Do you know all the ins and outs of the housing allowance for pastors? If not, don’t worry; you’re not alone. Many people don’t fully understand the legal intricacies of this tax benefit for ministers and clergy.
The Ministers’ Compensation & Housing Allowance (as the IRS calls it) is also referred to as a parsonage allowance or rental allowance. Whether you are a pastor or minister who qualifies for the benefit or work in the realm of church finance or human resources, it’s essential to know how this policy affects full-time pastors and clergy.
In this ultimate guide to the housing allowance for pastors, we will cover the basics and answer the major questions related to this subject. We also encourage you to consult a professional accountant or lawyer for questions related to your personal situation. You want to be sure to verify all the details of the tax law in your state as well.
So, let’s dive into the details of the housing allowance for pastors.
Estimated reading time: 12 minutes
Table of contents
- What is the Pastors Housing Allowance?
- Who Can Take Advantage of the Housing Allowance for Pastors?
- Who Determines the Housing Allowance?
- Calculating the Housing Allowance
- What Housing Expenses Can You Include in Your Housing Allowance?
- What Do You Need to Know About the Housing Allowance for Tax Purposes?
- Other FAQs About the Housing Allowance for Pastors
- The Minister’s Housing Allowance
- More on Pastor Compensation
What is the Pastors Housing Allowance?
First, let’s lay out the definition of the housing allowance and clarify who can take advantage of it. According to the Internal Revenue Code (IRC) Section 107, a minister may be provided a parsonage or paid housing allowance as part of their salary compensation and exclude the value from their reported taxable income.
Pastors can use this housing allowance to rent or purchase a home and pay utilities, furnishings, and necessary maintenance and repairs. Note that you can exclude the allowance from gross income for federal income tax purposes but not self-employment tax purposes.
According to Christianity Today, 81% of full-time senior pastors take advantage of the housing allowance. In addition, this is saving pastors a total of about $800 million a year.
For example, suppose a minister has an annual salary of $50,000, but their total housing allowance is $25,000. They would be taxed on salary minus living expenses, which is now $25,000, half the original salary.
Instead of owing taxes of $6,000 (a 12% tax rate on $50,000), the minister would owe $3,000 (12% tax rate on $25,000). The tax savings add up to $3,000 in this scenario, which is a significant tax break for many families.
Who Can Take Advantage of the Housing Allowance for Pastors?
The housing allowance is available to ordained, licensed, or commissioned ministers of the gospel. Workers in this category can include missionaries, evangelists, Christian counselors, youth pastors, music ministers, or any minister who performs religious worship or service as their primary job function.
However, this doesn’t apply to everyone who works at a church or for a ministry. For example, administrative staff, maintenance workers, and other support staff are not considered ministers for the purposes of this exemption.
To qualify for the housing allowance, a person must meet the following criteria:
- Be an ordained, licensed, or commissioned minister of the gospel
- Serve as a primary religious leader of the congregation as designated by the church and/or denomination
- Spend a majority of their working hours in religious activities and functions or performing “ministerial services”
- Receive a salary or housing allowance from the church as part of their compensation
If you are a pastor or minister who meets the criteria above, you are eligible to claim the housing allowance.
Now let’s look at how to calculate and claim the housing allowance on your taxes.
Who Determines the Housing Allowance?
The church’s governing body designates the housing allowance each year. Depending on the church, this may be a board, council, or denominational authority. It’s important to note that the housing allowance cannot be more than the reasonable salary compensation paid to the minister.
The housing allowance should be set up in advance, before the beginning of the tax year or when the pastor is hired. Although the housing allowance resolution can be adopted or amended at any time, it can only be applied prospectively, not retroactively.
If you’re a pastor going through the hiring process, the housing allowance may be part of your total compensation package. It’s one type of benefit along with cash salary, benefits, paid leave, and other reimbursements. The housing allowance may be negotiable, but you should have that conversation with your church leaders before accepting the position.
Calculating the Housing Allowance
The housing allowance is limited to the fair rental value of your home, plus utilities, but limits do exist. The total amount cannot be more than the reasonable salary for your position, as determined by the church.
For the housing allowance, you can exclude the lesser of the following amounts from your gross income:
- the officially designated housing allowance
- the amount used to provide or rent a home
- the fair market rental value of your home which includes utilities, furnishings, etc.
It’s important to note that you cannot choose which of these parameters to use; your exclusion must be the lesser amount.
The definition of “fair rental value” is the amount you could reasonably expect to receive from renting your home on the open market. You can look at local real estate prices or consult a realtor to determine accurate pricing based on comparable listings in your community.
