The housing allowance lets ordained staff deduct the cost of housing from income subject to federal taxes.
The amount of the allowance should cover the cost of maintaining a home: mortgage or rent payments, taxes, repairs, insurance, furnishings, utilities, etc. For federal income tax purposes, the excludable amount of a housing allowance is limited to the lesser of:
A minister cannot exclude more than his/her church designates, so the designated amount must at least be enough to cover items # 2 or 3 above. If the designated amount exceeds the lesser of item # 2 or 3, the minister must report the excess as taxable income.
A church must designate the housing allowance portion of a minister’s salary in advance of when that salary takes effect. The minister is responsible for documenting actual housing expenses. For more information on the housing allowance, click here
|Housing Allowance Example|
|Designated by the church||$22,000|
|Fair rental value of a furnished house, plus utilities||$19,000|
|Actually spent on housing by the minister for the year||$17,600|
In this example, the church designated $22,000 of its minister’s salary as a housing allowance. A realtor’s estimate of the rental value for a similarly furnished house came to $19,000, so the church’s designation was too high.
But when the minister added up her actual mortgage payments, utility, and maintenance costs for the year, the total was even lower: $17,600. Since that is the least of the three amounts, the minister can only deduct $17,600 from her federally taxable income.
For a minister living in a parsonage, the church does not report the rental value or any utility costs paid or reimbursed by the church as income for federal income tax purposes. However, the minister must count the parsonage rental value, utilities, and parsonage allowance as income when calculating his or her SECA tax.
A church should base the rental value on what the parsonage could be rented for in the community. A local real estate agent can help you determine this. Alternatively, your church can use 1% of the market value of the parsonage. For example, if the parsonage market value is $100,000, the monthly rental value would be $1,000. Consider annual adjustments to the parsonage rental value.
Your church’s accurate report of parsonage value helps MMBB determine death, disability, and retirement benefits.
An accurate parsonage rental value does more than help a pastor save on taxes. Your church reports this value, along with cash salary and utilities, to MMBB for Comprehensive Plan premium purposes.
If the reported rental value is less than the actual value of the parsonage, the minister’s death, disability, and retirement benefits will be lower. That can create considerable hardship if the member’s surviving family must find alternative housing.
The Impact of Under-Reporting
(45 Year-old Member)
Compensation Death Benefit
(4 x Reported Compensation)
Actual: $50,000 $200,000 Under-reported: $45,000 $180,000
In addition to determining the parsonage rental value, your church can also designate a part of a minister’s cash salary as a parsonage allowance. The parsonage allowance covers anything purchased by the minister to maintain a home in the parsonage, such as furnishings or renter’s insurance. The amount of this allowance is excluded from the minister’s taxable income to the extent that it can be justified by actual housing costs.
Unlike homeowners, ministers who live in parsonages usually do not have equity in their homes. This puts them at a disadvantage when they approach retirement. They must seek housing while not having built up equity over the years.
Churches can help such ministers by providing an equity allowance in addition to the minister’s compensation. There are several tax-advantaged ways to do this:
Housing Allowance Worksheet
MMBB provides this allowance worksheet as an example only – this is in no way a form to suggest or provide advice in any way, for any situation, and should be treated as such.
Remember the tax code limits the nontaxable portion of housing compensation designated as housing allowance for ministers who own their home to the fair rental value of the home (furnished, plus utilities). Ministers who own their homes should take the following expenses into account in computing their housing allowance exclusion.
Click to download the housing allowance worksheet – PDF 124.4 KB.