Tag Archives housing allowance

The following is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance:

Calculating

By now you understand who is allowed to take a clergy housing allowance and the process by which you can do so. But here’s the big question everyone has: how do you know how much of a housing allowance to request?

First of all, there are limits to the amount of housing allowance that the IRS will allow you to claim. Your maximum allowed housing allowance is 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 services.
  
  

That means that even if your mortgage payment is $2,000 a month, if you could only rent the home (furnished, with utilities) for $1,500 your housing allowance has to be the lesser amount. 

Remember that those services only include ministerial services. If you are a bi-vocational minister, you can only claim a housing allowance from your ministerial income. If your expenses can justify it, though, you could claim your entire ministerial income as a housing allowance and use your secular income for all of your other expenses. Also, it doesn’t matter how you are paid for your ministerial services. Whether it’s hourly or salary or by W-2 or 1099 does not affect the housing allowance.

To determine your housing allowance, you should calculate both your anticipated expenses and the fair market rental value of your home and request the lesser amount. When calculating anticipated expenses, it is wise to include an extra 10% or so to cover things that come up unexpectedly, like a new crib or repairing termite damage. 

Some pastors regularly request the fair market rental value of their home even when it is higher than their anticipated expenses to ensure that they maximize the exclusion. The risk with this is that if your expenses are significantly lower, you will have to add the excess to your taxable income when you file your return and could end up owing a lot of taxes. 

Also, retirement account contribution limits are often tied to income. Claiming a higher housing allowance reduces your taxable income and could unnecessarily limit the amount you can save for retirement in a tax-advantaged account. Usually, by the time you realize your taxable income will be higher (because you didn’t use the whole allowance), it’s too late to put more into retirement. 

For families with children, the housing allowance can affect your child tax credit. Part of the child tax credit is refundable, which means the government will give you the money even if you don’t owe any taxes. However, the refundable portion is limited to a percentage of your income. If you erase too much income with the housing allowance, you could eliminate your refundable child tax credit and miss out on thousands of dollars. You’ll have to play with the numbers to find the right amount of housing allowance to claim to maximize all of the tax benefits available to you. 

When calculating your expenses, make sure to include any large purchases that you have planned for the year, such as a new refrigerator or deck. If you live in a parsonage or other church-provided housing, only calculate those expenses that you, yourself, pay for. You can’t claim an exemption for something that the church is paying for. That’s lying, and we all know who the father of lies is. For a worksheet or online calculator to determine your housing expenses, visit https://pastorswallet.com/free-resources/.

This is an excerpt from the book The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance, which is available in paperback and Kindle format on Amazon.

Treasury regulations state that,

In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.

Another term the IRS commonly uses for “services which are ordinarily the duties of a minister of the gospel” (since that’s way too long) is “ministerial services.” So, as with everything, in order to determine eligibility for the housing allowance, we need to define ministerial services. IRS Publication 517 states that “Ministerial service, in general, is the service you perform in the exercise of your ministry.” Writing this book is the exercise of my God-given ministry. Does that mean I can take a housing allowance? I wish!

Luckily, they provide further guidance, since that’s about as clear as mud. There are two different purposes for which the US government concerns itself with the definition of ministerial services. One is the housing allowance, which we are discussing, and the other relates to self-employment taxes. As such, the definitions and examples that the government provides for either one apply to the other (in almost all situations). That’s good for us because it gives us a larger body of work to pull from when looking for answers.

Ministerial service is that which you do in the exercise of your ministry. Here are the ministries that you can exercise that qualify you for the clergy housing allowance (and some that don’t): 

Pastors & Church Workers

What we usually think of when we think of a pastor or minister fits well into the IRS’s common definition of someone that conducts religious worship and performs sacerdotal, or priestly, functions. Those activities are hard to define, however, because every religion is different and even denominations within a religion vary widely in their activities and worship. 

