Deciding on Ministerial Housing Allowance is easier than you think.

Too many ministers are confused, overwhelmed, or anxious about housing allowances.

I remember when my first church asked me how much I wanted designated as housing allowance in my first pastor job almost 20 years ago. I was so confused and scared of making a mistake the IRS would see as fraud. I still get lots of questions from ministers about how to set aside part of their salary for housing expense. The good news is it is incredibly easy to calculate and designate.

Who can use a housing allowance?

Any minister who is licensed or ordained can designate any or all of their reasonable ministerial income as housing allowance. If you work for a church as a custodian or business manager or secretary, you can’t designate any of that income as housing. Ministerial income is income you earn from performing sacerdotal duties. That’s a fancy word but essentially it means preaching, teaching, leading worship, and performing ceremonies such as baptisms, funerals, communion. As an example, I had a housing allowance when I was a pastor and when I was an executive pastor but I did not have a housing allowance when I was a church secretary, even though I was ordained. (Long story, maybe later.) I was a paid youth minister before I was ordained and while my work was sacerdotal in nature, I was paid like a regular employee with NO housing allowance because I was neither licensed nor ordained.

Why have a housing allowance?

A housing allowance saves you money on taxes. The amount of ministerial compensation you receive that is used for housing is not taxed for income tax purposes. You may still have to pay social security tax on it but that’s a separate discussion. Let’s start with a simple example.

Pastor Alan earns $4,000 per month, or $48,000 per year. He rents an all-bills-paid furnished house for $1,500 per month. Alan’s church’s finance committee designates $2,500 as salary and $1,500 as housing allowance. At the end of the year, Alan will pay income tax on $2,500 x 12 or $30,000 per year.

If Pastor Alan didn’t have the committee designate the housing allowance, he would have to pay income tax on all $48,000 of income. 

That’s nice and easy because his housing cost is very easy to calculate. It gets a lot more challenging when we have variable utility costs, own our own home, or furnish our own home.

Why is it simple to designate and calculate?

A minister can claim ministerial housing allowance on their taxes as the lower of three numbers:

A. The amount officially designated (in advance of payment) as a housing allowance;

B. The amount actually used to provide or rent a home; or

C. The fair market rental value of the home (including furnishings, utilities, garage, etc.)

Since A is the amount you decide, that’s not helpful. Since you can’t see the future, you cannot know how much your housing expenses will be so B is irrelevant. You simply designate C, the annual rental value of your home if it were rented fully furnished as your designated housing allowance amount, A.

But wait, what if my actual expenses end up being lower?

They should be lower. They probably will be lower. You will let the IRS know that on your tax return.

Pastor Katie owns a home. Her payment is $1,000 per month and her utilities including internet and cable TV are $200 per month. The rental value of her 1,700 square foot home is $1,700 per month and if it were furnished, it would rent for $2,000 per month. Pastor Katie should designate $2,000 per month or $24,000 per year of her ministerial income as housing allowance.

But what if her actual expenses are only $1,200/month or $14,400 per year? No problem. She indicates on his 1040 return housing expenses of $14,400 and excess housing allowance of $9,600. She will pay tax on the $9,600. 

Wouldn’t it have been easier to just say $1,200 for housing?

Well, simpler, yes. But dumb. The Bible says “Don’t be dumb.” Here’s why.

At the end of the year Pastor Katie realizes that the $500 plumbing bill she paid and the $1,000 extra principal payment on her mortgage would have reduced her taxes but ONLY if she has designated plenty of housing allowance. If Pastor Katie used $2,000/month, all those expenses reduce her taxes.

Designating the rental value of your home, in advance, keeps your options open.

How do I know what the furnished rental value of my house is?

Step 1: Figure out what the rental value of your house is. 

Use realtor.com or some other source for rental properties near your house. The same or adjacent zip codes are best. Find 3-5 similar houses and record their rental prices.

House address Square feet Monthly rent $/square foot

House 1 1,500 $1,500 $1.00

House 2 1,600 $1,760 $1.10

House 3 1,800 $1,620 $0.90

Average $1.00

Katie’s house: 1,700 square feet x $1.00 per square foot = $1,700 rental value

Step 2: Add the value of the home being furnished:

Then, look for furnished rentals in your area. Determine how more they cost to rent per square foot and add that to the rental value.

