3 Things Every Minister Should Know About Housing Allowance

By Raul Rivera

The minister’s housing allowance is perhaps the best tax benefit among pastors; however, it is also one of the most misunderstood!

This blog is intended to clarify what the housing allowance is and explain how to properly establish your housing allowance so that it works in your favor. In order to do that, you must first understand what the housing allowance really is.

What is the minister’s housing allowance?

Part of the misunderstanding of the minister’s housing allowance largely stems from the words “HOUSING ALLOWANCE.” 

When most ministers think of “housing allowance,” they assume that a portion of money is given to them for their housing needs. Ministers with this misconception do not view the housing allowance as “salary.”

Perhaps a better term to describe this benefit is a “HOUSING EXCLUSION.” The portion of a minister’s salary that is properly designated as a housing allowance may be excluded from gross income and considered tax-free income.

To keep things simple, think of the housing allowance in the following manner: 

1. Your housing allowance is salary. 
2. Your housing allowance is a designated portion of your salary that is excluded from income tax. 

How to maximize your housing allowance

There are three key factors for receiving maximum benefits from the minister’s housing allowance, which are as follows:

#1: Know how to properly set up your housing allowance.

When setting up your housing allowance, and prior to its use, the allowance must be approved by your board of directors and recorded in board meeting minutes. 

One reason for doing so is that your housing allowance is only proactive and not retroactive. For example, if you wait until June to set up your housing allowance, then you will not be able to include the months of January to May.

#2: Understand how to correctly calculate your housing allowance.

Another important part of establishing your housing allowance is to understand how to correctly calculate it.

The IRS Ministers Audit Technique Guide describes the limits placed on a minister’s ability to exclude a housing allowance from gross income. A minister may exclude no more than the lowest of the following amounts:

1. The amount used to provide a home; 
2. The amount designated as a housing allowance; or
3. The fair rental value of the home, including furnishings, appurtenances (i.e. garage), and the cost of utilities.

It is a pastor’s responsibility to calculate each of these amounts. (Our Compensation Suite provides you with a housing allowance worksheet to assist you with this process.)

The next obvious question is, “What expenses can you include when calculating your housing allowance?”

In essence, your designated housing allowance may include all costs that are directly related to maintaining your home. Some examples of qualified housing allowance expenses include:

1. Monthly payments: mortgage and rent payments;
2. Taxes: real estate taxes, personal property taxes;
3. Insurance: homeowners, fire, flood, renters;
4. Home improvements: new roof, home additions (i.e. garage, carport), fencing, landscaping, pool, deck, etc.;
5. Maintenance and repairs: drapes, curtains, blinds, throw rugs, wallpaper, paint, molding, shelving, artwork, bedspreads, sheets, linens, towels, knick-knacks, etc.;
6. Utilities: gas, electricity, water and sewer, garbage service, cable/satellite, internet, phone line, home security, etc.;
7. Miscellaneous: home cleaning supplies, brooms, mops, vacuums, light bulbs, home supplies, carpet/rug/drapery cleaning, landscaping services, lawn equipment and supplies, garden hoses, garden tools, etc.;

Before we move on, I want to share a little-known tip regarding the amount of money your church designates as a housing allowance for you.

There is nothing in the tax code, treasury regulations, or other IRS publications that limits the amount that a church can designate as a housing allowance for a minister. 

The housing designation does not determine how much a minister will be able to exclude from gross income. To meet the legal requirement, your housing allowance simply needs to be designated in advance of payment for the services you provide as a minister to the church.

When the board designates your housing allowance at 100% of your compensation in advance of payment, you can utilize the actual expenses paid to have a home. 

Thus, the end result is maximization of your housing allowance benefit. At the same time, please recall that the amount you are able to report is limited to the lowest of the three amounts mentioned above in key factor #2.

#3: Know how to report your housing allowance.

In the year 2000, the IRS issued a written determination clarifying that section 6051(a) of the Internal Revenue Code does not require that the housing allowance be reported on a minister’s Form W-2. Although this might be considered as a good thing, there are some advantages to reporting the housing allowance on your Form W-2.

Examples of some benefits are as follows:

• Banking and major buying purposes: When you apply for a loan to purchase a home or a car, banks want to know whether your income is acceptable to make the payments. Many banks today will deny a loan request if the income reported on one’s Form W-2 is not sufficient. Oftentimes, the housing allowance reported in box 14 of the Form W-2 is just enough to have your loan application approved.
• Self-employment tax reporting: Remember that although the housing allowance can be excluded from income tax, if you have not opted-out, it is still subject to self-employment tax. Reporting the housing allowance on Form W-2 makes it easier for you to report your income on Form SE for self-employment tax purposes.

If you decide to report the housing allowance, then it should be reported in box 14 of Form W-2.

Need more help?

We make every effort to educate pastors and church leaders on the importance of understanding the minister’s housing allowance in order to take full advantage of this tax benefit. 

However, there is still much misunderstanding among pastors when it comes to this topic. If you want to learn more about how we can help, click below to find out more about our housing allowance service.

For a more comprehensive look at the three key factors for receiving maximum benefits from the minister’s housing allowance, check out our Compensation Suite by clicking here.

This is a lot of information to process. If you want to make certain that you are properly setting up, calculating, and reporting your housing allowance, I encourage you to click on the link below or call us today at 877-494-4655! One of our knowledgable team members is waiting to assist you.

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