What Is A Housing Allowance?

What Is A Housing Allowance? April 8, 2011

The minister’s housing allowance is a provision in the tax code (section 107 of the IRC) that allows the minister to exclude some or all of their income from gross income for income tax purposes, but not for SECA tax purposes (self employment / social security).  For nearly one hundred years, ministers have enjoyed this tax benefit as outlined in the Internal Revenue Code.  It’s interesting to note that a housing (or parsonage) allowance has existed by common consent for over two hundred years in America!

Who Qualifies For The Minister’s Housing Allowance?

A ‘minister’ as defined by the IRS is someone who:

1.     Administers church sacraments;

2.     Conducts religious worship;

3.     Manages the responsibilities of maintaining the religious organization or church (controls, conducts, and maintains integral agencies of organization)

4.     Holds a denominational license, commission, or ordination; and

5.     Performs teaching and administrative duties at theological seminaries or regarded as a leader by the church or denomination.

A minister may be bi-vocational and still receive a housing allowance from the income received from ministerial work (see above).  The income from secular employment cannot be used towards a minister’s housing allowance.

Retired ministers also qualify for a housing allowance from funds distributed from a qualified 403(b) retirement plan.  The funds must have been earned through ministerial work (see above) and follows the same limitations as listed below.

How Much Is Eligible For Minister’s Housing Allowance?

There are three basic limitations for declaring a housing allowance.  This ‘lesser of’ equation allows ministers to claim a housing allowance equal to the smaller amount of the following:

1.     The designated housing allowance adopted by the church board;

2.     The fair rental value of the home (fully furnished, including utilities);

3.     The actual housing expenses (including mortgage, taxes, utilities, furnishings, repairs, insurance, and maintenance).

Example:

Community Church establishes a $25,000 housing allowance for Pastor Smith.  Pastor owns his home and has annual expenses of $22,000.  Fully furnished, his home could rent for $25,000 per year. Pastor Smith may claim a $22,000 housing allowance because his actual expenses ($22,000) are less than the other qualifiers.

Arrangements for Minister’s Housing Allowance:

Ministers can receive a housing allowance through three basic arrangements:

1.     A parsonage provided by the church.

2.     A housing allowance for rental homes.

3.     A housing allowance for a home they own.

What Can Be Covered in the Minister’s Housing Allowance?

If a minister owns a home, the following actual expenses can be claimed towards a housing allowance:

  • Down payment on a home;
  • Mortgage payment (including interest and principal)
  • Property insurance;
  • Real estate taxes;
  • Utilities (water, gas, electric, trash, telephone, internet)
  • Furnishings and appliances
  • Yard maintenance, home repairs;
  • HOA dues (homeowners association)

The exclusion of these expenses from income tax must follow the eligibility requirements outlined in the previous section.

How To Report Minister’s Housing Allowance For Tax Purposes

Minister’s housing allowance is an exclusion of income for income tax purposes only, and is still subject to SECA taxes.  A nonretired minister must include any housing allowance on line 2 of the Schedule SE of Form 1040.  If a minister if living in a parsonage, the fair rental value of the parsonage must be included on line 2 of the Schedule SE of Form 1040.

Section 6051 of the IRC “does not require reporting of compensation that is not subject to withholding of FICA tax or income tax.  Since housing allowance is not subject to FICA (income tax), a church may not be required to report the housing allowance on a W-2.  *A tax preparer should always be consulted before making any decisions about tax reporting.

Responsibilities of Ministers Receiving a Housing Allowance

Ministers who receive this tax benefit should take the following into consideration:

  • Expenses should be monitored closely so that a housing allowance can be adjusted as needed year after year.
  • Ministers need to understand the limits of housing allowance and what is eligible for housing.
  • Any excess housing allowance must be reported as taxable income on line 7 of the tax form 1040 (if employee) or Schedule C (if self-employed).
  • SECA taxes must be satisfied on housing allowance or fair rental value of the church parsonage.

Quick Tips for Minister’s Housing Allowance

  • Ministers who own their home can still deduct the mortgage interest from their taxable income, even when they receive a housing allowance.
  • If you’ve paid off your mortgage, you can still claim a housing allowance, as long as you follow the ‘lesser of’ equation.  (You can claim your actual expenses or fair rental value, or designated allowance declared by the church – whichever is the lesser of the three.)
  • Down payments are eligible for housing allowance, as long as the ‘lesser of’ equation is observed.
  • Spouses of deceased ministers cannot continue to receive the deceased minister’s housing allowance.

Are you a minister who receives a housing allowance?  Did this information help you?  If you have a specific question, just leave a comment and I’ll try to find the answer!

 

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