By law, a minister’s housing allowance must be designated by a church or church denomination. But what does that mean? Surely a mosque or synagogue would count since the government isn’t allowed to discriminate between religions.

The IRS uses a different meaning for church than most of us do in our everyday language. Church for them has more to do with an organization’s religious purpose than their actual religion or common vocabulary. The truth is, Section 107 of the Internal Revenue Code that lays out the clergy housing allowance does not actually define the term church. 

How The IRS Identifies A Church 

Since the law doesn’t spell things out, there have been disagreements that have led to court cases throughout the years. The decisions in those court cases are what the IRS has used to develop a list of characteristics that they attribute to churches. This is what the IRS looks for to be able to call something a church:

• Distinct legal existence
• Recognized creed (set of fundamental beliefs) and form of worship
• Definite and distinct ecclesiastical government
• Formal code of doctrine and discipline
• Distinct religious history
• Membership not associated with any other church or denomination
• Organization of ordained ministers
• Ordained ministers selected after completing prescribed courses of study
• Literature of its own
• Established places of worship
• Regular congregations
• Regular religious services
• Sunday schools for the religious instruction of the young
• Schools for the preparation of its members

When determining whether an organization is classified as a church for federal tax purposes, the IRS looks at these characteristics along with other facts and circumstances. They look at the organization’s religious purposes and how it accomplishes those religious purposes. A church does not have to have all of the above attributes to qualify. At a bare minimum, a church must have two things:

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

Examples Of Court Tax Rulings

If you don’t have a group of people that gets together regularly to worship, you are not a church. And if that’s not your primary purpose, then you’re not a church either. The court has stated that if bringing people together for worship is only an incidental part of an organization’s activities, that’s not enough to call the organization a church. Many schools have regular chapel services and teach religious coursework, but they are still considered schools, not churches. 

In one court case, De La Salle Institute v. US, a religious group’s non-profit ran a winery and distillery. On the premises was a chapel where they could worship. They claimed that the non-profit was a church and an integral part of a church and so should be exempt from paying certain taxes. Neither the IRS nor the tax court judge bought it. They determined that it was not a church, it was a winery.

While having prayer meetings at your tech company won’t make it a church, the IRS still goes beyond the usual connotations for their definition of a church. If you’re an ordained minister who preaches, performs weddings, and officiates funerals, you still may be able to take a housing allowance even if you don’t work for a “traditional” church.

This is exemplified in the Whittington v. Commissioner tax court case. There was a ministry that presented the gospel through crusades, services, and publications that had a loyal, regular following. Their leaders conducted daily services and married, performed funerals for, and counseled their followers, many of whom were not associated with other religious organizations. The IRS denied the leaders a housing allowance because they did not work for a church. The leaders challenged it and the tax court judge sided with them, declaring that their ministry counts as a church because they have a body of believers.

They aren’t just flexible about the structure of your “church.” If you act like a church, even if you don’t have traditional beliefs, you can still qualify as a church. That’s what happened in the Foundation of Human Understanding v. Commissioner tax court case. A foundation based on Judeo-Christian principles and the doctrine and teachings of its founder claimed to be a church. They owned buildings in two different locations where they conducted regular services for a congregation of over 50 people. They also had a school where their beliefs were taught to children and owned a retreat center for seminars and meetings. The IRS said that it didn’t qualify as a church but the tax court judge struck that down and ruled that they are a church. 

How To Get A Final Determination

While I really hope you don’t start a cult, I highlight these examples to show you that you don’t necessarily have to work for a traditional church for it to qualify to designate you a housing allowance. The IRS is fairly flexible in its definition. 

I wish I could spell it out to you more clearly, but this is all that we have because of the way our legal and tax system works. If you have any doubts as to the validity of your organization as a church, you can request a private letter ruling from the IRS. Or, you can get audited and take the IRS to tax court for a final decision. Have fun with that. 

I’m pleased to announce that my first book is now available for sale on Amazon! The Pastor’s Wallet Complete Guide To The Clergy Housing Allowance is a comprehensive look at all things housing allowance. 

The Story Behind The Book

Last February, I sat down to put together a downloadable resource about the housing allowance since it is a common topic of reader questions. As I started my research, I thought to myself, you could write a whole book about this stuff! 

And so I did. 

I spent hours in research, reading through IRS documents, tax court cases, and the Internal Revenue Code. If you think that sounds incredibly boring, you’re right. I would much rather read a John Grisham novel than anything put out by the IRS. 

