Your Housing Allowance Questions Answered
Who qualifies for a housing allowance and how does it work? In a previous post, we described how clergy compensation and taxes are structured. But questions remain - what qualifies someone to receive a housing allowance? How do you determine the amount? What is the process for approving or changing the amount?
Who can receive a housing allowance?
The IRS allows ministers who perform ministerial services in their employment to qualify for a housing allowance (also known as a parsonage allowance). The IRS defines ministers as those “who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination” and ministerial services as “the services you perform in the exercise of your ministry.” Those ministerial services include administering sacraments, conducting religious worship, and/or management duties within local churches or denominations. Churches and denominations vary about who they consider ordained, commissions, or licensed ministers. Ministerial services can also vary. For more detailed definitions of minister and ministerial services, see IRS Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers.
What is the advantage of a housing allowance and how is a housing allowance amount determined?
A housing allowance is that portion of a minister’s gross salary that may be excluded from federal income tax. This can result in significant tax savings. Housing-related expenses are calculated to determine the housing allowance total. There are three factors that determine the maximum allowable amount of a housing allowance: the housing allowance must be the lesser of a) the actual cost of maintaining a home (mortgage or rent, utilities, etc.), or b) the fair rental value (furnished and including utilities) of the home, or c) the amount actually approved and designated by the oversight body (see below). Any amount of housing allowance that exceeds this amount needs to be reported on the minister’s taxes as taxable salary. So, for example, if a minister receives a $30,000 housing allowance but the fair rental value (including furnishings and utilities) of the home is $24,000, the minister needs to report the excess $6,000 as taxable salary on their tax forms.
A minister’s housing allowance may change year to year due to a move, inflation, or home improvements. Geneva Benefits offers these helpful housing allowance worksheets as a tool for calculating housing-related costs. There are different worksheets for those who own, rent or live in church owned housing (parsonage or manse). It is important to note that a minister must be able to document housing-related expenses should the IRS conduct an audit.
What is the process for approving or changing a housing allowance?
An oversight body like a session of elders, a board, etc. must review and approve housing allowances. The IRS allows for the housing allowance amount to be amended at the start of each calendar year or during the year if there is a major change such as a move. We recommend our clients ask their ministers to fill out a new housing allowance worksheet annually in the autumn to see if a change should be proposed for approval, and implement that change in the first pay period of the new year. Note that housing allowance changes must be approved and designated in advance of any new payments being made. According to IRS rules, you can’t pay out a housing allowance and then have the board approve it retroactively.
Questions?
A housing allowance is a complex but helpful provision given to clergy by the IRS. Auxilio recommends consulting a tax accountant familiar with minister taxes when setting up your compensation and again when filing your taxes. If the housing allowance and taxes are not treated properly, it can be a costly mistake for the minister. Auxilio clients should contact their Partner Strategist if they have questions. Others can contact us at hello@auxilio.partners for more information.