Because of this, the IRS doesn’t get into specifics regarding sacerdotal functions and worship. Rather, they leave that up to each minister’s church or denomination. Treasury Regulation § 1.1402(c)-5(b)(2)(ii) allows those definitions to be governed by the tenets and practices of the particular religious body. I appreciate the freedom of religion, but boy does it make my job hard!

Sacerdotal functions usually include things like baptism, performing weddings, and administering communion. These are things that only certain people within the religion are allowed to do. Conducting worship services is similar because in most religions not everyone has the authority to run their regular gatherings. 

The IRS wants to see that your religious body considers you a spiritual leader. You should have special authority and act on it. While there is some ambiguity regarding those that qualify for the housing allowance, the IRS is very clear about some people that don’t. 

According to IRS Publication 517, ministers of music or education and those who serve in administrative or other functions who aren’t authorized to perform substantially all of the religious duties of an ordained minister in your church (even if commissioned as a minister of the gospel) are not eligible to take a housing allowance. As you can see, having authority is key. Overseeing the worship department is not enough. If your church doesn’t view you as a pastor, neither does the US government. 

Workers In Religious Organizations

When it comes to working with religious organizations like religious boards and societies (and their integral agencies), they have a little more to say. First of all, the organization has to be under the authority of a religious body such as a church or denomination. The organization doesn’t have to be directly controlled by the church, though. They consider any organization organized for and dedicated to carrying out the tenets and principles of a faith in accordance with the faith’s rules to qualify. 

However, you can’t just slap a fish on it and call any organization Christian. Your church or denomination probably has certain requirements or sanctions governing the creation of their institutions, and those must be followed for your organization to be legitimate.

Within the organization, you have to also perform legitimate work for it to qualify as ministerial services. Being the janitor for a religious society is not enough. You need to control, conduct, or maintain the organization (and not the kind of maintenance that janitors provide). 

What they mean is that you need to be involved in directing, managing, or promoting the activities of the organization. Likely, it will require a leadership position within the organization. You can run a department within your denomination’s Missions Board, and though you aren’t preaching and burying people, you are performing ministerial services in the eyes of the IRS. Is this getting complicated enough for you yet? Keep reading, it gets even better!

Pastors In Secular Settings & Government

You don’t actually have to work in a church or religious organization for your activities to qualify as an exercise of your ministry. As long as you’re conducting worship and performing sacerdotal functions, those are ministerial services even if performed in secular society. 

A good example of this is campus ministries. Most colleges are not religious organizations by any stretch of the imagination. Yet, many pastors work on campuses leading services and counseling students. These campus ministers are pastors through and through, and the IRS does not deny it.

The same does not ring true for government workers, though. If you are a US military chaplain, your services do not constitute ministerial services for the sake of the clergy housing allowance. You are considered to be functioning as a commissioned officer, not a minister exercising his ministry. Also, a chaplain in a state prison or government-owned hospital that is a government employee is considered to be acting as a civil servant of the state and not as a minister of the gospel. We’ve got to keep church and state separate, after all. 

Church Assigned Positions

Even if you aren’t performing typical pastoral duties and you aren’t working for a religious organization, if you were directed by your church to take the position, it can count as ministerial services. The services must be assigned or designated by the church to qualify. 

Be careful about trying to twist this provision in your favor if you have secular employment, though. This situation only works if your church assigned you to the position for reasons directly related to the purposes of the church. People with secular employment have gone back and had their church “assign” it, and it hasn’t ended well for them. 

Work In A Religious School

Administrative duties and teaching responsibilities in a church school, college, or university qualify as ministerial services for the sake of the pastoral housing allowance. The key is that it must be a religious school. The same duties in a non-church school do not qualify. However, if a secular school provides you with faculty lodging, it may be tax-exempt because of another rule. IRS Publication 525 can give you more information about that. We only care about the pastoral housing allowance in this book.

Theological Students

If you are a theological student, just acting like a pastor is not enough to qualify you for the clergy housing allowance. When serving a required internship as a part-time or assistant pastor you can’t exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. 

