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Ministers - Housing

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Question or Topic

Is a housing allowance taxable?

What requirements does the IRS  

Related topics and information

1. Ministers - IRS Accounting & Tax Requirements

2. Attachment to the Schedule SE

3. Adjustments to Deductions Required

4. Income Tax and Deductions for Ministers

5. SE, FICA and Medicare Taxes

6. Moving Expenses

7. Car - law requirements for recordkeeping

8. Car - law requirements for recordkeeping

9. Accountable plan

   1. Accountable Plan Emp Manual

   2. Accountable Plans

10. Ministers - Worksheets (Housing allowance worksheet and Deductible Expenses for Income Tax Deductions worksheet)

11. Minister & Clergy Expenses

The Answer

  There are very good examples of the treatment of housing allowances

 in Ministers - IRS Accounting & Tax Requirements.

Solutions are dependent upon facts & circumstances, law and the objectives.  These elements vary from one time to another, from one circumstance to another and from from person or entity to another

For the Minister

A minister's housing allowance, sometimes called a parsonage allowance or a rental allowance, is excludable from income for income tax purposes, but not for self-employment tax.

If you receive in your pay an amount officially designated as a rental allowance, you can exclude the allowance from income if:

• the amount is used to provide or rent a home, and
• the amount is not more than reasonable pay for your services.

If housing is furnished to you by your congregation as pay for your services, the exclusion cannot be more than what is reasonable pay for your services.

Limit on Exclusion:  If you own your home and you receive a housing allowance as part of your pay, the exclusion cannot be more than the smaller of the following:

• the amount actually used to provide a home,
• the amount officially designated as a rental or housing allowance, or
• the fair rental value of the home, including furnishings, utilities, garage, etc.

A housing allowance paid to you as part of your salary is not income to the extent you use it, in the year received, to provide a home or to pay utilities for a home with which you are provided. The amount of the housing allowance that you can exclude from your income cannot be more than the reasonable compensation for your services as a minister. The church or organization that employs you must officially designate the payment as a housing allowance before the payment is made. A definite amount must be designated; the amount of the housing allowance cannot be determined at a later date. Other provisions may apply. While not subject to income tax, the housing allowance is subject to self-employment tax, with very limited exceptions.

As a minister, what do I do if my household expenses are greater than my housing allowance?

Usually, the total of household expenses is only used as a limit to the amount of excludable parsonage allowance (for an ordained, commissioned, or licensed minister). A parsonage allowance or the fair rental value of a parsonage provided as pay for a minister's services is excluded from income for income tax purposes only, not for the computation of self-employment tax.

While the excess cannot be claimed, it is helpful to prepare a worksheet like the one labeled "Attachment 1," shown as part of the comprehensive example at the end of Publication 517, Social Security and Other Information for the Members of the Clergy and Religious Workers. This worksheet, when completed, reflects the amount of income you've received, your qualified expenses, and your tax-free (excluded) income. If your expenses exceeded the amount of your parsonage allowance, your allowance will be fully excludable for income tax purposes.

EXAMPLE: ATTACHMENT 1

Ministers - Worksheets

As a minister, what do I do if my household expenses are less than my housing allowance?

To the extent that your household expenses are less than your parsonage allowance, your allowance is taxable income for income tax purposes.

If you receive in your pay an amount officially designated as a rental allowance, you can exclude the allowance if:

• the amount is used to provide or rent a home, and
• the amount is not more than reasonable pay for your services.

If housing is furnished to you by your congregation as pay for your services, the exclusion cannot be more than what is reasonable pay for your services.

If you own your home and you receive a housing allowance as part of your pay, the exclusion cannot be more than the smaller of the following:

• the amount actually used to provide a home,

• the amount officially designated as a rental or housing allowance, or

• the fair rental value of the home, including furnishings, utilities, garage, etc.

The amount of the allowance that cannot be excluded should be entered with your wages on line 7 of Form 1040, U.S. Individual Income Tax Return.

Housing. Special rules apply to members of the clergy. Under these rules, you do not include in your income the rental value of a home (including utilities) or a housing allowance provided to you as part of your pay. The home or allowance must be provided as compensation for your duties as an ordained, licensed, or commissioned minister. However, you must include the rental value of the home, or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you are subject to the self-employment tax. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Expenses of providing a home include rent, house payments, furniture payments, costs for a garage, and utilities. They do not include the cost of food or servants.

Designation requirement. The church or organization that employs you must officially designate the payment as a housing allowance before the payment is made. A definite amount must be designated; the amount of the housing allowance cannot be determined at a later date.

If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. The local congregation must officially designate the part of your salary that is to be a housing allowance. However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the agency. If no part has been officially designated, you must include your total salary in your income.

