The minister's housing allowance is the most important tax benefit available to pastors.

The Minister's Housing Allowance

by Ray Lewis

The minister’s housing allowance is the most important tax benefit available to ministers.

Section 107 of the Internal Revenue Code says that “in the case of a minister of the gospel, gross income does not include...(an) allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.” To provide a home is defined as including the purchase of a home or any expense directly related to owning or maintaining a home.

This benefit is only available to “ministers for tax purposes.” Even though someone serving in a church staff position may be recognized by the church as a minister, this does not necessarily mean they are a minister for tax purposes. To make that determination requires looking at the IRS criteria.

The IRS has five criteria for determining who is a minister for federal tax purposes.

1. Is the person ordained, licensed or commissioned?

2. Does the person administer ordinances (i.e., baptism and observance of the Lord’s supper)?

3. Does the person conduct religious worship?

4. Does the person have management responsibilities in the church?

5. Is the person considered to be a religious leader by the church?

Generally, a minister for tax purposes must be ordained, licensed or commissioned and answer yes to a majority of the other four questions. If they do, they are eligible for a church-designated housing allowance.

Many ministers think the housing/parsonage allowance only pertains to rent or house payments and utilities. Others don’t think they can exclude a housing allowance because they own their own home and do not have house payments. The housing allowance includes much more than rent or mortgage payments, however.

Ministers who own their own homes are allowed to include the following expenses in computing their housing allowance exclusion:

• Down payment on a home;
• Mortgage payments (both interest and principal);
• Real estate taxes;
• Property insurance;
• Utilities;
• Furnishings and appliances (purchase and repair);
• Structural repairs and remodeling;
• Yard maintenance and improvements;
• Maintenance items (household cleansers, light bulbs, pest control, etc.);
• Homeowner’s association dues.

Ministers who live in a parsonage can exclude from their federal income taxes “the portion of their ministerial compensation designated by their employer as a parsonage allowance,” to the extent that it is used to pay for parsonage-related expenses such as utilities, repairs, and furnishings.

For ministers who rent their homes, actual expenses may include rental payments, furnishing, and utilities.

Therefore, whether a minister owns his home, rents his home, or lives in a parsonage, his church/employer should designate part of his income as a housing allowance. Unfortunately, many churches fail to do this for their pastor, thus denying him an important tax benefit.

Ministers can exclude the lowest of the following three amounts from income for federal income tax purposes when their church employer properly designates a housing allowance for them:

• The housing allowance designated by their church; or
• Actual housing expenses; or
• The fair rental value of the home (furnished, including utilities).

If actual expenses exceed the church designated allowance, the minister can only exclude the allowance. If the actual housing allowance exclusion is less than the church-designated allowance, then the minister will need to report the difference as additional income on his federal tax return.

It is important to remember that a housing allowance may be excluded from income for federal income tax purposes, but not for SECA tax purposes. The church treasurer excludes this value from Box 1 of the W-2.

The housing/parsonage allowance exclusion is an important benefit for ministers. If your church has not voted for this exclusion, it is not too late to do so. Just remember the exclusion will be effective only for the remainder of the current year in which it is adopted.

About the Writer: D. Ray Lewis became general director of the Board of Retirement and Insurance in August 2005. He and his wife Ida live in Antioch, TN. Read more about the Board of Retirement at www.boardofretirement.com.