Traveling Evangelists

Traveling evangelists who are ordained ministers are eligible to take a housing allowance from the money given to them by churches located away from their home community. This comes from Revenue Ruling 64-326, which allows for the housing allowance of an ordained minister to be paid by multiple churches. All of the same rules apply, so it must be designated in advance in writing and used to maintain a permanent home. 

Missionaries

For missionaries who are ordained, licensed, or commissioned ministers, all of the same rules apply. Whether or not a missionary should claim a housing allowance, though, will depend on their personal tax situation. There are a lot of complex rules surrounding Americans abroad and they are beyond the scope of this book. 

If you’re a missionary, just know that you’re still subject to US taxes no matter where you live and you really should work with a tax preparer or financial planner that understands expat taxation. If you try to do it yourself, you’ll either die of boredom or make costly mistakes. The costly mistakes can even happen if you work with a professional if they’re not experienced in working with Americans abroad. Please, please, please, believe me on this one. And thank you so much for what you’re doing. The rest of us really admire and appreciate it.

If you want to learn more about the clergy housing allowance, pick up a copy of The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance on Amazon today!

One of the greatest financial benefits available to pastors is the housing allowance exemption. This comes in two forms: the minister’s cash housing allowance and parsonage allowance. These allow “ministers of the gospel” to exempt all of their housing expenses from federal income taxes. That can be worth quite a bit of money, so who are these “ministers of the gospel” that are eligible to take advantage of it?

The Bible calls us all to be ministers of the gospel but I don’t think that’s what the IRS has in mind. And “gospel” is a very Christian word but you know the US government would not give special benefits to Christians and not other religions. That would be unconstitutional. So who is eligible for this awesome tax benefit, then?

IRS Definition Of A Minister

The IRS defines a minister as:

Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. 

If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. 

As you can see, there are two main components to being a minister eligible for the housing allowance. You have to have the right authority and participate in the right activities. Let’s break those down for more clarity:

You Need The Necessary Authority

You must be ordained, commissioned, or licensed and it has to be by a religious body constituting a church or church denomination. However, the law does not spell out what constitutes a church or denomination. Rather, our definitions are based on case law, or previous court rulings.

There are two things that have been established as the bare minimum for something to be called a church:

1. A body of believers or communicants
   
   
2. The body of believers assembles regularly in order to worship
   
   

On top of that, assembling to worship must be the main purpose of the body of believers. Because of this, schools that have chapel services do not qualify because their purpose is educational and their worship services are incidental. Also, faith-based companies that have regular Bible studies or devotionals for their employees do not qualify because their purpose is business and their religious gatherings are incidental.

Once you determine that your church or denomination qualifies, you have to make sure the position they have given you qualifies. You must be “ordained, commissioned, or licensed.” If you have the same authority as someone with one of those titles but lack the title, you could argue that you are eligible for the housing allowance. Jewish cantors did and won the right to claim a housing allowance.

You Need To Provide Pastoral Services

Treasury regulations state that,

In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.

Just having the right title is not enough to qualify you for the housing allowance exemption. It must be given to you in exchange for your services which are ordinarily the duties of a minister of the gospel, or simply “ministerial services” as the IRS often refers to them.

If you’re a pastor in a church, what the IRS wants to see is that you do things like baptize people, perform weddings, administer communion, and run church services. Things that not just anyone in the church is allowed to do. 

The IRS doesn’t get into a lot of specifics about it because different religions vary greatly. They do, however, state that ministers of music or education and those who serve in administrative or other functions who aren’t authorized to perform substantially all of the religious duties of an ordained minister in your church (even if commissioned as a minister of the gospel) are not eligible to take a housing allowance. 

There are some other positions that qualify as providing ministerial services besides just being a traditional pastor:

• Workers in Religious Organizations. You must have a leadership or key role in an organization that is under the authority of a church or denomination and exists to carry out the tenets and principles of the faith. An example would be a denominational missions board or religious society.
  
  
• Pastors in Secular Settings. If you do the duties of a pastor but outside the church in a secular setting, that still qualifies. An example of this would be a campus minister.
  
