Housing Allowance: A Big Tax Break for Ministers

If you’re a minister, there’s a big tax break that you should take advantage of. It’s called the minister’s housing allowance, which allows you to exclude a portion of your gross income—spent on housing expenses—from federal and state income taxes.

This means that your federal and state taxes will be reduced when you receive a portion of your income dedicated to housing allowance. Your housing allowance is money that is not reported as income. Thus, your taxes are reduced, not deducted.

It’s important to note that housing allowance affects federal and state income taxes but not self-employment taxes.

Who Is Eligible for the Minister’s Housing Allowance?

Section 107 of the Internal Revenue Code permits ordained, licensed, or commissioned ministers to receive housing allowance. It is the minister’s responsibility to follow housing allowance protocol and to keep record of all housing allowance expenses.

Not sure if you fall under this category? Check with the IRS to make sure you’re eligible.

How Does a Minister Receive Housing Allowance?

Before a minister can receive housing allowance, the allowance must first be approved by the employing organization—such as the church leadership or board—and documented before the beginning of the year. A minister may not receive housing allowance until after it has been established.

Again, for a minister to receive housing allowance, the following must first be completed:

  • It must be approved by a board or leadership
  • The approved housing allowance amount must be documented in writing
  • The date of approval must be designated before the new calendar year

If you’re a minister and want to begin taking housing allowance, start the process now. That way, you’re ready to receive your tax benefit when the new year rolls around.

Permissible Housing Allowance Expenses

Ministers must use their primary place of residence for housing allowance. Other homes, such as commercial property or vacation homes are not allowed.

Some authorized housing allowance expenses include:

  • Mortgage payments
  • Rentals
  • Home insurance
  • House utilities
  • Household appliances and furniture
  • Home improvements and repairs

Ministers are permitted to exclude from gross income the lesser amount of the following:

  • The official designated housing allowance amount
  • The amount paid to provide or rent a home
  • The fair market value of a home

If a Minister’s Home Is Provided by the Church, Can They Still Take Housing Allowance?

If this is the case, ministers are allowed to designate a part of their income (used as housing allowance) to go towards housing expenses, such as furniture and home repairs. To reiterate—any household furniture or home improvements (that are not paid for by the church) may be used as housing allowance expenses.

What Happens If a Minister Spends over Their Allotted Housing Allowance?

From time to time, your housing allowance expenses may exceed your allotted amount for the year. If this happens, you are required to include the excess amount as income on Form 1040.

If your expenses change and you happen to spend less than your allotted housing allowance amount, you may only count the money spent towards housing allowance expenses. Make sure you keep detailed records of any unused money just in case you get audited.

Can a Minister Make Changes to Housing Allowance?

A minister may not alter a housing allowance for that year. If a change is made at the end of the year, it may only be applied to the following year’s housing allowance—not to that year’s previous months.

How Does a Minister Report Housing Allowance for Tax Purposes?

As a minister, you are responsible to keep records of all housing allowance expenses. Here’s what you need to do:

  1. First, determine if you are eligible for housing allowance.
  2. Then, keep records of everything you used for Housing Allowance purposes.
  3. Finally, report and pay taxes on any portion of income that exceeds the lesser of actual housing expenses or fair market rental value of the home (furnished, plus utilities).

Can a Minister Take Housing Allowance in Retirement?

The IRS views active and retired ministers the same. This means that ministers can make tax-free contributions to their retirement plan plus take out distributions tax free. Again, retired ministers are eligible to take housing allowance from their retirement plan.

This is a huge benefit for retired ministers!

But keep in mind that it’s best to keep your money in a church-designated 403(b)(9) or 401k account. If you roll it over to an IRA, you are no longer eligible to take housing allowance on those funds.

To receive housing allowance in retirement, make sure you’re 59 ½ and receive a written approval letter from your church or organization.

Want to Know More?

Do you have questions about housing allowance? We’d love to help. You can count on our expertise to guide you towards the best option for you.

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