So, even if your expenses are more significant than your allotted housing allowance due to mortgage and home operations, the amount you claim as a housing allowance exclusion cannot exceed the fair rental value of your home.
For example, if your housing allowance is $24,000 per year and the fair rental value of your home is $22,000 per year, you can only exclude $22,000 from your gross income.
In addition, suppose $20,000 of your salary is designated as a housing allowance, but the actual expenses of your home are only $18,000. You’re required to include that extra $2,000 in your gross, taxable income. Any unused portion of your housing allowance will become part of your total income subject to taxes.
Pastors living in a furnished parsonage provided by their church can still claim a housing allowance for other home costs. These include things like home maintenance, repairs, utilities, and furnishings. Next, we’ll look at what you can and cannot include.
What Housing Expenses Can You Include in Your Housing Allowance?
You are able to include home operations expenses in your housing allowance in addition to basic mortgage and rent.
These housing operations expenses can include:
- Utilities: electric, water, sewer, trash
- Homeowners insurance
- Real estate taxes
- Home repairs and remodeling
- Furnishings and appliances for your home (including repairs)
- Pest control
- Lawn care and snow removal services
- Homeowners or renters association dues
You are not able to include the following expenses in your housing allowance:
- Food and other groceries
- Clothing
- Cleaning or domestic help
- Auto expenses like gas, car payments, and insurance
- Entertainment
The list of items you can include in your housing allowance for pastors is quite lengthy. Many churches also add an additional “buffer” amount to the housing allowance to allow for unexpected expenses such as repairs that may come up throughout the year.
You do need to remember a couple of things when it comes to these expenses. First, you need to keep accurate records and receipts of the expenses you’re looking to include. Second, you can only designate expenses you incur within the designated year.
You should consult a tax advisor before filing your taxes if you have any questions about what you can or cannot include in your housing allowance.
What Do You Need to Know About the Housing Allowance for Tax Purposes?
So what steps do you need to take to maintain proper legal records and prepare for tax season?
First, all agreements should be in writing. The pastor and church should maintain signed copies of the housing allowance resolutions and any amendments on file. It’s important that there is a clear paper trail indicating that the funds have been set aside expressly for housing expenses.
Next, save all receipts related to your housing expenses throughout the year. These include mortgage statements, rental agreements, property tax bills, and insurance premiums.
It’s also a good idea to keep a monthly ledger of your housing expenses. This record can be a simple Excel spreadsheet that includes the date, type of expense, and amount spent for each month.
By taking these steps throughout the year, you can be confident that you have everything accounted for and in place when it comes time to file your taxes.
How Does It Affect My Taxable Income?
While the housing allowance provides an exclusion from gross income, there are still some essential details to know come tax time.
The housing allowance excludes a portion of the income from federal taxes but not SECA (Self-Employment Contributions Act) taxes. So this means that you will still have to pay social security and Medicare taxes on the housing allowance.
In addition, if you live in a state with income tax, you will still be required to pay state taxes on the housing allowance.
According to the IRS, “For services in the exercise of the ministry, members of the clergy receive a Form W-2 but do not have social security or Medicare taxes withheld. They must pay social security and Medicare by filing Schedule SE (Form 1040), Self-Employment Tax.”
If you receive housing allowance payments in advance, you’ll need to include those amounts in your gross income for the year in which you receive them. On the other hand, if you accept housing allowance payments after the end of the year they were earned, you’ll need to include those amounts in your gross income for the following year.
Finally, if you receive housing allowance payments that exceed your actual housing expenses, you’ll need to include the excess amount in your gross income. For example, if your housing allowance is $12,000 per year and you only spend $11,000 on housing expenses, you’ll need to include the $1000 in your gross income.
The housing allowance provides an excellent benefit for pastors and their families to offset the cost of living expenses.
Other FAQs About the Housing Allowance for Pastors
The housing allowance for pastors can be overwhelming and confusing because there are a lot moving parts. It can always get complicated when dealing with federal income taxes and figuring out housing allowances. Here are some frequently asked questions about the housing allowance for pastors with some helpful answers.
What is the “Clergy Housing Allowance Clarification Act of 2002?”
The Clergy Housing Allowance Clarification Act of 2002 amended the 1986 parsonage allowance exclusion and clarified a few points.
Section 107 of the IRC reads:
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 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.
Is There a Legal Threat to the Housing Allowance?
The Housing Allowance was challenged in 2011 by the Freedom From Religion Foundation (FFRF) in a lawsuit, Gaylor v. Mnuchin. The FFRF sued the IRS and claimed the housing allowance created an unconstitutional preference for religion.
