Housing Allowance for the Pastor
One of the few significant tax advantages left for clergy is the ability to exclude from federally taxable income the rental value of a parsonage or that part of compensation that is used to provide a home. (Internal Revenue Code section 107)
Who qualifies for the Housing Allowance?
- Must be employed by the church (or agency of the church)
- Must be ordained, commissioned, or licensed
- Administers the sacraments
- Conducts religious worship
- Has management responsibilities in the church or denomination
- Considered to be a religious leader
- The benefit is made available to the minister as compensation for services.
- All of these need not apply.
What kind of expenses can be used when calculating the housing allowance exclusion?
- Mortgage or rent payments
- Real estate taxes
- Property Insurance
- Down payment on a home
- Furnishings & Appliances (purchase & repair)
- Remodeling & repairs
- Yard maintenance & improvements
How much of the Pastor’s salary can be used as the housing exclusion?
Only the lowest of the following can be used when the pastor files his federal income tax return:
- The fair rental value of the home.
- The amount actually used to provide a home.
- The amount officially designated as the housing allowance.
How is the difference between the designated housing allowance and the lower of the three amounts handled?
- If the allowance exceeds the lower of the actual expenditures or the fair rental value: the pastor needs to include the difference on Form 1040 as "other income."
- If the actual expenditures or fair rental value exceed the allowance: the difference cannot be taken as an additional deduction on the pastor’s tax return. It is lost.
How is the Housing Allowance declared?
- It should be adopted by the church council or congregation
- It should be in writing
- It should be in advance of the calendar year or in advance of a new pastor starting employment (If a congregation fails to designate an allowance in advance of a calendar year, it should do so as soon as possible in the new year. The allowance will operate prospectively never retroactively.)
What about the pastor living in a parsonage?
Those clergy living in church-owned parsonages are already having the fair rental value of their home excluded from their income. In addition they can request their church council to establish a "parsonage allowance" out of their salary that is used for such things as utilities, repairs and furnishings for the parsonage.
How is the Housing Allowance handled on the W-2?
The housing allowance (or the value of living in a church-owned parsonage) is always excluded from federal income. This means the congregational treasurer excludes this value from Box 1 of the W-2. The treasurer can however put this amount in Box 14 of the W-2 which is merely an information box.