The clergy housing allowance is by far the most common topic that I receive questions about. Here are 10 or the most common questions answered to help you get the most value out of your housing allowance:
How does a housing allowance work?
- You, the pastor, calculate what your housing costs will be for the year and submit it to your church.
- Your church approves the housing allowance and does not include it as taxable income in box 1 of your W-2.
- You track your housing expenses throughout the year. Add any excess housing allowance to your taxable income on your tax return when you file.
- If you have not opted out of Social Security you need to include the housing allowance amount as income when calculating your self-employment taxes.
What expenses can be included in the housing allowance?
A housing allowance can cover:
- Down payment on a home purchase
- Mortgage principal and interest payments
- Property taxes
- Homeowner’s insurance
- Structural maintenance and repair
- Landscaping, gardening and pest control
- Furnishings (purchase, repair, replacement)
- Utilities (gas, electricity, water, internet) and trash collection
- Land telephone line
- Cable TV expenses
- Homeowner’s association dues/condo fees
Is the housing allowance the church’s or the pastor’s responsibility?
It is the pastor’s responsibility. The church’s only role is designating and paying the allowance. The pastor must calculate the allowance, document expenses and include the proper housing allowance amounts when filing his or her tax return.
Is a housing allowance considered income for tax purposes?
Not for income tax, but for self-employment taxes. If you have opted out of Social Security you do not pay self-employment taxes so your allowance does not affect your taxes. Housing allowances are exempt from most state income taxes, but you should double check with your particular state.
How much is exempt from federal income taxes?
The IRS specifies that only the lesser of the following can be excluded from your gross income:
- 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 which represents reasonable pay for your services.
When should I request my housing allowance?
You should get your housing allowance approved prior to the beginning of the year or at the beginning of the year so that you don’t miss out on any of the benefits. An allowance can be approved at any time during the year, but only expenses incurred after the approval will be eligible for the housing allowance.
Is it better to overestimate or underestimate my housing allowance?
Overestimate. If you underestimate your expenses you cannot go back and increase your housing allowance. However, if you overestimate, you can make a correction by including the excess amount as taxable income when you file your taxes.
Can I change my housing allowance from year to year?
Most definitely. If your housing expenses change from year to year so should the allowance you request. When you plan on making a large purchase, such as a bed, deck or house, your requested allowance should include that amount. If you end up not making the purchase, you will simply adjust down the allowance when you file your taxes. If you don’t include the large expense, you will unnecessarily pay taxes on that amount.
Can I still take the mortgage interest deduction?
Yes. Receiving a housing allowance does not preclude you from deducting your home mortgage interest and real estate taxes if you itemize deductions.
Do I need to document my housing expenses?
Yes! Keep all receipts, bills, etc. that apply to your housing allowance. The IRS loves paper trails and if you get audited without one it could get ugly.
36 Responses
Tom Gordon
March 6, 2023This is 2023. In regards to allowed expenses shouldn’t Lana Line be changed to Cellular? No one has a landline anymore. Also, we stream our video, cable is being phased out like phone landlines. Finally, why is basic internet service not listed? It needs to be.
Amy
April 9, 2023Tom, cell phones are not eligible housing expenses even though land lines are (some people still have them, I know someone in her 40’s that still does). The reason is because the landline is attached to the house and the cell phone is not. It works the same way with computers – a desktop is eligible but a laptop is not. I know that may sound silly, but I don’t make the rules. Based on my understanding of the law, I believe that internet service and TV streaming should be eligible. The reason it seems dated is because the only things that we know for sure are eligible are because they have been decided in tax court. Technology has changed faster than cases have been taken to court, so we don’t have any official rulings on anything more modern.
Phillip
March 6, 2023Question. We were thinking of paying our mortgage off soon but wanted to check to see if we pay the mortgage off will we still be able to take a Fair Market Rental Value of our home as a Housing Allowance still? BEst I can tell from your information here
we will but just wanted to ask and make sure? I have read it can be anywhere from 12-15% is reasonable based on the value of your home and utitilites plus expenses like furnishings for your home. Thanks for any help.
