Housing Allowance

What Is Housing Allowance For Ministers?

The Minister’s Housing Allowance—sometimes called a parsonage allowance or rental allowance—is excludable from gross income for federal and state income tax purposes, but not for self-employment tax purposes. When a portion of compensation is received as housing allowance, federal and state taxes are directly reduced. Self-Employment Contributions Act (SECA) taxes are not directly reduced.

Who Can Receive the Minister’s Housing Allowance?

In order to receive the Minister's Housing Allowance, you must be an ordained, licensed, or commissioned minister. 

The housing allowance is an exclusion from income permitted by Section 107 of the Internal Revenue Code. It is not a deduction. In other words, a housing allowance is money that is not reported as income. A housing allowance is never deducted because it is never reported as income in the first place. However, the minister is required to include any excess housing allowance as income on their Form 1040.

Whether the minister owns or rents a home, it is essential that his or her employing organization designate a housing allowance. Housing allowances must be:

  1. Adopted by the organization board or leadership

  2. Recorded in written form (such as minutes)

  3. Designated in advance of the calendar year

However, organizations that fail to designate an allowance in advance of a calendar year should do so as soon as possible in the new year. The allowance will operate prospectively.

Click here for more Housing Allowance questions and answers.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.


 

To learn more about housing allowance, visit our Help Center or download our FREE Housing Allowance eBook.

 

Housing Allowance Frequently Asked Questions

What is Housing Allowance?

  • A tax benefit for ordained, licensed, or commissioned ministers.

  • A portion of income that is excluded from gross income, and thus is not subject to federal income tax.

  • Gives them the ability to take a portion of money out of their 403b without the 20% mandatory withheld (its possible they may still owe state or SECA taxes).

  • Also referred to as parsonage allowance or rental allowance.

Why does one get Housing Allowance?

The idea is that pastors use their house as part of their regular duties.

Who can take Housing Allowance?

A person who is an ordained, licensed, or commissioned minister.

Is there a limit to the amount of Housing Allowance?

Housing Allowance cannot exceed the lesser of 100% of compensation or actual housing expenses.

 

What if they want to take more than their Housing Allowance limit?

They can and can even do it on the Housing Allowance form.  But they will be taxed on the extra amount.

What is required to take a Housing Allowance distribution?

Download the Distribution Authorization Form - Special Housing Allowance Tax Treatment. Complete all sections of the form and return it to your former employer. Each year, you need to provide Envoy with a Housing Allowance Authorization letter from your organization, on letterhead, signed by an authorized individual, and  indicating the amount of Housing Allowance approved for the year.

Is there a due date on the letter?

The letter must be dated by December 31st of the previous year, but the letter can be handed in later than that.  

Who approves it?    

It must be approved by the board at the church by December 31st of the previous year. 

Is there an age limit?    

Yes, the pastor must be 59 ½ or older to take it from their 403b and avoid the taxes.    

What is the fee?    

$25 for a one-time and $10 a time for a periodic    

What if they are still employed?

Technically they can take it, BUT:

  • They still need to be 59 ½ or older,

  • The plan needs to allow in-service distributions,

We need proof that they are not receiving their housing allowance in other ways (church is paying them the housing allowance).

Can they take Housing Allowance distribution if they rolled over to an IRA or 401(k)?

No, this is why it is important for pastors to keep their money in a 403(b) and not rollover into an IRA or 401(k).

However, if they get a new job, they can roll back into a 403(b), and then have housing allowance eligibility.

How will this look on their tax form?

The total amount taken from the 403b for the year will show up in the “Gross Amount” section, but the amount in the “Taxable Amount” section will be the gross amount minus the housing allowance. So the housing allowance will not show in the taxable amount. The form you will get is a 1099.

Is this money reported as income?

No. The employer does not report it as income. However, the pastor will include any excess housing allowance on their Form 1040.

What is Excess Housing Allowance?

Say in December of the previous year the pastor goes to his board and says that his housing allowance needs for next year will be $12,000. But at the end of the year he adds up his expenses and they were only $11,000. The extra $1,000 would need to be reported as income.

Can they set up a recurring/periodic payment?

Yes, but it if their housing allowance amount changes, the account holder is responsible for letting us know and will need to fill out a new form with a new Housing Allowance letter.

The account holder should also send us a new Housing Allowance letter each year, even if it hasn’t changed.

Can they stop a recurring/periodic payment?

They can call or email us to let us know to stop it.

Are there sample Housing Allowance letters

Yes, have them log on to the web portal and go to the Help/Resource Center > Distribution > Housing Allowance > Scroll down to the bottom.

Where can I look for more tax law info?

Section 107 of the Internal Revenue Code

Can it count towards RMD?

Yes, they can take out their housing allowance without the majority of taxes, and the IRS will see the distribution as an RMD. 

If their RMD is larger than their housing allowance they would need to take out more and it would be taxed like normal.

Housing Allowance After Retirement

What Are The Special Requirements for Housing Allowance After Retirement?

To take a distribution with special housing allowance tax treatment, you must be at least age 59½ and receive a Housing Allowance Authorization Letter from your church or governing organization.

Housing Allowance Distributions

You can request one distribution and have a portion of that distribution be treated as housing allowance and another portion a regular distribution. You will receive one check or one electronic payment (ACH) for the total amount of the distribution less any elected tax withholding.

You may designate a percentage to be withheld from any taxable portion of your distribution, but you will be responsible for any estimated tax and any penalties incurred as a result of that decision.

Making Changes to Your Special Housing Allowance Tax Treatment

You are responsible for submitting a new Distribution Authorization Form—Special Housing Allowance Tax Treatment to Envoy. If you do not submit a new Distribution Authorization Form—Special Housing Allowance Tax Treatment to Envoy, your original Housing Allowance amount as elected on the form will continue from one tax year to the next for recurring payments.

Your payments will continue until you stop the payment or until your account balance is depleted. If you wish to stop payments, please contact Envoy.

Can You Take a Housing Allowance Distribution if You’ve Rolled Over to an IRA or 401(k)?

No, this is why it is important for pastors to keep their money in a 403(b) and not rollover into an IRA or 401(k).

However, if you get a new job, you can roll back into a 403(b), and then have housing allowance eligibility.

Click here for more Housing Allowance questions and answers.


To learn more about housing allowance, download our FREE Housing Allowance eBook.

Envoy does not offer legal or tax advice and encourages that you consult with a lawyer and/or professional tax advisor for personalized tax advice.

Housing Allowance: Are you throwing away free money?

Housing Allowance: Are you throwing away free money?

When an ordained, licensed, or commissioned minister receives a portion of their compensation as housing allowance, that portion is excluded from gross income and therefore not subject to federal income tax. This can represent substantial tax savings for the minister. Further, when an ordained, licensed, or commissioned person retires, a portion of their 403(b)(9) retirement plan distribution can be received as housing allowance, providing additional tax savings in retirement.