The Must-Know Facts About Housing Allowance

By Christine Bove

One of the best tax breaks pastors can get is through claiming a housing allowance. However, establishing it properly and calculating it on your own can be confusing.

I will point out that the name “housing allowance” is a misnomer. Perhaps a more fitting term is “housing exclusion” because it allows you to exclude part of your income from taxes. 

Housing allowance is a designated portion of a minister’s salary that is excluded from income tax. The amount used for housing is then excluded from the gross income and is considered tax-free.

Another confusing point about the housing allowance is how to correctly calculate it and report it. Despite the confusion, once you have a better understanding on the housing allowance, it is an incredible benefit to use. 

There are three things every pastor or minister should know about the housing allowance to use it for their full advantage.

1. How to properly set up your housing allowance

Housing allowance must be approved by the board of directors before it comes into effect. 

At a board meeting, your board of directors will need to vote to approve what they will offer you for your housing allowance. Once that has been decided, this amount and the agreement must be recorded in the board meeting minutes. 

Also, please note that a housing allowance is only proactive, not retroactive. This means that if you get your housing allowance approved in June, you will not be able to include the previous months of January through May. 

This topic is always helpful to go over in your annual board meeting.

2. How to correctly calculate your housing allowance

At the end of the tax year, you can calculate how much of your gross income is able to be excluded from income taxes. 

When calculating your housing allowance, you need to select the least of the following: 

• The amount used to provide a home,
• The amount designated as a housing allowance,
• And the fair rental value of the home, including furnishing, appurtenances, and the costs of utilities.

Even though the board needs to approve the housing allowance, it is the pastor’s responsibility to calculate all of the amounts.

This can be an overwhelming process if you’re handling this by yourself. We have a Compensation Suite to help minimize the stress of calculating. If you prefer someone else to do it altogether, we also offer a housing allowance service. 

The following expenses can be included when calculating your housing allowance:

• Monthly payments, such as mortgage and rent
• Taxes, including real estate taxes, personal property taxes
• Insurance, like homeowners, fire, flood, renters
• Home improvements, such as a new roof, home additions (garage, carport), fencing, landscaping, pool, deck, etc.
• Maintenance and repairs. This includes: drapes, curtains, blinds, throw rugs, wallpaper, paint, molding, shelving, artwork, bedspreads, sheets, linens, towels, etc.
• Utilities. Gas, electricity, water, sewer, garbage service, cable and satellite, internet, phone line, home security, etc.
• Miscellaneous. This includes, but isn’t limited to: home cleaning supplies, brooms, mops, vacuums, light bulbs, home supplies, carpet cleaning, landscaping services, lawn equipment, and garden tools and supplies.

Insider’s tip: 

There isn’t anything in the tax code, treasury regulations, or other IRS publications that limits the amount a church can designate as a housing allowance for a pastor.

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 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 use the actual expenses paid to have a home. 

So, the end result is the 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. How to report your housing allowance

The IRS has noted that the housing allowance doesn’t need to be reported on a minister’s Form W-2. 

However, we have found that there are benefits in reporting your housing allowance on your W-2.

One benefit is banking and major buying purposes. When you apply for a loan to purchase a home or car, banks want to know whether your income is acceptable to make the payments. Many banks will deny the loan request if the income reported on the W-2 isn’t enough. 

Because of this, including the housing allowance in box 14 on the W-2 helps substantiate the pastor’s total income and can assist in getting a loan approved. 

Another benefit is self-employment tax reporting. This is one of those points that gets a little more complicated. Although the housing allowance can be excluded from income tax, if you have not opted-out, it is still subject to self-employment tax. By reporting your housing allowance on form W-2, it makes reporting your income on Schedule SE (Form 1040) for self-employment taxes easier. 

You deserve the best 

Understanding how to use the housing allowance is highly beneficial. It’s a great advantage towards tax benefits for pastors. 

At StartCHURCH, we make every effort to empower pastors and ministry leaders understand the minister’s housing allowance. We want pastors to take advantage of this tax benefit.

And while there is a lot of information to process, we want to help. It’s important that pastors and ministry leaders properly set up, calculate, and report on their housing allowance.

If you have any further questions about how to implement the housing allowance in your taxes, give us a call at 877-494-4655. 

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