The Retired Clergy Housing Allowance and IRS Rules

The clergy housing allowance is a tax benefit under the Internal Revenue Code that allows qualifying ministers to exclude a portion of their income from federal income taxes. This provision recognizes that a minister’s home is often a center for professional duties. For many, this benefit extends into retirement, applying to pension distributions and other retirement income earned through their ministerial career.

This continuation of the housing allowance into retirement can significantly reduce a retired minister’s overall tax liability. However, the rules for retired clergy have distinct requirements. These regulations govern eligibility, how the allowance is officially established, and the methods for calculating and reporting the exclusion.

Eligibility Requirements for Retired Clergy

To qualify for the housing allowance in retirement, an individual must meet the IRS’s definition of a “minister of the gospel.” This definition is based on a combination of factors outlined in guidance like IRS Publication 517. The IRS considers whether an individual is ordained, licensed, or commissioned, has the authority to administer sacraments, conduct worship services, and is regarded as a religious leader by their church or denomination.

Eligibility during retirement hinges on the nature of the retirement income. The pension payments must be for past services performed as a minister. The retirement benefits must stem from a 403(b) or similar church-sponsored retirement plan where contributions were made from ministerial earnings. To maintain eligibility, these funds must be distributed directly from the qualified church plan. If the funds are rolled over into a different type of account, such as a standard IRA, the ability to claim the housing allowance is lost.

Designating the Housing Allowance

A retired minister cannot simply decide to claim a portion of their pension as a housing allowance. The designation must be a formal action taken by the entity responsible for the retirement payments before the payments are made. For most retired clergy, this is the national pension board of their denomination or the organization that administers their 403(b) retirement plan. This designation authorizes the minister to exclude a portion of their income, but it does not make the income tax-free by itself.

The designation must be made in advance for the upcoming year and must be documented, often through an official resolution or a formal statement in board meeting minutes. Some pension boards simplify this by automatically designating 100% of a retired minister’s distributions as a potential housing allowance. This action provides the retiree with the flexibility to claim their actual housing costs up to the limit of their distribution.

Calculating the Allowable Exclusion

Once the housing allowance is officially designated, the retired minister must determine the actual amount they can legally exclude from their taxable income. The excludable amount is subject to a three-part limitation. The retiree can exclude the lowest of the following three figures: the amount officially designated by the pension board, the actual amount spent on housing-related expenses, or the fair rental value of the home, including furnishings and utilities.

To calculate the second limitation, the retiree must track all qualifying housing expenses for the year. Qualifying expenditures include:

• Rent or mortgage payments (both principal and interest)
• A down payment on a home
• Real estate taxes and property insurance
• Utilities such as electricity, gas, water, sewer, telephone, and trash removal
• Repairs, maintenance, and home improvements
• Furnishings and decorations

For example, consider a retired minister who receives $30,000 in annual pension payments, with the entire amount designated as a housing allowance. During the year, the minister documents $18,000 in actual housing expenses. An independent appraisal determines the fair rental value of their furnished home, plus utilities, is $22,000 for the year. Following the IRS rule, the excludable amount is the lowest of the three figures: $30,000 (designated amount), $18,000 (actual expenses), or $22,000 (fair rental value). In this case, the retired minister can exclude $18,000 from their federal income tax.

The responsibility for substantiating all of these costs rests entirely with the retiree. Maintaining detailed records, including receipts, canceled checks, and bank statements, is necessary to support the claimed exclusion in the event of an IRS inquiry. The fair rental value can be determined by assessing comparable rental properties in the area or through a formal appraisal.

Reporting on Your Tax Return

The total pension distribution paid to the retired minister will be reported by the pension board on Form 1099-R. The retiree then reports the total distribution amount on the appropriate line for pensions and annuities on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR for seniors.

To report the exclusion, the retiree subtracts the calculated housing allowance from the total distribution. On the tax return, the total distribution is entered on one line, and the smaller, taxable amount is entered on the corresponding line for the taxable portion. The difference between these two figures represents the excluded housing allowance.

For instance, if the total pension reported on Form 1099-R is $30,000 and the calculated excludable housing allowance is $18,000, the taxpayer reports the full $30,000 as the gross distribution. They then report $12,000 as the taxable amount, and only this $12,000 is included in their adjusted gross income.