The minister housing allowance is the most important tax benefit available to ministers who own or rent their home. This article breaks down how it works, who qualifies, and the key rules to follow to take advantage of this essential tax break.
- Ministers can exclude a portion of their income designated as a housing allowance from federal income taxes.
- Eligible expenses include mortgage payments, rent, utilities, and home maintenance.
- The allowance must be designated in advance and cannot exceed the fair rental value of the home, including utilities.
What is the Minister Housing Allowance?
The housing allowance exclusion allows ministers to exclude from federal income taxes the portion of their salary designated as a housing allowance, provided:
- The allowance represents compensation for ministerial services.
- The allowance is used to pay for eligible housing expenses.
- The amount does not exceed the fair rental value of the home, including utilities.
Eligible housing expenses include mortgage payments, rent, utilities, repairs, furnishings, insurance, property taxes, and maintenance costs.
Key Rules for Housing Allowance Designation
To maximize this tax benefit, it’s important to follow these guidelines:
- No Retroactive Designation: Housing allowances cannot be designated retroactively. They must be approved in advance.
- Documentation: Most churches base the allowance on a housing expense form submitted by the pastor to the board or compensation committee.
- Amendments: Housing allowances can be amended during the year to reflect changes in expenses, but amendments only apply prospectively.
Who Qualifies for the Housing Allowance?
Only credentialed ministers performing ministerial services are eligible. For example:
- Ordained, licensed, or commissioned ministers qualify if they perform ministerial duties.
- Non-credentialed church staff (e.g., youth directors or music ministers) are not eligible, even if they perform some ministerial duties.
- Credentialed ministers performing non-ministerial duties (e.g., bookkeeping) are not eligible for a housing allowance.
Important Considerations
There are additional factors to keep in mind:
- Taxable Excess: The allowance is taxable to the extent it exceeds the lesser of actual expenses or the fair rental value of the home. Churches should remind ministers of this requirement.
- Self-Employment Taxes: The housing allowance exclusion applies only to federal income taxes. Ministers must include the allowance in self-employment tax calculations.
- Reporting: Churches are not required to report the housing allowance on a minister’s W-2 form. Some include it in box 14 (“other”), but this is optional.
FAQs: Minister Housing Allowance
1. What expenses qualify for the housing allowance?
Qualifying expenses include mortgage payments, rent, utilities, insurance, repairs, and home maintenance.
2. Can a housing allowance be amended?
Yes. Churches can amend the allowance during the year, but changes apply only to future expenses.
3. Are housing allowances subject to self-employment tax?
Yes. The allowance is excluded from federal income taxes but must be included when calculating self-employment taxes.
4. Can non-credentialed church staff receive a housing allowance?
No. Only ordained, licensed, or commissioned ministers performing ministerial duties are eligible.
The minister housing allowance is a powerful tax benefit for clergy. Churches and ministers should work together to ensure allowances are designated properly, documented thoroughly, and compliant with IRS rules.