  
• Chaplains. Chaplains in church-related or nonprofit health and welfare institutions are eligible for the housing allowance. Chaplains in government-owned hospitals or with the US military are not eligible because they are said to be functioning as government employees and not ministers.
  
  
• Church Assigned Positions. Even if you aren’t performing typical pastoral duties and you aren’t working for a religious organization, if you were directed by your church to take the position, it can count as ministerial services. The services must be assigned or designated by the church to qualify. 
  
  
• Work in a Religious School. Administrative duties and teaching responsibilities in a church school, college, or university qualify as ministerial services for the sake of the pastoral housing allowance. The key is that it must be a religious school.
  
  
• Traveling Evangelists. Traveling evangelists who are ordained ministers are eligible to take a housing allowance from the money given to them by churches located away from their community as long as it is designated in advance in writing and used to maintain a permanent home. 
  
  
• Missionaries. Missionaries are eligible for the housing allowance just as pastors are.
  
  

So, to be eligible to claim a ministerial housing allowance you need to have been given authority by a qualifying religious body and you need to receive it in exchange for pastoral services that you provide. 

Don’t forget to check out our Housing Allowance Calculator and Housing Allowance Book!

One of the benefits of being a pastor is getting to claim an income tax-free housing allowance. Not having to pay income taxes on part of your income can be a great benefit, so it’s one I always recommend that pastors maximize. But how do you maximize it?

What Is The Maximum Allowed Housing Allowance?

The first step in maximizing your housing allowance is knowing how much you’re allowed to claim in the first place. There are limits and some people have ended up in tax court for disregarding them. 

Your maximum allowed housing allowance is 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.
  
  

How To Calculate Your Housing Allowance Limit

Therefore, to figure out what size of housing allowance you’re eligible for, simply calculate each of the above amounts and go with the lowest. If your mortgage payment is $2,000 a month but you could only rent the home for $1,500, then your housing allowance is limited to $1,500 a month. But, if your church has only designated $1,450 a month for your housing allowance, then that’s the most you can claim. 

If you find that the lowest number is your designated housing allowance, that’s an easy fix. Ask your church to designate a higher housing allowance for you. You can start claiming it the moment they have made the designation official. 

Your housing allowance is also limited to an amount that represents reasonable pay for your ministerial services. That means that if you only work ten hours a week at the church, then you cannot claim a $75,000 housing allowance. I don’t think the IRS would consider $150 an hour “reasonable” compensation for your service.

Remember, also, that those services only include ministerial services. If you are a bi-vocational minister, you can only claim a housing allowance from your ministerial income. If your expenses can justify it, though, you could claim your entire ministerial income as a housing allowance and use your secular income for all of your other expenses. Also, it doesn’t matter how you are paid for your ministerial services. Whether it’s by W-2 or 1099 does not matter.

How Much Housing Allowance Should You Request?

To determine your housing allowance, you should calculate both your anticipated expenses and the fair market rental value of your home. Then request the lesser amount. When calculating anticipated expenses, it is wise to include an extra 10% or so to cover things that come up unexpectedly, like a new crib or repairing termite damage. 

Some pastors regularly request the fair market rental value of their home even when it is higher than their anticipated expenses. They do this to ensure that they maximize the exclusion. The risk with this is that if your expenses are significantly lower, you will have to add the excess to your taxable income when you file your return and could end up owing a lot of taxes. 

Also, retirement account contribution limits are often tied to income. Claiming a higher housing allowance reduces your taxable income. That could unnecessarily limit the amount you can save for retirement in a tax-advantaged account. Usually, by the time you realize your taxable income will be higher (because you didn’t use the whole allowance), it’s too late to put more into retirement. 

Try out the Pastor’s Wallet Housing Allowance Calculator. Just make sure to include any large purchases that you have planned for the year, such as a new refrigerator or deck. If you live in a parsonage or other church-provided housing, only calculate those expenses that you, yourself, pay for. You can also learn about calculating the fair market rental value of your home here.