Where a church has no parsonage, generally the church seeks to provide for the housing needs of the pastor by giving him a “ministerial housing allowance” so that he may secure his own home, either by renting or owning. Again, housing allowances have become extremely popular over the past few years as churches have sought to shed the burden of providing a self-contained house for their pastor. If properly documented, the amount a church provides to a minister (either the senior pastor or any other credentialed minister) for housing allowance is non-taxable for federal income tax purposes but is taxable for Social Security purposes. Just as another reminder, the church treasurer should be mindful that non-ministerial employees do not receive the housing allowance tax benefit. If the church pays the housing of the employee, it is still counted as reportable income – and is included in Box 1 of the employee’s W-2 form.
The Ministerial Housing Allowance has been the subject of much controversy over the past few years and has even been challenged on constitutional grounds of violation of church and state (see next article). In 2002 the Clergy Housing Allowance Clarification Act of 2002 (Public Law 107-181) was enacted to bring some clarification to this issue. The law provides that the ministerial housing allowance exclusion cannot exceed
- the fair rental value of the furnished house, plus the cost of utilities,
- the actual expenses of operation of the home, or
- the amount designated by the church as a housing allowance;
whichever is less.
Simply put, in looking at the three qualifiers above, you must use the least of the three. For example, let’s assume the minister receives a housing allowance of $12,000 a year from his church. In the year in question, he had to put a roof on his house in addition to his payments and he paid out $16,000 towards his housing costs. Further, the house he lives in, fully furnished with all utilities paid, would rent for $2,000 a month ($24,000 a year). In this example, the most the minister could exclude from his income would be $12,000 – the amount designated by the church as housing allowance since it is the least of the three. Assuming the same example, but with the fact that the minister paid out only $8,000 for actual housing costs in the year, the housing exclusion would be limited to $8,000, again the least of the three qualifiers. Just because the church designates a certain amount does not automatically make that amount excludable from the minister’s income.
It is the responsibility of the church to establish the amount of the housing allowance in cooperation with the minister based upon his or her actual housing expenses. The treasurer will play a critical role in this process. The church, acting in conference or by action of the Pastor’s Council, should set the ministerial housing allowance amount each year.
In determining his housing allowance, the minister may include (but is not limited to) the following expenses:
- mortgage payments/rent
- property taxes
- homeowners insurance
- furniture, appliances, etc.
- repairs and upkeep
- utilities/basic cable TV
- lawn care, snow removal, shrubbery
To accurately report his expenses to the local church body, the minister should complete an Estimate of Housing Allowance form and submit the same to the governing body of the church for adoption prior to any designation of housing allowance being made. In other words, the church’s governing body has to adopt the housing allowance before the minister can claim such. A housing allowance cannot be made retroactively.