How Much Can a Pastor Claim for Housing Allowance?

The housing allowance for ministers of the gospel is a provision within the U.S. tax code, specifically Section 107 of the Internal Revenue Code. This allowance allows qualifying ministers to exclude a portion of their income, designated for housing expenses, from their gross income for federal income tax purposes. This benefit originated in 1921, initially for church-provided parsonages, and expanded in 1954 to include cash allowances. It aims to provide equitable treatment for ministers whether they live in church-provided housing or their privately owned or rented homes.

Eligibility and Formal Designation

To qualify for the housing allowance, an individual must meet the Internal Revenue Service’s definition of a “minister of the gospel.” This includes individuals who are ordained, licensed, or commissioned and perform sacerdotal functions, conduct religious worship, administer sacraments, or are engaged in ministerial work for a religious organization. This eligibility extends to both employed and self-employed ministers.

The housing allowance must be formally designated in advance by the church or religious organization. This designation must be in writing, often as a formal resolution, board action, or employment contract provision. The allowance cannot be retroactively applied to past income or expenses. This formal action establishes the portion of compensation intended for housing, allowing potential exclusion from taxable income.

Determining the Maximum Allowance

The amount a minister can exclude as a housing allowance is limited to the lowest of three figures. The first figure is the amount officially designated as a housing allowance by the church or religious organization.

The second figure is the fair rental value (FRV) of the home, which includes the cost of furnishings and utilities. FRV represents what the home would rent for on the open market, not necessarily the minister’s mortgage payment or actual rental cost. Ministers can determine FRV through methods such as comparing their home to similar rental properties or obtaining a professional appraisal.

The third figure is the total of all actual, reasonable expenses paid or incurred for providing a home during the year. The minister can only exclude the smallest of these three amounts. For example, if a minister’s designated allowance is $25,000, their actual expenses are $22,000, and the fair rental value of their home is $28,000, they can only exclude $22,000. If the designated amount was $20,000, actual expenses $22,000, and FRV $28,000, the exclusion would be limited to $20,000.

Allowable Housing-Related Expenses

The “actual housing expenses” component in the allowance calculation encompasses a range of costs directly related to providing and maintaining a home. These qualifying expenses include:
Rent payments for those who lease their homes, or for homeowners, mortgage payments, covering both principal and interest.
Property taxes and homeowners insurance premiums.
Utility costs such as electricity, gas, water, sewer, trash collection, internet service, and basic phone service.
Expenses for repairs and maintenance, such as plumbing work, roofing, or painting.
The purchase and repair of furnishings for the home, along with improvements like additions or landscaping.

It is important to note that certain personal expenses are not considered part of the housing allowance. These typically include costs for food, domestic services, and other personal items. Additionally, expenses for portions of the home not used for housing purposes, such as an office space primarily for non-ministerial business, may not qualify.

Tax Treatment and Reporting

While the designated housing allowance is excluded from a minister’s gross income for federal income tax purposes, it is subject to self-employment (SE) tax. The Internal Revenue Service considers the housing allowance as earnings from ministerial services for self-employment tax calculations.

For employed ministers, the non-taxable housing allowance may be reported in Box 14 of Form W-2. The full amount of ministerial earnings, including the housing allowance, is subject to self-employment tax, which ministers calculate and report on Schedule SE (Form 1040). Self-employed ministers report their ministerial income, including the housing allowance, on Schedule C (Form 1040), Profit or Loss from Business, before calculating self-employment tax on Schedule SE.

Ministers should retain the formal designation letter from their church or organization, along with all receipts for housing expenses, utility bills, and other documentation related to their housing costs. These records help verify the amount excluded in case of an IRS inquiry or audit.