A number of Chicago pastors from various denominations intervened in the lawsuit to defend the housing allowance.
In November 2019, a federal appeals court ruled in favor of the Housing Allowance, stating that the tax code provision does not violate the Establishment Clause.
Where Can I Get a Worksheet to Help Calculate the Housing Allowance?
If you’re looking for tools and resources to help track your expenses and activity to prepare for taxes, we’ve found a few helpful worksheets online. Of course, be sure you’re using the most up-to-date resources year to year and verify with your church board, accountant, or tax assistant.
These tools may be a helpful start for you:
- Clergy Housing Allowance Worksheet from clergytaxnet.com
- Understanding Clergy W-2 Forms from clergyfinancial.com
The housing allowance for pastors is a great benefit that allows them to save money on their taxes. By understanding the rules and regulations surrounding the housing allowance, pastors can take full advantage of this benefit.
The Minister’s Housing Allowance
Understanding the housing allowance for pastors is vital for both ministers and their congregations. As we’ve explored, it provides a valuable opportunity for pastors to receive tax benefits on housing expenses. This offers a financial cushion in a demanding, and often underpaid, profession.
As pastors fulfill their spiritual duties, they also shoulder financial responsibilities that can be eased through prudent tax planning. Through transparency and clear communication, pastors can work with their staff to establish reasonable housing allowances that comply with tax regulations. Moreover, staying informed about updates and changes in tax laws ensures you remain compliant and take advantage of available benefits.
Ultimately, the housing allowance serves as a means to support you in your calling and alleviate financial burdens. By recognizing its significance and adhering to legal guidelines, you and your church can foster a supportive environment where ministers can focus on their ministry with peace of mind. In doing so, you honor the dedication and service of pastors who play an integral role in nurturing spiritual communities.
We hope this guide was helpful. God bless!
More on Pastor Compensation
About The Author
Comments 40
if the church paid my first and last month’s rent and deposit prior to the housing allowance being designated, can this still be part of my housing allowance? It was paid in April and I will be official with the church as of June 1st but needed to secure housing as I have to move for the job.
I am very Thankful that I found your site! My daughter and her husband are full time missionaries and have just begun receiving Clergy Housing Allowances this year, 2024!
It is a bit confusing and I am helping them navigate the information to ensure they do everything correctly!
We have been blessed enough that we were able to help them into a home without a mortgage. Where I am confused…..
Are they able to use fair market rental value OR since there is no mortgage, are they only allowed to use cost of upkeep, insurance, utilities, etc?
On the worksheet that you have put together it shows a ‘Method 3’ that could indicate that they could use ‘fair market’.
Determining what to withhold for the social security is another area that is so confusing but that is for a different day 🙂
Author
Hi Jacque,
So glad it was helpful. The ministry needs to decide on the amount that they will designate as a housing allowance. Your daughters family can only deduct that amount. That amount can’t exceed the actual value of their housing expenses. Yes, upkeep would be included, but in this scenario, that might be the only deduction. In theory, You could consider giving them a gift and then charging a rent for the home, that could then be eligible as a housing expense, but this is a more advanced tax strategy. I’d recommend speaking to a tax professional who can give you some advice on your specific situation.
I am a lay chaplain in a Catholic hospital ministry. I have a MDIV, and am a board certified chaplain. I perform many rituals for end of life patients, baptism in emergencies, prayer to patients and families and staff at the hospital and offer communion to patients occasionally. My local bishop has endorsed me for Board certification. My certifying body “Missioned” me to serve as a lay Catholic Chaplain. Do I qualify for minister’s housing allowance? Thank you!
Author
This comment section is intended for discussion on the minister’s housing allowance. It is not intended to be tax advice. Please consult a tax professional for advice on your specific tax situation.
Can someone who has a 1099-misc instead of the W-2 receive the housing allowance?
Author
Either one should be fine. In theory 100% of a ministers income can come from a housing allowance. So 1099, W2 really have not bearing on the housing allowance.
My husband and I are Brazilian and we were both ordained pastors. We have the F-1 visa and as soon as we graduate we will be applying for the OPT and after a year we will apply for the religious visa as we will be working full time as pastors. I’d like to know if we are eligible to apply for the Housing Allowance during OPT time?
OPT is Optional practical training. It allows students on an F-1 visa — students studying abroad in the United States temporarily — to take temporary employment in an area directly related to their studies.
Thank you, this info is just what i was looking for.
Author
So Glad it was helpful!
