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 income taxes and state income taxes, but not for self-employment tax purposes. When a portion of a minister’s gross income is received as a housing allowance, federal income taxes and state taxes are directly reduced because the housing allowance reduces the minister’s taxable income. 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 one of the greatest tax benefits available to ordained, licensed, or commissioned ministers.

The minister’s housing allowance is an exclusion from income permitted by Section 107 of the Internal Revenue Code. This housing allowance is not a deduction. In other words, housing allowance payments are monies 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 payments as income on their Form 1040.

Who Approves the Minister’s Housing Allowance?

A housing allowance must be board-approved and designated in writing by the organization before the beginning of the calendar year. It cannot be designated retroactively, meaning it must be established before the minister earns the income on which the organization designates the housing allowance.

A ministry can not change their allowance at the end of the year to match their spending. If changes are made in December, they can not claim housing allowance on those change from January to November of that year. Any changes to housing allowance can only be designated for the future.

A designated housing allowance must be:

  1. Adopted by the organization’s 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 a housing allowance in advance of a calendar year should do so as soon as possible in the New Year. The housing allowance will operate prospectively.

What Are The Responsibilities For The Minister in Regards To Housing Allowance?

The minister receiving the housing allowance must determine their eligibility, understand the limits, and follow the rules. Ministers must keep records to substantiate the amount they include when calculating housing expenses.

Eligible housing allowance expenses include:

  • mortgage payments (principal and interest)

  • rent payments

  • real estate taxes

  • property insurance

  • utilities (gas, electricity, water, sewer, garbage pickup, local telephone service)

  • appliances and furniture (purchase or rental cost and repairs)

  • remodeling expenses

  • homeowners’ dues

  • pest control

The housing allowance may not exceed the lesser of 100% of compensation or actual housing expenses.

Ministers that live in homes provided by the church (church parsonage, etc) are allowed to designate part of their income as tax-free housing allowance, which can be used for furniture, home repairs, and other home items that are not reimbursed by the church.

 

Understanding Housing Allowance
During Retirement

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

In short, no. This is why it is important for pastors to keep their money in a 403(b)(9) and not roll over into an IRA or 401(k). Retired pastors may want to consolidate various investments into a single account. But if you roll over your 403(b) account into an IRA or 401(k), you will no longer be able to claim housing allowance on those funds. It’s important for retired pastors to keep their funds in a 403(b) account so that they can take tax-free distributions. The housing allowance benefit usually helps their retirement funds last up to 25% longer!

Housing Allowance and 403(b)(9) Church Plans

One of the greatest benefits of a 403(b)(9) Church Retirement Plan is that ministers can take non-taxable ministerial housing allowance distributions in retirement from their plan to help with housing expenses—a big tax break because it does not count towards their gross income.

Let’s take a look at a hypothetical example:

A minister wants to take $50,000 a year in retirement distributions.

Their housing allowance is set at $10,000 a year.

Normally, if they do not have a housing allowance setup, their gross income would be $50,000.

However, because of their housing allowance, their gross income is reduced by $10,000 (the housing allowance), leaving them with a taxable income of $40,000. Saving them a significant amount in income taxes.

Envoy Financial and 403(b)(9) Retirement Plans

For over 30 years, Envoy Financial has helped churches set up and steward 403(b)(9) retirement plans. We have accumulated extensive knowledge regarding these plans and how they work with the housing allowance for pastors. If you have any questions or would like to talk to us about a retirement plan for your church please contact us here.

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

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