Housing Allowance (exclusion)
The Must-Know Facts About Housing Allowance
Christine Bové
Taxes
One of the best tax breaks pastors can get is through claiming a housing allowance. However, establishing it
properly and calculating it on your own can be confusing.
I will point out that the name “housing allowance” is a misnomer. Perhaps a more fitting term is “housing
exclusion” because it allows you to exclude part of your income from taxes.
Housing allowance is a designated portion of a minister’s salary that is excluded from income tax. The amount
used for housing is then excluded from the gross income and is considered tax-free.
Another confusing point about the housing allowance is how to correctly calculate it and report it. Despite the
confusion, once you have a better understanding on the housing allowance, it is an incredible benefit to use.
There are three things every pastor or minister should know about the housing allowance to use it for their full
advantage.
1. How to properly set up your housing allowance
Housing allowance must be approved by the board of directors before it comes into effect.
At a board meeting, your board of directors will need to vote to approve what they will offer you for your
housing allowance. Once that has been decided, this amount and the agreement must be recorded in the board
meeting minutes.
Also, please note that a housing allowance is only proactive, not retroactive. This means that if you get your
housing allowance approved in June, you will not be able to include the previous months of January through
May.
This topic is always helpful to go over in your annual board meeting.
Discover How to Maximize Your Housing Allowance
2. How to correctly calculate your housing allowance
At the end of the tax year, you can calculate how much of your gross income is able to be excluded from
income taxes.
When calculating your housing allowance, you need to select the least of the following:
The amount used to provide a home,
The amount designated as a housing allowance,
And the fair rental value of the home, including furnishing, appurtenances, and the costs of utilities.
Even though the board needs to approve the housing allowance, it is the pastor’s responsibility to calculate all
of the amounts.
This can be an overwhelming process if you’re handling this by yourself. We have a Compensation Suite to
help minimize the stress of calculating. If you prefer someone else to do it altogether, we also offer a housing
allowance service.
The following expenses can be included when calculating your housing allowance:
Monthly payments, such as mortgage and rent
Taxes, including real estate taxes, personal property taxes
Insurance, like homeowners, fire, flood, renters
Home improvements, such as a new roof, home additions (garage, carport), fencing, landscaping, pool,
deck, etc.
Maintenance and repairs. This includes: drapes, curtains, blinds, throw rugs, wallpaper, paint,
molding, shelving, artwork, bedspreads, sheets, linens, towels, etc.
Utilities. Gas, electricity, water, sewer, garbage service, cable and satellite, internet, phone line, home
security, etc.
Miscellaneous. This includes, but isn’t limited to: home cleaning supplies, brooms, mops, vacuums,
light bulbs, home supplies, carpet cleaning, landscaping services, lawn equipment, and garden tools and
supplies.
Insider’s tip:
There isn’t anything in the tax code, treasury regulations, or other IRS publications that limits the amount a
church can designate as a housing allowance for a pastor.
The housing designation does not determine how much a minister will be able to exclude from gross income.
To meet the legal requirement your housing allowance needs to be designated in advance of payment for the
services you provide as a minister to the church.
When the board designates your housing allowance at 100% of your compensation in advance of payment, you
can use the actual expenses paid to have a home.
So, the end result is the maximization of your housing allowance benefit. At the same time, please recall that the
amount you are able to report is limited to the lowest of the three amounts mentioned above in key factor #2.
3. How to report your housing allowance
The IRS has noted that the housing allowance doesn’t need to be reported on a minister’s Form W-2.
However, we have found that there are benefits in reporting your housing allowance on your W-2.
One benefit is banking and major buying purposes. When you apply for a loan to purchase a home or car, banks
want to know whether your income is acceptable to make the payments. Many banks will deny the loan request
if the income reported on the W-2 isn’t enough.
Because of this, including the housing allowance in box 14 on the W-2 helps substantiate the pastor’s total
income and can assist in getting a loan approved.
Another benefit is self-employment tax reporting. This is one of those points that gets a little more complicated.
Although the housing allowance can be excluded from income tax, if you have not opted-out, it is still subject to
self-employment tax. By reporting your housing allowance on form W-2, it makes reporting your income on
Schedule SE (Form 1040) for self-employment taxes easier.
You deserve the best
Understanding how to use the housing allowance is highly beneficial. It’s a great advantage towards tax benefits
for pastors.
At StartCHURCH, we make every effort to empower pastors and ministry leaders understand the minister’s
housing allowance. We want pastors to take advantage of this tax benefit.
And while there is a lot of information to process, we want to help. It’s important that pastors and ministry
leaders properly set up, calculate, and report on their housing allowance.