Amy
April 9, 2023Phillip, your housing allowance is limited to the LESSER of the fair market rental value or your actual expenses. So, if your actual expenses exceed the rental value than you can claim it. Otherwise, you can only claim your actual expenses.
Bill Berger
April 7, 2023Question: As retired ordained clergy, I receive a monthly denominational pension. I have no employment related income, but plan to claim business expenses (professional dues, mileage, etc). If I am entitled to claim a housing allowance after retirement, how should the amount be recorded on my federal tax return (forms, documentation)?
Amy
April 9, 2023Bill, you can have your pension designated as housing allowance. You will receive a Form 1099 showing all of your pension distributions. Even if you have requested that it be designated as housing allowance, it may be marked that the taxability is undetermined. All you have to do in that case is attach a statement explaining that it is a housing allowance.
Jim
April 20, 2023Do expenses related to providing a home for my child while she’s attending college (dormitory, apartment rental, etc.) qualify as housing allowance deductions?
Amy
April 23, 2023No, only your primary residence and the related expenses count.
Mary Fultz
April 12, 2024As pastor; I receive a housing allowance from my church. I also pay quarterly social security tax.
Does that mean I have to claim my housing allowance as taxable income??
Amy
April 15, 2024It’s kind of confusing, but the housing allowance is exempt from income taxes but subject to Social Security tax. As such, it doesn’t show up on your Form 1040 as taxable income but it does show up on Schedule SE where you calculate your Social Security taxes.
Jeff Harper
June 14, 2023Am I allowed to utilize both the housing allowance and housing exclusion?
Amy
June 21, 2023I’m not quite sure what you mean by the housing exclusion.
Larry
June 21, 2023If we are starting a new job at a new church and buying a house midway through the year, can we allocate our (essentially) entire salary from the new position as housing allowance to pay towards down payment/mortgage/etc.?
Amy
July 2, 2023Larry, as long as you have qualified expenses to back it up and it does not exceed the fair market rental value of the home, then yes, you can designate up to 100% of your salary as housing allowance.
Ben
July 28, 2023This year we are having a new roof put on my home. Our insurance company is giving us the money (minus the deductible), and then we are paying the roofer. Am I able to claim the entire project amount as a qualified housing expense, or just the deductible amount?
Amy
July 29, 2023Just the deductible, since the insurance company is paying for it.
Thomas Pietz
October 26, 2023I have an opportunity to buy the parsonage as a 56 year old pastor. Is that a good idea? What would be the costs/benefits. Right now, we get a free house, they mow, they plow, fix and upgrade everything. We pay for water softener salt, that’s it. On the other hand, would it be wise to own a home? At 59.5 can I withdraw from the 403B and slowly pay off the mortgage to maximize the housing benefit, putting 20-30% down? Or with your philosophy, pay for the house outright with no mortgage?
Amy
November 2, 2023Thomas, the first question you will want to answer is what will you do for housing once you retire? Do you want the responsibility of owning a home or would you prefer to rent? If you want to own a home, then the next question is if you would want to own that specific home (the parsonage) or not. If you were starting from scratch in looking for a home, would you pick that one or would you prefer something else? There are some benefits to purchasing the parsonage, in that you know how it has been cared for throughout the years and you would not have to move. The risk is that you purchase it because it is easy and then later you regret it because the home doesn’t suite you in your old age. As for timing, the benefit of purchasing it now is that it will likely cost more in ten years, whereas the downside is that then you wouldn’t be getting it all for free anymore (and mortgage rates are fairly high right now)! Perhaps the church would be willing to increase your pay by the amount of the mortgage payment to even things out or you could make an arrangement to purchase the house upon retirement.
Sally Davison
January 23, 2024My husband is a retired pastor. He came out of retirement to fill an urgent need at our church. He was Interim pastor for several months. We never claimed housing allowance in the past but need to find help in doing our 2023 taxes.Our church recommended secretary recommended doing the housing allowance. I’ve asked pastors’ wives to find out what they do but so far I am more confused. I considered Turbo Tax but we have used Linux for 20 years and Turbo is only available using Windows. We own our home. We live in northern Arizona. I appreciate any advice you can provide.
