Housing Allowance and Taxes
For decades, the Minister’s Housing Allowance has been an important provision of the federal tax code for qualifying ministers. While ministers sometimes hear concerns that the housing allowance may be in danger of going away, it has deep roots in U.S. tax law. The provision has changed relatively little over its long history, and a significant constitutional challenge to the housing allowance was rejected by the Seventh Circuit Court of Appeals in 2019.
While no provision of the tax code can be guaranteed to remain unchanged, the Minister’s Housing Allowance continues to be recognized under Section 107 of the Internal Revenue Code.
For more than 75 years, Servant Solutions has helped churches and servants of the Church understand the unique financial considerations that accompany ministry. What follows are some of the questions we hear most often about the Minister’s Housing Allowance and taxes.
Is a Housing Allowance Taxable?
Qualifying ministers may exclude a properly designated housing allowance from gross income for federal and most state income tax purposes, subject to applicable limits.
According to the IRS, special tax provisions for ministers apply to individuals who qualify as duly ordained, commissioned, or licensed ministers and perform services in the exercise of their ministry.
Although a qualifying housing allowance may be excluded from federal income tax, it is generally included when calculating a minister’s net earnings from self-employment for Social Security and Medicare purposes under SECA. Different rules may apply to retired ministers and ministers who have received an IRS-approved exemption from self-employment tax on ministerial earnings.
For additional guidance, see [IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers] and [IRS Topic No. 417: Earnings for Clergy].
How Much Housing Allowance Can a Minister Exclude?
The rules differ somewhat depending on whether a minister lives in church-provided housing or owns or rents a home.
If the church provides a parsonage?
A qualifying minister generally may exclude from gross income the fair rental value of a church-provided parsonage, including utilities, subject to reasonable compensation limits.
If the minister personally pays utilities or other qualifying housing expenses, the church may also designate an additional housing allowance to cover those costs.
If the Minister Owns or Rents a Home
A qualifying minister may exclude a properly designated housing allowance from federal gross income. The amount excluded cannot exceed reasonable compensation for the minister’s services and is generally limited to the lowest of:
- The amount officially designated in advance as housing allowance;
- The amount actually used to provide or rent a home; or
- The fair rental value of the home, including furnishings, utilities, garage, and similar considerations.
Any designated housing allowance that does not qualify for the exclusion must generally be reported as taxable income.
See the [IRS Ministers’ Compensation & Housing Allowance FAQ] for additional information.
How is Housing Allowance Calculated and Designated?
Properly designating a housing allowance can provide significant tax savings for a qualifying minister.
A minister should estimate anticipated qualifying housing expenses and submit a housing allowance request to the appropriate governing body of the church or employing organization.
The IRS requires the employing church or organization to officially designate the housing allowance in advance of payment. The designation may be documented in an employment contract, church or board minutes, a budget, or another official action.
Because a housing allowance cannot be designated retroactively for income already earned, many churches establish housing allowance designations before the beginning of each calendar year.
Ministers should maintain records of their actual housing expenses and review their housing allowance each year.
How do I Report Housing Allowance on My Tax Returns?
A qualifying housing allowance is generally excluded from federal income tax, subject to the applicable limits. However, for an active minister, the housing allowance or fair rental value of a parsonage is generally included when calculating net earnings from self-employment for SECA purposes.
An excludable housing allowance should not be included in Box 1 of the minister’s Form W-2. The employer may report the designated housing allowance in Box 14 or provide the minister with a separate statement.
The minister, rather than the employer, is responsible for maintaining records of actual housing expenses and determining how much of the designated allowance qualifies for the federal income tax exclusion. Any portion of the designated allowance that does not qualify for the exclusion must generally be reported as taxable income.
State and local tax treatment may vary. Ministers should consult a qualified tax professional regarding the rules that apply to their individual circumstances.
What About Housing Allowance in Retirement?
Housing allowance can continue to provide an important tax benefit for qualifying ministers in retirement.
Under IRS guidance, eligible retired ministers may be able to exclude from federal gross income qualifying retirement distributions that have been properly designated as housing allowance, subject to applicable limits.
Servant Solutions’ 403(b)(9) Church Plan allows eligible retirement distributions to qualifying retired ministers to be designated as housing allowance. The retired minister is responsible for determining how much of the designated distribution qualifies for the exclusion based on applicable IRS requirements and actual housing expenses.
Because individual circumstances vary, retired ministers should consult with a qualified tax professional regarding their eligibility and the amount they may exclude.
Where Can I Learn More About the Minister’s Housing Allowance?
Servant Solutions has spent decades helping ministers understand the financial opportunities and considerations unique to ministry. Through financial education, one-on-one guidance, calculators, articles, videos, and other resources, we want to help ministers make informed decisions and experience greater financial peace of mind.
For authoritative tax guidance, we encourage ministers and church leaders to consult these IRS resources:
- IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers (link)
- IRS Topic No. 417: Earnings for Clergy (link)
- IRS Ministers’ Compensation & Housing Allowance FAQ (link)
- IRS Form 4361: Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners (link)
Have a question about how Servant Solutions can help? Contact us.
This information is provided for educational purposes and is not intended as tax or legal advice. Tax laws and individual circumstances vary. Consult a qualified tax professional regarding your specific situation.