What is Minister's Housing Allowance?

What is Minister's Housing Allowance?

Minister’s housing allowance is arguably the most important tax benefit available to ministers, allowing them to exclude housing expenses from their ministerial income, before and after retirement. But unfortunately, it’s often misunderstood and misapplied so ministers may not receive their full benefit.

So let's clarify who can claim a minister's housing allowance. Well, as you know, ministers are unique — unlike any other Internal Revenue Code. And according to the IRS, ministers for tax purposes must be licensed, ordained, or commissioned ministry leaders involved in direct ministry.

Who can claim a minister’s housing allowance?

Housing allowance is available to any minister, as recognized by the IRS, who owns a home, rents or lives in a rent-free church-owned parsonage. So, how does this work?

• While actively employed at a church or church-related employer, a minister may exclude some or all of their ministerial income.
• While retired, a minister may exclude some or all of their ministerial income if a denominational pension board — such as GuideStone^® — designates it as housing allowance, according to Revenue Ruling 75-22.

Now, this is a tremendous benefit to you in retirement! But, it’s important to note that this only applies to distributions from ministerial income that were deferred into a church retirement plans such as 403(b) [plan] offered through GuideStone. So in other words, an individual retirement account ,or IRA are not eligible for a housing allowance designations.

So, how can you, as a minister — whether you're actively serving or retired — make sure you are appropriately taking advantage of minister’s housing allowance?

How can you make sure you’re taking advantage of housing allowance in the right way?

Let’s discuss a few best practices regarding housing allowance.

First, be sure you designate appropriately.

For ministers who own a home, remember that housing allowance can only be designated for a minister’s primary residence and it will be the lesser of these three things:

1. The amount officially designated as a housing allowance by the church.
2. Actual housing expenses (that may include your mortgage payments, utilities, property taxes, insurance, furnishings, repairs and improvements) or
3. Fair market rental value of your furnished home (which includes utilities)

For ministers who are renting, the minister’s housing allowance will be the lesser of these two amounts:

1. The amount designated by their church or
2. Actual housing expenses (including rent, renter’s insurance, utilities, furnishings, repairs, and improvements).

And, ministers living in a rent-free church-provided home may also claim a housing allowance as well for expenses like utilities, repairs, furnishings and other housing expenses not covered by the church.

It’s important to note that housing allowance designations must be prospective, meaning you must designate an estimated amount before incurring the actual expenses. A best practice is to designate housing allowance for both the current year and all future years unless changes are provided — this is known as an evergreen provision. A helpful template for a church to designate minister’s housing allowance is available in the Compensation Planning Guide at GuideStone.org/CompensationPlanning

Next, always keep good receipts.

Many ministers fail to maintain adequate receipts for housing expenses. In the rare occurrence of an IRS audit, the minister will be responsible for providing documentation of expenses related to the housing allowance claimed; therefore, keeping good receipts is essential!

And finally, understand your tax liability.

The minister’s housing allowance may be excluded from income for federal income tax purposes but not for SECA tax purposes. In other words, a minister's housing allowance excludes gross income for federal income tax purposes but not for Social Security self-employment tax purposes.

By striving to follow appropriate guidelines and best practices, churches and ministers can avoid many common mistakes when designating the minister’s housing allowance. Consider visiting GuideStone.org/CompensationPlanning to download a free copy of Questions and Answers About the Minister’s Housing Allowance.

Navigating ministerial tax issues can be complicated, but as part of GuideStone’s mission to enhance the financial security and resilience for those who serve the Lord, we have developed resources to make it easier for you. For more information about common tax-related questions and considerations for ministers, please visit GuideStone.org or call us Monday through Friday, from 7 a.m. to 6 p.m. CT.

We look forward to serving you as you serve the Lord.