Amy
January 31, 2024Sally, the housing allowance must be designated in advance, so if the church never designated a housing allowance previously then it will not affect your 2023 taxes. If they did designate a housing allowance, you need to 1) compare it to your actual expenses. If the designated amount is higher, you need to add the excess back to your taxable income; 2) the taxable income number on the tax form the church gives you should not include the housing allowance. That is what you will use on Form 1040 as your income. If you have not opted out of Social Security, you will need to add the housing allowance amount to the taxable income reported and use that total to fill out Schedule SE.
The big question is if there was a housing allowance designated in advance. You cannot now decide to claim part of the 2023 income as housing allowance but you can ask to have some designated as housing allowance going forward.
Sharon
January 26, 2024I am working on W2’s and our pastor gets all her pay designated as housing allowance. When I put 0.00 dollars in Box 1 for Wages, tips, etc. it won’t let me proceed. It wants a dollar amount in there. Is there a way to get around that?
Amy
January 31, 2024I don’t know if there is any way to get around that. If the system won’t let you put $0, you could try putting $1 and hopefully your pastor is understanding about it.
Monty G Thompson
February 18, 2024Do I need to attach to my 1040 the worksheet/explanation of how I arrived at the amount of my housing allowance is taxable income? I’ve always done that in the past, but using Turbo Tax, that requires me to print and mail the forms as Turbo Tax does not provide a way to upload that form.
Amy
February 19, 2024Monty, you do not have to include that but you should keep it for your records.
Monty G Thompson
February 19, 2024Thank you so much Amy. I may not have given you all the information. I get a 1099R from my denomination on my withdrawals of my 403b in which 100% is shown as housing allowance. I prepare a explanation showing the 1099R less my housing expenses resulting in the amount to be taxable on line 5b (1040SR and the amount is below my fair market value). I don’t have to attach that notation to my tax return, but just keeo it for my records? Sorry, for the two questions, just want to make sure.
Amy
February 26, 2024Often those calculations will be included on a statement with your tax return. Turbo Tax should have a way to attach statements, though I’m not exactly sure how they do it.
Sara
March 10, 2024Hi, if my job qualifies me for parsonage, but not my husband’s, can I claim parsonage based on the full rental and utilities amount, or only half of it? Does it depend on whose name/s is/are on the apartment lease? I am assuming both our names will need to be on the lease. And I am assuming that to claim the full amount, that all the rent, utilities, and apartment costs will need to be paid from my bank account, correct? Is there a maximum parsonage amount that can be excluded from my gross income – it seems from the comments above that it can be as much as 100% of my earnings, is that correct?
Amy
March 15, 2024Sara, you can claim all of your housing expenses even though your husband lives there and does not provide ministerial services. Usually the IRS doesn’t get so picky as to look at whose name is on the lease and utilities or which bank account the money comes from. They are mostly interested in making sure you have actual expenses to back up what you claim for the allowance. It would probably be different if you were living with a roommate, but the IRS usually views a married couple as a single unit so if you’re living in the home, it’s okay if things are in his name.
It is correct that you can have up to 100% of your earnings designated as long as that doesn’t exceed your actual expenses or the fair market rental value of the home.
John
March 11, 2024Hi,
If I paid into social security for 23 years then opted out at 40 am I eligible for Social Security benefits and Medicare? My statement shows I paid enough in to earn full credits at 67 or 70.
Thanks
John
Amy
March 15, 2024John, yes, you are still eligible for the benefits that you earned while doing secular work.
Yolanda
March 20, 2024If I only worked one month and retired, do I need to deduct partial housing allowance?
Amy
March 27, 2024You can have your pay in the month you worked designated as a housing allowance, but it is not required.
Heather
April 12, 2024If a portion or all of the salary is designated as a housing exemption but the full salary is in box 1 of the W2 (housing exemption is listed in box 14), is there a way to deduct the exemption from federal taxes or is the W2 in need of correction? The housing exemption was approved prior to the year. Thank you.
Amy
April 15, 2024If the housing exemption is listed in Box 1, you will need to get a corrected W-2.