What is the Housing Allowance?

Introduction

This article examines the popular topic of housing allowance.

Executive Summary

Ministers who own or rent homes can exclude from their income the portion of their ministerial income designated by their employer as a "housing" allowance. 

A small percentage of ministers live in a church-owned house, most live in a house they own/rent. these ministers are not required to pay income taxes on the portion of their compensation that is decided upon in advance by their employing church as a housing allowance, as long as that the allowance is used to actually pay for housing expenses and, does not exceed the annual fair rental value of the home (furnished, plus utilities). There are a number of things you should know about housing allowances.

(1) minister

A housing allowance is a tax-free fringe benefit only if it is provided to a "minister of the gospel" as compensation for services of ministry. Some churches designate housing allowances for nonminister church employees. This accomplishes nothing since the full amount of the allowance must be reported as taxable income to the employee.

(2) an exclusion

The amount of the housing allowance is excluded from gross income, rather than a deduction. Therefore, the exclusion is "claimed" by simply not reporting the allowance as income.

(3) designating a housing allowance

Whether a minister owns or rents, it's essential that the employing church designate the housing allowance. Housing allowances should be

(1) adopted by the church board or congregation,

(2) recorded in written form (such as minutes), and

(3) designated in advance of the beginning of the year.

The  tax regulations state the designation of the allowance may be contained in "an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action."

Under no circumstances can a minister exclude any portion of an allowance retroactively designated by a church.

(4) amending a housing allowance

A church can amend a housing allowance designation during the course of the year if things have changed rendering the allowance inadequate. Of course, any change would only count forward from the date of the change.

(5) how much should a church designate as a housing allowance?

There is no "limit" that can be designated by a church as a housing allowance. However, a church should not designate an allowance significantly above a minister's actual housing expenses, or the annual fair rental value of the minister's home.

(6) "double deduction"

Ministers who own their homes and itemize their deductions are eligible to deduct mortgage interest and property taxes on Schedule A even though these items were excluded as part of the housing allowance. This is the so-called "double deduction."

(8) Social Security

The housing allowance is an exclusion just for federal income tax. It can't be excluded in computing the minister’s Social Security liability.