Four Important Things to Know about Pastor’s Housing Allowance

The pastor’s housing allowance is one of the greatest tax benefits you will ever receive as a minister.  But there are some key aspects to it that you must follow.  Many miss the opportunity, and more than a few make some critical mistakes. Here are four important things that you need to know concerning the housing allowance:

1. The housing allowance is for pastors/ministers only. 

Not every staff member at the church can take this allowance. Section 107 of the Internal Revenue Code clearly allows only for “ministers of the gospel” to exclude some or all of their ministerial income as a housing allowance from income for federal income tax purposes. 

Who, then, is a minister?  According to the IRS, “ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets and practices of that church or denomination. If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a Minister for Tax Purposes (IRS Publication 517).”

Therefore, current and retired pastors can receive a housing allowance.  That’s right—even retired pastors can! This is probably a surprise to many of you, but IRS Revenue Ruling 75-22 allows denominational pension boards (like GuideStone within the Southern Baptist Convention) to designate a housing allowance for retired pastors receiving income. Retired pastors may ask their pension board to designate up to 100% of their retirement income as housing. Note, though, that retired pastors must continue to follow the housing allowance rules and limits that are listed below.

2. As a pastor, you have the responsibility to know how much and what you can include in your housing allowance.

There are several aspects to this part:

What is eligible for declaration? More than you would think! Eligible expenses include mortgage payments (principal and interest); rent payments; real estate taxes; property insurance; utilities (gas, electricity, water, sewer, garbage pickup, local telephone service); appliances and furniture (purchase or rental cost and repairs); remodeling expenses; homeowners’ dues; and pest control. 

You CANNOT, however, include cleaning services, food, and domestic help. A worksheet downloaded online can help you list each item and attach an associated monetary amount with it.  This total will be your “declaration.”

That probably leads you to wonder if there is a monetary or percentage limit.  According to the IRS and tax experts, there is no limit on how much you and the church can designate.  However, you must be able to substantiate your declaration.  If you cannot, you are being dishonest and asking for trouble.

A housing allowance is available for a principal residence only.  The allowance is not allowed for a second home, vacation home, business property, or a farm.

Home equity loan payments can be included as part of a housing allowance only if the loan is used to pay for housing expenses such as remodeling. Home equity loan payments used for college tuition or anything other than eligible housing expenses cannot be included from income as a housing allowance.

Ministers who own their own home can exclude the lowest of these three amounts:

• The housing allowance designated by the church.

• Actual housing expenses (see this list above for eligible expenses).

• The fair rental value of the home (including rent, renter’s insurance, utilities, repairs and maintenance, and furnishings).

*If you rent, you can declare the lowest of the housing allowance declared by the church (i above) or the fair rental value (iii above).

Pastors who live in a church parsonage can still declare a housing allowance if they pay for utilities, repairs, furnishing, or other eligible expenses. They would declare the lower of:

• The housing allowance designated by their church.

• Actual housing expense not paid for by the church (like furnishings, repairs, or improvements).

3. The church has a responsibility to designate the housing allowance in writing before the first of the year. 

After the pastor has determined the amount of his housing allowance (see above), the church’s governing body must declare in writing what the housing allowance will be for the year ahead and include it in the church’s minutes.  Churches often finalize this in their annual meeting or a special-called business meeting.  A church can also use their deacons, finance committee, personnel committee, or trustees to make this declaration in one of their meetings and have it included in their minutes. 

If the church forgets to officially designate the housing allowance, the pastor CANNOT take it!  Unfortunately, some pastors and churches fail to do it for the first time or forget to continue it through the years.  So, in this initial agreement, the church may want to include wording such as “this agreement will continue year after year unless otherwise noted or changed by the pastor or church.”  This would protect the pastor in case the written designation is somehow overlooked or forgotten.  Unfortunately, the designation statement is often overlooked, and the pastor is left without the tax benefit.

Some pastors and churches have tried to get by with just a verbal recognition, but this is risky. Where there is no written proof of the agreement, there can be confusion and legal/tax issues for the pastor and church, especially if there should be an IRS audit.  Having it in writing is always much better!

4. Your housing allowance must still be declared as income for your self-employment income on your tax form. 

The housing allowance declaration removes “income” from your federal tax portion but not your SECA (self-employed portion).  It can be confusing, especially for those who are new pastors or those who are new to this allowance.  But, for a pastor, there are two sides to taxes—the federal and the SECA.  The housing allowance will allow you to reduce your federal taxes by the amount of your “allowance” and thus reduce your federal taxable income.  However, when you figure your salary for the self-employed section, the housing allowance is added back in for tax purposes. 

For example, let’s say you make $50,000 a year.  Of that amount, you have designated $15,000 for your housing allowance (and the church has approved it and has made a written declaration of it). When you fill out your taxes, your federal income (on the first page of your 1040) would show $35,000 ($50,000 less the $15,000 housing allowance).  However, on your self-employed tax, your salary would be the full $50,000.  Therefore, you would pay self-employment tax on the full $50,000.

These four essentials will save you a lot of headaches, and help you enjoy one of the greatest benefits that you as a pastor can enjoy.