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Clergy Housing Allowance Prior to Retirement

A minister is eligible for the clergy housing allowance as long as the minister was ordained by a church—regardless of the church’s denominational affiliation.

Under certain circumstances, a pastor’s entire compensation can be designated as excluded from federal income taxes under the clergy housing allowance. For example, John is the pastor of a small church that is only able to pay him $5000 per year. John also works a part-time secular job to support himself. If John has at least $5000 of housing expenses, it would seem perfectly reasonable and appropriate for his church to designate his entire salary as a housing allowance. No court (or the IRS) has ever ruled that a housing allowance designated by a church cannot be fully claimed by a pastor who has secular earnings.

To determine the fair rental value of your home, ask a realtor. You can find out what the market rental rate would be. Alternatively, you can ask the realtor to estimate the market sale value of the property then estimate that the fair market value of the home would be approximately 1% of the market value.

If amount designated by the church as housing allowance is greater than the fair rental value of the home, the excess amount must be reported as taxable income on the minister’s Form 1040. The amount is reported on the line titled “Other income” under taxable income on the first side of the form. Suggested wording for the form is “Excess allowance.”