Is a Housing Allowance Taxable?

Housing Allowance and Taxes

For more than 70 years, we have provided financial education and vital planning tools for churches and servants of the church. The tax code involving the Minister’s Housing Allowance has been revised only twice in the last 100 years—in 1954 and in 2002—and Servant Solutions was there, as always, to help those who minister adapt to the changes and new opportunities. By now, it’s safe to say this benefit for qualifying ministers has become a “fabric of the Code” with deep roots in our nation’s tax history. The allowance has been challenged in recent years but was upheld in 2019 by the Seventh Circuit Court of Appeals. What follows are some of the most frequent questions about the Minister’s Housing Allowance and taxes.

Is a Housing Allowance Taxable?

To put this question in a broader context, we have created a detailed overview of the Minister’s Housing Allowance. If the minister qualifies under the terms outlined by the IRS, the housing allowance is not to be considered part of the minister’s gross income in a calendar year. According to the IRS, “to qualify for the special tax provisions available to ministers, an individual must be a ‘minister’ and must perform services ‘in the exercise of his ministry.’” This designation applies to any “duly ordained, commissioned, or licensed minister. Qualifying payments for a housing allowance are excluded from federal income tax. However, it’s important to note that these amounts are to be included in the computation of self-employment Social Security/Medicare taxes (SECA) on Schedule SE unless the minister is retired or (s)he has opted out of Social Security and has an IRS-approved Form 4361 in his/her personnel file.

How Much Housing Allowance Can a Minister Claim?

There are different considerations if the minister is in church provided housing or the minister own/rent their home.

If a minister lives in a church-owned parsonage or housing rented by the church, the fair rental value of the housing is not reported for income tax purposes. The fair rental value is subject only to self-employment tax. However, the minister may also request a housing allowance to cover expenses incurred in maintaining church-owned or church-rented housing. A cash housing allowance that is not more than reasonable pay for services is excludable for income tax purposes, subject to the lowest of (1) actual housing expenses paid from current ministerial income, or (2) the amount prospectively and officially designated.

If ministers own or rent their own home, they may exclude, for income tax purposes, a cash housing allowance that is not more than reasonable pay for services and that is the lowest of (1) the amount used to provide a home from current ministerial income, (2) the amount prospectively and officially designated, or (3) the fair rental value of the furnished home, plus utilities.

How is Housing Allowance Calculated?

The proper designation of a cash housing allowance can result in significant tax savings for the qualifying minister. Review our information about The Minister’s Housing Allowance, complete the appropriate ECFA Worksheet, and then submit your request to your church Finance Board or Board of Elders. Remember, the IRS requires that a minister’s housing allowance request be approved strictly on a calendar year basis because the tax return is based on the calendar year. This approval must happen before the tax year in question begins.

How Do I Report Housing Allowance on My Tax Return?

Qualifying payments for a housing allowance are excluded from federal income tax. However, it’s important to note that these amounts are to be included in the computation of self-employment Social Security/Medicare taxes (SECA) on Schedule SE unless the minister is retired or (s)he has opted out of Social Security and has an IRS-approved Form 4361 in his/her personnel file. Generally, housing allowance payments are also exempt from state income tax. Box 1 of the minister’s Form W-2 should not include any portion of the church-designated housing allowance. Rather, it should be reported in Box 14 of Form W-2, or the church treasurer should provide a letter by January 31st to the minister indicating how much was paid as designated housing allowance in the previous year. A copy of this letter should be maintained in the minister’s personnel file. Housing expense details, receipts, and records are not to be submitted to the employer. They are handled differently than professional business expenses and remain confidential. It is the minister’s obligation to determine how much of the annual designation can be excluded and to report any unused portion of the designated amount as additional taxable income on the annual tax return. Retired clergy will receive a Form 1099-R for their retirement distributions. When reporting retirement payments made as “housing allowance,” the Form 1099-R carries the statement “taxable amount not determined” since it is the individual minister’s responsibility to determine the amount qualifying as an exclusion from taxes.

How Can Servant Solutions Provide Insight into How Taxes Work with Minister Housing Allowance?

Our Credentialed Employee’s Toolbox Series is designed to help ministers navigate, manage, and wisely steward their financial resources. Over the years, Servant Solutions has helped countless ministers with their personal financial goals and retirement planning. We provide the education and tools ministers need to make the very best decisions for their future. Through our financial calculators, newsletters, blog posts, educational videos, and other resources available on our website, we provide insight about the unique financial needs of those who minister. Not finding the answer to a specific question? Reach out to us directly.