Limitations on the Housing Allowance

After reading about the Housing or Parsonage / Manse Allowance, you may be thinking, “if I designate my entire salary as a Housing Allowance, would it all be excluded from federal income taxes?” IRS has already addressed this by limiting the Allowance to the least of the following:

1. The amount designated
2. The actual housing cost
3. The fair rental value of the home, including furniture, utilities, and improvements.

Example:

• The Church designates $20,000 of William’s salary as a housing allowance.

• William’s actual housing expenses for the year total $17,000.
• The fair market rental value of the home (including furnishings and utilities) totals $14,000.

• Even though the Church designated $20,000 as a Housing Allowance, only $14,000 of William’s compensation is considered nontaxable when calculating income tax.

Even if you could hypothetically designate 100% of your salary towards housing, you would be limited by the actual amount you spent during the year or by the fair rental value. If the housing allowance designated by the church exceeds the amount that can actually be claimed, the excess should be reported as “other income” on your return.

Upon retirement, the IRS allows credentialed ministers of all established church denominations to declare a housing allowance on distributions from their 403(b) retirement accounts. That means the portion of your distributions used for housing expenses is excludable from gross income for income tax purposes. This can save you significant money during retirement. The IRS limitation also applies to these distributions.

Contact Clergy Financial Resources to help you with the next steps.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com