House address Square feet Monthly rent $/square foot

House 1 1,400 $1,680 $1.20

House 2 1,500 $1,770 $1.18

House 3 1,600 $1,856 $1.16

Average $1.18

Furnished homes in Pastor Katie’s neighborhood rent for 18% higher when compared to unfurnished homes. If you don’t have furnished homes available for rent near you, find data from another part of your city, or a city of similar size near you.

Print out the source data for your rental prices and print out your table. Keep track of your data! I recommend you do this in December and designate your housing allowance for the whole upcoming year and plan to do the same thing each December.

You might even share this information with your church finance committee, elders, vestry etc. I wouldn’t because it’s none of their business but feel free to.

Designating the rental value of your home, in advance, keeps your options open.

What kind of expenses can be used with housing allowance?

You can use any expense that is for providing a furnished home including

• Principal and interest

• Rent payments

• Real estate taxes

• Homeowners or renters insurance

• Utilities including gas, electric, sewer, water, trash pickup, cable TV, internet, home phone (not cell phone; that’s not at your house but for the love, your church should be reimbursing you for that. If not, at least set aside some of your salary for expenses)

• Appliances and furniture (repair, rental or purchase but nobody smart rents furniture)

• Repairs, remodeling, improvements, landscaping (even gasoline for the lawnmower)

• Homeowners Association (HOA) dues

• Pest Control

• Extra principal payments.

What kind of expenses are NOT justified housing allowance?

• Obvious stuff like cars and clothes are right out.

• Don’t claim gray area things like gas grills, cleaning services, domestic help, second home, decorations, bedsheets, and dishes.

• Home equity loan payments when the original loan was used to pay for things other than housing expenses such as tuition, car purchase, debt reduction, etc.

What if I live in a church parsonage?

I lived in a church-owned parsonage for four years so I know the life. Remember that the rental value of the church parsonage is income to you and you have to pay Social Security and Medicare tax on it. If you are ordained or commissioned and you live in a parsonage as part of your ministerial compensation, the rental value is not taxable for income tax purposes.

If you live in a church parsonage, you can still designate housing allowance. You are still limited by the higher of actual expenses and housing allowance designated in advance. You can include utilities, furniture, lawn care, maintenance, and repairs that you pay for. That last part is really important. If your employer(church) pays for repairs, it doesn’t count; it has to be your money that goes for the expense. The same rule applies here as above: estimate high. You will still pay taxes on any excess housing allowance. When I lived in a parsonage, I designated about 50% more than what I expected to actually pay in utilities, cable, internet, and lawnmower fuel/oil/repair. At the end of the year, I added up what I spent on approved expenses and paid income tax on the unused housing allowance.

On keeping records

I hate keeping records. I hate analyzing data. My best suggestion is to make sure you do all your tax deductible stuff out of the same bank account so at least the drudgery of collecting your records at the end of the year is easier. Oh, and keep your transactions separate! If you go to Home Depot and buy cover plates for your house and then you buy batteries for your kid’s toys, just swipe the debit card twice and be sure you do record somewhere which were the (housing expense) cover plates and which were the (not tax deductible) batteries.

The Nerdy Stuff

If you have a windfall and you choose to pay down your mortgage, that extra principal payment is indeed considered housing expense. Don’t make extra payments on your principal that will put you actual expenditure over the designated amount.

Here’s an example.

Pastor Katie (see above) designates $24,000 per year as housing allowance (see above). She has payments of $14,400 plus other expenses of $1,500 (see above). Her total expense will be $15,900. Katie owes $60,000 on her home after she makes her December payment.

On December 10, Katie’s long lost uncle dies and Katie inherits $50,000. She considers paying off her mortgage. 

Should she?

Well, maybe. But she shouldn’t do it this month!

Katie has $8,100 left in housing allowance designation that she hasn’t used yet. That’s $24,000 allowance minus $15,900 expenses.

She should pay $8,100 toward her mortgage right away before the end of the year and save herself paying taxes on that amount. 

She can consider paying off the mortgage in January OR even better, she space out paying off her mortgage so she lowers her tax bill with every dollar she puts toward her mortgage. Remember, she’s limited by the rental value of her house.

In fact, if I had $100,000 in cash and a $100,000 mortgage, I would not pay it off if I expected to be a paid minister for the next few years.  Make sense? If not, email me and I’ll explain.