Written by André Short (the International Stakeholder) and Adrienne Weir (Stakeholder and Xcelerate Founding Mother)
Housing allowances were and are still constitutional and a valuable tax benefit. It was recently appealed and on March 19th of this year the courts ruled that pastors and ministers could continue to designate part of compensation as a housing allowance. This allowance is exempt from a pastor’s gross income. That’s great news!
We have boiled the laws down to the most essential and important information.
What does it cover?
It is only meant to cover the exact cost to provide a primary residence, such as rent or mortgage payments. Second homes, vacation homes, commercial properties, other land, or farms cannot be included in the housing allowance. In addition, the following expenses can also be excluded from income (provided that the church employer does NOT reimburse these expenses):
utilities and service delivery
homeowner association fees
remodeling expenses including furniture purchases and repair
What does it NOT cover?
The housing allowance can not be used for non-housing related items such as food, clothing, domestic services, and cleaning services.
How do you report it on your taxes?
Because the allowance is only meant to cover expenses for providing a primary residence, any allowance remaining should be reported on the pastor’s annual tax return as income on line 7 of the U.S. Individual Tax Return form 1040.
The housing allowance is only deductible from federal income tax, not self-employment tax. So let’s break that down. For example, if a pastor’s salary is $45,000 with a $15,000 housing allowance, taxable income to be reported for federal tax is $45,000, while self-employment taxable income is $60,000.
In other words, self-employment tax includes both the pastor’s salary and the housing allowance. Federal tax includes only the salary.
Unfortunately there is no consistency across all states. Be sure to check if your state taxes require reporting the allowance in taxable income.
How do you set it up correctly for your church?
A housing allowance needs to be board approved and in writing before pastors receive compensation. Most churches typically create a document that clearly states the exact amount and/or percentage designated for the housing allowance and include it in their Board Minutes. This way there is a clear date for when it was approved in the case that proof is required in the future.
That should cover everything you need to know about the housing allowance.
Have more questions?
Feel free to reach out to us with questions and we will be sure to help you save the most on your taxes.