Does this apply if you are a licensed minister, have a non profit organization and rent a room out from someone else who owns a home?
Author
Yes. You should be able to receive a portion of your income as a housing allowance to cover your rent. Make sure you have a rental agreement for the room your are renting.
We have paid off our mortgage. Can we still claim the fair rental value of our home? I know we can claim the costs of running our home, but that is less than our fair rental value.
Author
Typically you can’t. But you can claim whatever you pay in Property Taxes and HOA Fees if applicable.
Dear Thomas,
I am minister in a church under R-1 Status (Relgious Worker, Resident Alien). The church submitted a petition to change my classification to Special immigrant. W-2 for the 2 last years are required by the immigration office to prove that I received compensation for the said period. As the housing allowance is part of my wage, the amount is deducted from my gross income. Unfortunately, the immigration office did not take into consideration the housing allowance and considered only the gross income in box 1 of the W-2 which is logically low as it is = Initial wage – Housing allowance.
How to prove that the real yearly compensation is Box1 + Box 14?
Thank you,
You mentioned Christian Counselors as eligible. My church licenses me as a minister, but I only work per diem there. I also run a non-profit Christian Counseling service. Can I use a housing allowance through the counseling organization? Can other FT ordained pastors as well through us? We’re in PA. Thanks!
The church has a parsonage (debt-free), and pays all utilities, that I live in at no cost. I also have a weekly cash salary. Is housing allowance required? Additionally, if I have no housing allowance designated, is there any impact on my social security taxable amount (W2 box 14), or would my Federal taxable income (W2 Box 1) be the same as my Social Security taxable income?
Author
Hey Kevin,
Is housing allowance required?
If the church provides a parsonage for you to live in at no cost and covers all utilities, you don’t necessarily need to have a designated housing allowance. However, it can still be beneficial for tax purposes. If you have ministry-related expenses that aren’t covered by the parsonage and utilities, a housing allowance can help you cover those expenses with tax-free dollars. You should discuss this with your church board and a tax professional to determine the best approach for your situation.
Impact on Social Security taxable amount (W2 Box 14) and Federal taxable income (W2 Box 1)
If you don’t have a designated housing allowance, your W-2 would not reflect any adjustments for housing allowance in either Box 1 or Box 14. Your Federal taxable income (W2 Box 1) would be your cash salary, and your Social Security taxable income (W2 Box 14) would also be based on that cash salary amount. Keep in mind that if you decide to designate a housing allowance in the future, it would not be subject to federal income tax (so it would not appear in Box 1), but it would be subject to self-employment tax for Social Security and Medicare purposes (so it would appear in Box 14).
Please note that this information is for general guidance purposes only and should not be considered professional tax or legal advice. I recommend consulting a tax professional or attorney to address your specific situation.
I am retired from the military and also receive VA disability. My home state does not have state income taxes. I live in a state currently that has state income taxes.
We rent here (Missouri) but pay property taxes in our home state.(Washington) Neither my wife nor I are employed.
I’m about to accept the senior pastor position here and I’m not sure what to do! I believe that if I take a salary in Missouri I would have to claim my military retirement and my social security as income in Missouri. It seems to me that I would lose money to state taxes that would probably outweigh my current income.
Author
Hey Scott,
Congrats on being offered the senior pastor position! It’s a big decision, and I can see why you’d want to understand the financial side of things before accepting. Let’s break down your situation a bit.
You mentioned that you’re currently living in Missouri, which has state income taxes, but your home state (Washington) doesn’t have state income taxes. You’re receiving military retirement and VA disability benefits, and you’re concerned about how accepting the pastor position might affect your taxes.
Here’s what you should consider:
Military retirement and VA disability: These benefits may or may not be subject to state income taxes, depending on the state’s specific rules. In Missouri, military retirement pay is partially exempt from state income tax. You’ll want to research Missouri’s tax rules or consult a tax professional to get more information about how your benefits would be taxed.
Social Security: In Missouri, Social Security benefits are generally exempt from state income taxes for most recipients. Again, it’s a good idea to verify this with a tax professional based on your specific situation.
Pastor salary: If you accept the pastor position in Missouri, your salary would be subject to state income taxes. You’ll need to weigh the additional income from the pastor position against the potential increase in your state income tax liability.
You might want to speak with a tax professional who’s familiar with both Washington and Missouri tax laws to help you navigate this situation. They can give you a better idea of the tax implications and help you make an informed decision.
I hope this helps!
Hi there!