Homeowner. If you own your home or are buying it, you can exclude your housing allowance from your income if you spend it for the down payment on the home, for mortgage payments, or for interest, taxes, utilities, repairs, etc. However, you cannot exclude more than the fair rental value of the home plus the cost of utilities, even if a larger amount is designated as a housing allowance. The fair rental value of a home includes the fair rental value of the furnishings in it.

You can deduct on Schedule A (Form 1040) the qualified mortgage interest and real estate taxes you pay on your home even if you use nontaxable housing allowance funds to make the payments

Traveling evangelists. If you are an ordained minister and are providing evangelistic services, you can exclude amounts received from out-of-town churches that are designated as a housing allowance, provided you actually use them to maintain your permanent home.

Retired members of the clergy. The rental value of a home provided rent free by your church for your past services is not income if you are a retired minister. In addition, a housing allowance paid to you is not income to the extent you spend it for utilities, maintenance, repairs, and similar expenses that are directly related to providing a home. These amounts are also not included in net earnings from self-employment.

The general convention of a national religious denomination can designate a housing allowance for retired ministers that can be excluded from income. This applies if the local congregations authorize the general convention to establish and maintain a unified pension system for all retired clergy members of the denomination for their past services to the local churches.

A surviving spouse of a retired minister cannot exclude a housing allowance from income. If these payments were reported to you on Form 1099-R, include them on lines 16a and 16b of Form 1040, or on lines 12a and 12b of Form 1040A. Otherwise, include them on line 21 of Form 1040.

Minister of Music or Minister of Education:If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a "of the gospel"), the exclusion does not apply to you.

CANTORS. If you are a cantor, the housing exclusion applies to you even if you are not ordained, provided you have a bona fide commission and are employed by a congregation on a full-time basis to perform substantially all religious functions.

Computation and Law Requirements

Even though your housing allowance (or parsonage) may be tax-free for income tax purposes, if you pay self—employment tax on your clergy income, then your housing allowance is also taxable as self—employment income.

Your housing allowance must be reasonable and is limited to the lesser of the following:

1. Actual money spent during the year.

2. Fair rental value of home plus furnishings.

3. Actual income earned from the the ministry.

4. Amount approved by the church.

The estimated housing deduction will not be included in wages on Form W—2. 

  Most ministers are required to pay the FICA, and Medicare themselves.  You will need to include the housing allowance on IRS Form "SE".  If you have allowable Employee Business Expenses from Schedule A, you can deduct the total amount from your self-employment income.  The housing allowance must be added to your self-employment income for the form SE.

  If you do not spend the entire housing allowance (or the limit is exceeded) on qualified housing expenditures, then the income is taxable to you for regular income tax also.  This is called "Excess Housing Allowance".

TO MEET THE QUALIFICATIONS FOR HOUSING ALLOWANCE EXCLUSIONS:

To be exempt from income taxation of any Housing Allowance:

• You must spend the allowance for qualified housing costs

  • Down payment on a home

  • Interest

  • Taxes

  • Utilities

  • Repairs

  • Rent

  • Appliances, etc.

If you spend the money on medical expenses, vacation, or save the money for the future purchase of a home the allowance fails to meet the qualification tests (regardless of what the Church or other payer has called it) and the allowance will be subject to income taxes in addition to the self-employment taxes.

• The housing allowance cannot be more than a Reasonable Compensation for your services.

• The Allowance is designated as a housing allowance BEFORE you receive the allowance.  The exclusion is not available to you if your church or other payer board of directors, elders, deacons, or congregational voters wait until the end of the year and tally your actual expenses - then designate the allowance.  If the designation is not made BEFORE you receive the allowance, your exclusion from income tax has been forfeited.

• The designation of the allowance must be OFFICIAL. If one member of your church authorizes you to consider a certain portion of your salary to be a housing allowance, your benefit will fail. The board of directors, elders, deacons, congregational voters, or some official body of your church or synagogue must officially designate this portion of your salary as your housing allowance. In some cases, the official designation is made by your national church agency, and the benefit is then secured for you. In this case, you need to be employed by the national agency. This will be the case when your national agency has designated your church as a new or mission church and has provided you as the minister — and the national board or agency pays you — until the church is financially independent.  If the church budget has a separate designation for a housing allowance, identifies the amount, year, and you as the recipient, and is approved by the governing board - the IRS might accept the budget.
• The limits must be followed

   

Pension. A pension or retirement pay for a member of the clergy is usually treated the same as any other pension or annuity. It must be reported on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.

For The Church (Employer)

For a minister, is the housing allowance included in box 1 with wages?

No. The church would enter the amount of any parsonage allowance and any utilities allowance in Box 14 of Form W-2. If the housing allowance exceeds the minister's qualified expenses, the minister would add the excess to the wage amount and enter the sum on line 7 of Form 1040.

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