their homes. The eligible housing allowance amount is exempt from federal income taxes, but not from self-employment taxes (Social Security and medicare) unless a minister has filed a Form 4361 and been approved to opt out of social security.

A nonexempt qualifying minister with an approved and designated housing exclusion must report the lesser of the following amounts on a SE schedule on their personal income tax return:

• The amount actually spent on eligible housing expenses
• The fair market rental value plus furnishings and utilities
• The amount officially designated in advance and paid by the organization as a housing allowance

Note: if you are not being paid anything from your organization, you will not have anything to report and exclude from personal income taxes.

A Housing Allowance and the Church:

The church is not required to report the minister's allowance for housing to the IRS. However some churches choose to report it in Box 14 of the minister's W-2 (which is labeled “Other”) as a courtesy to the minister.

The appropriate allowance for housing amount is reported to the SSA and IRS by a minister on Schedule SE of Form 1040.

Another option churches have to report a minister's housing allowance is to include the amount of the allowance in a separate letter to the minister. (This separate letter should not be sent to the IRS and will not be included or attached to the minister's personal tax return.)

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The comments above are for general information purposes only and do not constitute legal or other professional advice on any subject matter. See full disclaimer.