Understanding Minister's Housing Allowance

Understanding Minister’s Housing Allowance Designated by Your Church and by GuideStone

Ministers are unique in many ways: They experience a special calling and develop a personal ministry. But the differences do not end there — they even receive certain tax benefits.

One important tax benefit is the minister’s housing allowance. While this tax exclusion is available to both actively working and retired ministers, it’s important to know that the housing allowance designation must come from the same source who issues the income.

Active Ministers: Housing Allowance Designation by Your Church

Section 107 of the Internal Revenue Code allows actively working ministers to exclude some or all of their ministerial income designated by the church (or church-related employer) as a housing allowance from income for federal income tax purposes. The IRS considers multiple factors to determine if a person is a “Minister for Tax Purposes”, including if a person is ordained, licensed or commissioned as a minister of the gospel. See GuideStone’s Ministerial Tax Issues to learn more about the eligibility of housing allowance.

Are you a Minister for Tax Purposes? If so, how should your employer determine your annual housing allowance to ensure it follows IRS guidelines accordingly? Below are three tips to keep in mind to help your church effectively designate your housing allowance.

Three Tips for Church-designated Minister’s Housing Allowance

1. Start the year with an updated housing allowance designation. For tax purposes, your church-designated housing allowance must be made at the start of each year as it cannot be done retroactively. To make it official for recording purposes, the appropriate committee or board should keep a signed and updated annual designation on file.
   
   The housing allowance designation must always be for future housing expenses. A good practice is for the church to request an estimate of housing expenses from the minister at the end of the tax year, have the appropriate committee or ministry team evaluate the request as reasonable and then have the committee or church approve the housing allowance request for the following tax year. If you do not use all designated funds, you are responsible for reporting this amount as “other income — unused housing allowance” on your year-end taxes (IRS Form 1040).


2. Determine the amount of your housing allowance. Ministers can exclude the lowest of the following three amounts from federal income for tax purposes when your church employer properly designates a housing allowance for you:
   • The total housing allowance designated by their church
   • Actual housing expenses (including mortgage payments, utilities, insurance, improvements, furnishings, etc.)
   • The fair rental value of the home (furnished, plus utilities)


3. Housing allowance is not exempt from Social Security taxes. You need to annually report your total ministerial income on your self-employment tax form (Form 1040 Schedule SE), including the sum of your salary and housing allowance.

Did You Know?

Ministers have a unique dual tax status. They are considered employees for federal income taxes and self-employed for Social Security tax purposes.

Churches are not required to withhold federal income tax from a minister's paycheck. Ministers are responsible for paying both the employer and employee portion of Social Security taxes.

Retired Ministers: Housing Allowance Designation by GuideStone

There is good news for retired ministers! Revenue Ruling 75-22 allows denominational pension boards such as GuideStone^® to designate housing allowance for retired SBC ministers receiving income from their 403(b) retirement plan. (Housing allowance is never available from an Individual Retirement Account (IRA).)

You may ask GuideStone to designate up to 100% of your retirement income as housing. But, even as a retiree, you must continue to follow the housing allowance rules and limits.

As a retired minister, you still have three similar limits for your housing allowance during your retirement years. However, you will now need to make your housing allowance request through GuideStone. Your request will remain for future years, so unlike the authorization from the church, you do not need to submit your housing allowance request each year. If you need to change the housing allowance amount, contact GuideStone and they will make the change for you.

Ministers can exclude the lowest of the following three amounts from federal income for tax purposes when your pension board properly designates a housing allowance for you:

• The total housing allowance designated in advance
• Actual housing expenses (including mortgage payments, utilities, insurance, improvements, furnishings, etc.)
• The fair rental value of the home (furnished, plus utilities)

You may ask GuideStone to designate an amount on your retirement income application. You can also ask GuideStone to change that amount ahead of time by filling out a form. As a minister, you are always responsible as a taxpayer for following the housing allowance rules and reporting the correct amount of income on your tax return, regardless of what you ask GuideStone to designate.

If you are a retired non-SBC minister seeking a housing allowance designation, your initial request must be in writing and made in advance with a Retirement Income Application, verified and signed by your previous employer, or Housing Allowance Authorization form for changes going forward.

GuideStone Resources and Tools

• Commonly Asked Questions About Minister’s Housing Allowance
• Ministerial Tax Issues
• Ministers’ Tax Guide for our participants

Quick Recap:

• Both active and retired ministers may receive housing allowance — just from different sources.
• Housing allowance must be approved and designated for future income.
• During paid ministry, housing allowance is authorized by the church or ministry. In retirement, housing allowance is authorized by a denominational pension board such as GuideStone and in some instances must be verified first by a previous employer.

If you have more questions, please contact GuideStone at 1-888-98-GUIDE (1-888-984-8433) or a certified tax professional who is familiar with ministerial taxes.

This educational information is not intended as legal or tax advice. Ministers or churches with specific legal or tax questions should consult a legal or tax advisor who understands ministerial tax issues.