We rent out a bedroom in our single family home. It is 50% below the fair market rent in the area so it is “Not for profit”. However, we do claim this as taxable income, but we do not deduct any expense in our taxes.
So, should I deduct the rental income from my Housing Allowance? For example: My Housing Allowance is $30,000 and my expenses are $28,000. My Rental income is $500 per month (or $6,000 per year). Would I need to subtract the $6,000 from my expenses? Which would end up being $22,000.
I would really appreciate your assistance!
Thank you!
Author
Hey Kevin,
Very cool that you are making some extra income by renting out a room.
Based on your description, you are receiving rental income ($6,000 per year) for a portion of your home and claiming this amount as taxable income. However, you are not deducting any expenses related to the rental on your taxes. The key factor here is that your rental activity is considered “not for profit.”
In this scenario, you should not deduct the rental income from your housing allowance. The rental income is separate and should be reported as taxable income, as you mentioned you are already doing.
Your housing allowance of $30,000 can still be used to cover your housing-related expenses, up to the actual expenses incurred, which you stated are $28,000. As long as your housing allowance does not exceed your actual expenses, you can exclude the $28,000 from your taxable income for federal income tax purposes.
Keep in mind that the housing allowance is subject to self-employment tax (Social Security and Medicare). You should consult a tax professional to ensure you are properly reporting the rental income and the housing allowance on your tax return.
Again – This is general guidance, not tax advice. Talk to a tax pro for insights on your specific situation.
We started a pilot church in our home last year. My husband does not receive a salary but, only allowance can we still get our deductions? Does he have to do self employment though he doesn’t receive an allowance? Do we have to claim in for the federal taxes?
If a Rabbi Trust was set up by the church for the pastor’s retirement, can he/she use the money for housing allowance. Is there provision for the retired pastor to use part of his retirement for housing allowance?
Author
I’m not familiar with a “Rabbi Trust”. Maybe someone from the community can chime in with some ideas…
If a pastor starts drawing Social Security benefits will the housing allowance be considered income against the 21,000+ that a minister can receive without going through the $2 to $1 reduction?
Author
That’s outside of our expertise, but maybe someone from the community can chime in.
My husband “receives” a housing allowance, (untaxed), as part of his salary package.
Upon retirement, does he actually receive those funds?
I’m a pastor getting housing allowance for a couple years now. My wife just became a teaching pastor and they offered her housing allowance. Can we claim two housing allowances under 1 roof?
Author
As always, please consult a professional, but in most cases, she can claim a housing allowance. Still, the two housing allowances cannot total more than your combined housing expenses.
Can a down payment on a house be part of the exemption?
A down payment might be excluded from income if it doesn’t exceed the regular limits. Please check the IRS guidelines for further info: https://www.irs.gov/pub/irs-pdf/p517.pdf and be sure to consult a tax pro for your specific situation.
what happens if you leave the ministry during the year? will the MHA be prorated on the w-2 and you can pick up expenses for the period while in ministry? is there a penalty?
Are seasonal decorations such as Christmas decorations allowable housing allowance deductions?
It’s possible that decorations can be included in housing allowance deductions, but you should consult with your tax professional to be certain.
Can I use the housing allowance (half of what the church paid me for the year, this was in writing from the church) AND use my utility expenses as a deduction on my tax return?
What happens upon a pastor’s death if the pastor is married? I assume the church would own the home and the pastor’s wife would need to move out or purchase the home from the church. However, what if the pastor paid the down payment on the home and lived there for decades? Would the pastor’s wife be due the down payment amount (adjusted by the rate that the house appreciated over time)?
Author
Housing can come in either the form of a parsonage (a house owned by the church and provided to the pastor as part of their compensation package) or a housing allowance (a sum of money designated for the pastor to use towards housing expenses). In either case, the arrangement would typically end upon the pastor’s death. If the pastor is married, the surviving spouse would not be entitled to continue receiving a housing allowance or living in a parsonage unless the church decided to make such arrangements.
It is important to note that the specifics of a pastor’s compensation, including housing arrangements, are typically outlined in their employment contract with the church. It is possible that the contract may include provisions related to the pastor’s surviving spouse, so it would be important for the surviving spouse to review the contract and discuss any questions or concerns with the church.
Of course there are some exceptions to these general rules, so it is always a good idea to check with an attorney or your state’s labor department for specific guidance.
Is there a maximum percentage of the salary that can be designated as the housing allowance?
We recommend you consult with a professional accountant, but our understanding is that the housing allowance can be up to 100% of the minister’s compensation, but cannot exceed reasonable compensation for the minister’s services. Hope that helps!