The new year is just around the corner, so it’s time to be thinking about your 2020 pastor’s housing allowance. Here are a few things to keep in mind as you make your plans.

Your Housing Allowance Should Be Approved In December

The housing allowance for pastors is not and can never be a retroactive benefit. Only expenses incurred after the allowance is officially designated can qualify for tax exemption. Therefore, it is important to request your housing allowance and have it designated before January 1 so that it is in place for all of 2020. 

If your expenses are pretty regular from year to year, it is a good idea to use language such as “this designation shall be effective until modified by…” That way, you don’t have to request a new allowance each year.

It Is Limited 

You may not be able to claim all of your housing expenses for tax exemption. The housing allowance for pastors is limited to the least of:

• the amount actually used to provide or rent a home;
• the fair market rental value of the home (including furnishings, utilities, garage, etc.);
• the amount officially designated (in advance of payment) as a housing allowance; or
• an amount that represents reasonable pay for your ministerial services.

You can learn more about how much housing allowance pastors can claim and how to calculate the rental value of your home by following the links in this sentence.

The Housing Allowance Can Affect Your Child Tax Credit

One of the best parts of the Tax Cuts & Jobs Act for parents was that it doubled the Child Tax Credit. Our little boogers are now worth $2,000 apiece instead of $1,000. On top of that, up to $1,400 of that is refundable, meaning the government will give you the money even if you don’t owe any tax. 

One thing that I discovered when reviewing one pastor’s taxes, though, is that the housing allowance can actually hurt your eligibility for the refundable portion of the child tax credit. That’s because the housing allowance for pastors lowers your taxable income and the additional child tax credit is limited to a percent of your taxable income. If you have kids and claim a housing allowance, you should really read this article so that you’re not missing out on free money. 

Your Side Gig Might Affect Your Housing Allowance

While parents have a few extra things to consider regarding the housing allowance, entrepreneurs do too. If you run a side-business out of your home or rent out part of your home, that will affect your housing allowance. The portion of your home used to generate income is not eligible for the clergy housing allowance. You can read all about how that works here. 

You Can Change Your Housing Allowance Mid-Year

I know that I told you it’s really important to get your housing allowance in place before January 1, but that’s not really a magical date. The truth is, you can change or request a housing allowance at any time during the year. I recommend having it in place by January 1 so that you don’t miss out on any of the year. 

However, if your situation changes mid-year, so can your housing allowance. All you have to do is request a new one. Or, if you enter the ministry mid-year, you don’t have to wait until January to start claiming a housing allowance. Get it officially designated as soon as possible and start saving on taxes. This article explains how it works in greater detail. 

You Can Claim A Cash Allowance Even If You Have A Parsonage

The cash housing allowance and parsonage allowance are not mutually exclusive. You don’t necessarily have to choose one or the other. If you live in a parsonage but still pay some housing expenses out-of-pocket, then you can have both. You can read about how to do that here. 

You Can Claim A Housing Allowance In Retirement

Did you know that just because you retire your housing allowance doesn’t have to as well? That’s right, you can claim a housing allowance in retirement. You can only do so if you have your retirement money in a qualified church retirement account, though. If you want to learn more about saving on taxes in retirement by claiming a minister housing allowance, read this article.

It’s Okay To Overestimate

Since none of us can predict the future, there’s really no way to know exactly what your housing expenses will be in a given year. I didn’t expect to replace my roof, paint my house, or fix carpenter ant damage in January of the years that I did them. Houses have a way of surprising you sometimes.

How do you request a housing allowance for an unknown future? Overestimate. Now, there are a lot of times in life when you don’t want to overestimate. Overestimating on things like how far you can jump across a ravine or guessing your fiance’s weight will get you into trouble. But, the consequences are pretty minor for overestimating your expected housing expenses. 

All you have to do is add the excess allowance back into your taxable income when you file your return. It’s pretty simple. This article will give you step-by-step instructions on how to do it. It’s not a lot of work and it sure beats paying extra taxes because you underestimated.

How To Calculate Your 2020 Housing Allowance

So, are you ready to calculate your 2020 housing allowance now? I’ve got some tools to help you out!

Pastor’s Wallet has our very own calculator that you can use for free here.

I’ve also created a worksheet that you can either open in Excel or print and fill in.

I hope you find these tools useful and if you have any questions as you go, don’t hesitate to email me at amy@pastorswallet.com!