Understanding Housing Allowances for Pastors: A Guide to One of Your Greatest Benefits

Disclaimer: I am not a certified accountant. The information provided in this blog post is intended for general guidance only. Please consult with a CPA or a qualified tax professional for specific tax advice.

Table of Contents

1. What is a housing allowance?

2. Steps to setting up a housing allowance

3. Who qualifies?

4. What qualifies?

5. The lesser of three numbers explained

One of the best tax benefits that pastors have access to is the housing allowance. But often I find that new ministers are a little confused by this unusual benefit. Today, I’ll attempt to explain the housing allowance in simple terms as best I can.

What is a Housing Allowance?

A housing allowance is a portion of a minister's church income that is designated for his housing expenses. This can include rent, mortgage payments, utilities, repairs, and other housing-related expenses. But here’s what’s great- when used correctly, your housing allowance is not subject to federal income taxes. It’s somewhat similar to a tax deduction and it can really help you out.

Steps to Setting Up Your Housing Allowance

So how do you setup a housing allowance? First, it’s important to know that a housing allowance must be set in advance. If you take a job with a church in June, at best your new housing allowance will only apply from June-December. You can’t do a housing allowance retroactively.

Below I have a step-by-step guide to designating a housing allowance.

1. Estimate Expenses: Estimate your next year's housing expenses in detail and submit these estimates to your church board. This helps them set the allowance accurately. At Arrowhead, we typically send this form out to our pastors in November and it’s due on December 1.

2. Official Designation: Obtain an official designation form from your church. This needs to be done in writing and before the start of the year (or as soon as you come onboard their organization). .

3. Keep Records: Throughout the year, keep detailed records of all your housing-related expenses to prove the necessity of the allowance amount designated.

4. Prepare your Taxes: This is where the real work could be, but I promise it’s worth it. When it comes time to file your income taxes, you’ll get a W-2 from your church and it should already have a line (box 14) listed a “clergy housing,” which when combined with your salary line, adds ups to your total salary compensation. However, this “Clergy Housing” isn’t necessarily your final housing allowance number. Instead, you’ll need to rule the “lesser of three” rule check we’ll explain in a minute. That rule will determine the actual number you can take for housing allowance and if the number in box 14 over estimated your housing allowance, you’ll need to report the excess as taxable income.

Who Qualifies for a Housing Allowance?

If you’re a pastor currently serving in ministry, it’s highly likely that you qualify for the housing allowance benefit. That’s truly whether you’re full-time or part-time. The technical term in the tax code is that you must be a "minister of the gospel." To meet that criteria, a person must...

• Be an Ordained Minister: Individuals who are officially ordained by a recognized religious body to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets of their religious organization.

• Perform Ministerial Duties: These include regularly leading worship services, teaching, counseling, visiting the sick, or managing the operations and programs of a religious organization.

• Be employed by a Religious Institution: This should be obvious, but you have to be currently employed by a religious organization (or with religious duties), such as a church, denomination, religious school, military, hospital, charity, or missionary organization.

What Qualifies for a Housing Allowance?

So now you know that you qualify, what about your house? The main rule is that your housing allowance only covers your primary place of residence (sorry, that vacation beach house can’t count).

Let’s begin by determining the actual expenses of your home. Essentially, almost anything related to your home can count toward your housing expense total, whatever makes it “livable,” which is amazing. The kinds of housing allowance expenses that can qualify can include:

• Rent or mortgage payments.

• Property taxes and insurance.

• Utilities (such as gas, electricity, water, phone, internet).

• Furniture and appliances.

• Maintenance and repairs.

• Yard work.

So add all that up and we know what our qualifying housing expenses are. Going back up to our steps to get this setup, this is the number you’d ideally give to your church board before the new year to help them set an accurate housing allowance. You’re probably thinking “Whoa! That’s a ton!” And yes, it is! But hold up because this number isn’t yet our final housing allowance.

The Lesser of Three Numbers Concept

This is where it can get a little tricky, but hang with me cause I promise it isn’t that bad. When calculating your housing allowance, the rule is that the number you can take has to the smallest number out of these three options:

1. The amount officially designated as a housing allowance.

2. The amount actually spent on qualifying housing expenses.

3. The fair rental value of your home, furnished, including utilities.

This means you can only exclude from taxes the lowest of these three amounts. It ensures that the benefit matches real housing costs without providing an excessive tax advantage. This is regardless of what your W-2 says. So while your W-2 might have the right number in box 14, it’s not a guarantee. You need to do the work when you’re preparing your taxes; Calculate each of those three numbers above, use the smallest number for your housing allowance, and report any excess from box 14 as income.

As an example, let’s say box 1 says $30,000 and box 14 (clergy housing) says $20,000, adding up to total salary of $50,000. You do the three rule concept and you come up with:

1. $20,000 is the officially designated housing allowance from your church form.

2. $24,562 are the actual housing expenses you had last year.

3. You use Zillow and as best you can tell, the fair rental value of your home (fully furnished with utilities) is $21,800 a year.

What’s the actual housing allowance you can take? It’s the lesser of those three options above. So that would be $20,000 - the same as on your W-2. See? Took a little bit of simple math, but now you owe way less in income tax. Win!

Question: Can You Adjusting Your Allowance Mid-Year?

If your housing situation changes mid-year due to moving or significant repairs, you can request an adjustment to your housing allowance from your church administration. However, any changes can only be applied moving forward and not retroactively.

I’d like a little more help on this subject…

I understand. I’d recommend the Church and Clergy Tax Guide. I buy this every year and it’s quite extensive, especially for administrative staff like myself. I also like the housing allowance resources available at Guidestone.

I hope this helps!

Though setting up and managing a housing allowance requires some effort and detailed record-keeping, it is one of the most valuable benefits for pastors. Not only does it help with managing living costs, but it also offers significant tax advantages. With careful planning and understanding, you can make the most of this provision to support your ministry and family life effectively.

Disclaimer: I am not a certified accountant. The information provided in this blog post is intended for general guidance only. Please consult with a CPA or a qualified tax professional for specific tax advice.