What is the Minister’s Housing Allowance?
The housing allowance is a portion of clergy income that may be excluded from income for federal income tax purposes under Section 107 of the Internal Revenue Code. It’s one of the most significant tax benefits available to clergy, yet it is often the most misunderstood.
Whether you are an active pastor looking to maximize your designation or a retiree navigating IRS Section 107 rules, understanding the rules is essential. Our housing allowance page includes a brief overview, a full downloadable PDF guide with worksheets, and a video to assist you in ensuring your housing allowance is IRS-compliant and provides the maximum benefit to your family.
Who is Eligible for a Clergy Housing Allowance?
To be eligible, the pastor/clergy must be a “minister of the gospel” and be ordained, licensed, or commissioned by a church, convention or association of churches. IRS rules state the person must be performing “ministerial services” such as administering the sacraments, and be considered as a religious leader by the church and/or denomination. Therefore, a church custodian or secretary cannot have a housing allowance.
How much can a minister exclude from taxes?
(The Lesser of Three Rule)
If a housing allowance is properly designated in advance, a minister can exclude the lowest of the following three amounts from income for federal tax purposes:
- The total housing allowance designated by their church (or Church Benefits Board for retirees)
- The fair market rental value of your furnished home, including utilities
- Actual housing expenses (including mortgage payments, utilities, insurance, improvements, furnishings, etc.)
What expenses are eligible for housing allowance?
While there is no list of allowance expenses provided by the IRS, it is understood that most reasonable household expenses can be included.
- Some of these items include: down payment on a home, mortgage payments (including both interest and principal), real estate taxes, homeowners’ association dues, property insurance, and utilities.
- Other inclusions are: furnishings and appliances (including repairs), structural repairs, remodeling, yard maintenance and improvements, pest control, snow removal, maintenance items, and trash pickup.
- Important Note: The cost of food and/or clothing may not be included in the housing allowance.
For more details and printable worksheets for homeowners or renters, download the complete guide.
Do ministers pay SECA tax on housing allowance?
The housing allowance exclusion only applies for federal income tax purposes. Housing allowance and/or the fair rental value of a parsonage must be included as self-employment earnings subject to the self-employment tax. It is reported by the pastor on Schedule SE of Form 1040, line 2, together with salary.
When should a church approve a housing allowance?
A housing allowance must be designated in advance of the time it is paid. A housing allowance cannot be designated or increased retroactively. It is important for the housing allowance resolution to be adopted by the church council or annual charge conference prior to each new calendar year.
Can retired ministers receive a housing allowance?
It is important to note that only a 403(b)(9) church plan allows retired ministers to receive their distributions as a tax-free housing allowance. If you move your retirement savings to a traditional IRA or a 401(k), you permanently lose this IRS benefit.
As a qualified 403(b)(9) church plan, Church Benefits Board can facilitate housing allowance for retired ministers (within IRS limits). This housing allowance is not subject to Social Security taxes (SECA).
Minister’s Tax & Financial Guide
Church Benefits Board is proud to partner with the Evangelical Council for Financial Accountability (ECFA) to offer an in-depth tax resource guide entitled, Minister’s Tax & Financial Guide.