But I’ve met too many pastors who are paying taxes unnecessarily because they don’t understand how the housing allowance works. And I’ve heard from too many financial professionals who can’t give their clients good advice because they struggle to find accurate information regarding the housing allowance. 

God calls some people to pastor churches. He calls others to take the gospel to unreached people groups. I guess he’s called me to read IRS documents. I’d rather take that than Hosea’s call any day, though.

What Is In The Book?

I tried to put everything there is to know about the housing allowance into this book. Unlike Hollywood, I’m not planning for a sequel. There are no intentional cliff hangers here. That’s why I called it the Complete Guide. This is about as good as it gets. Here is an outline and summary of the book:

The Law: What’s This All About?

I started the book with a brief overview of the law itself. It is important to understand how tax law works so that you can understand why there are so many gray areas. This section provides the background for how we know what we do about the housing allowance. As I state in the book, it is optional reading for those who like to know why?

Eligibility: Who Is A Minister Of The Gospel?

The second chapter is where it starts to get really practical. Before you get into the details of the law, you need to know who it applies to in the first place. There are three things you must define in order to know who is eligible for the minister’s housing allowance:

1. What qualifies as a church or denomination?
2. Who is a minister of the gospel?
3. What qualifies as ministerial services?

In this chapter, we see how the law applies to pastors and church workers, workers in religious organizations, pastors in secular settings and government, workers in church-assigned positions, workers in religious schools, theological students, traveling evangelists, and missionaries.

Process: How To Claim The Housing Allowance

Once you establish eligibility, the big question is how to go about claiming a housing allowance. In this chapter, we break down the responsibilities between the church and the individual pastor, look at the proper timing for requesting an allowance, and how to calculate your housing allowance. Then we get into eligible expenses and what the law says about:

• Combining the parsonage and cash housing allowance
• Down payments
• The mortgage interest deduction
• Home equity loans and home equity lines of credit
• Cash-out mortgage refinancing
• Prepaid expenses
• Multiple homes
• Clergy couples
• Generating income with your home
  
  

Taxation & Other Government Programs

The next chapter looks at how the housing allowance affects federal income taxes, payroll taxes, and state income taxes. We discuss how the housing allowance should be reported to both the pastor and the IRS and what happens when you over or underestimate your expenses. Finally, we look at how claiming a housing allowance affects the following:

• Retirement contributions
• Social Security benefits
• Supplemental Security Income (SSI)
• Social Security Disability Income (SSDI)
• Free Application for Federal Student Aid (FAFSA)
• Children’s Health Insurance Program (CHIP)
• Premium tax credit (Obamacare subsidy)
• Medicaid
• Medicare Savings Programs
• Medicare premiums
• Earned Income Tax Credit (EITC)
• Child Tax Credit
• Additional Child Tax Credit
• Unreimbursed business expenses
  
  

The Finish Line: Claiming A Housing Allowance In Retirement

Did you know that you might be able to claim a housing allowance in retirement? It’s true, and this book will tell you how to do it. It covers the dangers of IRA rollovers, partial retirement, SECA taxes, required minimum distributions, IRS reporting, and what happens when your spouse dies. If you want a housing allowance in retirement, it’s important to read this before you retire.

Legal Challenges: Gaylor v. Mnuchin

We end with a look at the recent legal challenges that the housing allowance has faced. While it is safe for now, it is important to understand the legal arguments for how it is being attacked and how it has been defended. In light of all of that, the book ends with some considerations of the future implications and what you should do going forward.

Buy Your Copy Today!

If any of that sounds as if it would be helpful to you, I encourage you to get a copy. This isn’t the kind of book that you take to the beach, read through cover-to-cover, and then toss aside. It is more of a reference tool that will sit on your shelf, gathering dust, except for the once or twice a year you have to consult it. You won’t spend a lot of time reading it, but you’ll be glad you have it on hand when questions arise. And I try to add some humor so it’s not too boring for you! 

It is available in paperback and Kindle format, so buy it on Amazon today! And don’t forget to leave a review if you do!

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!

As we enter the final stretch of 2019, it’s time to review the year’s housing expenses and how they align with your designated housing allowance. It’s always a good idea to review your housing allowance about this time of year to make sure you are maximizing your tax savings. How well your actual expenses have lined up with your designated allowance will affect what you do the remainder of the year.

Free Minister Housing Allowance Calculator & Worksheets

I’ve created several tools that will help you as you review your housing allowance:

Online Calculator

Online Housing Allowance Calculator

Our Pastor’s Wallet online calculator can be used to both anticipate expenses for the coming year and review the past year’s expenses. Make sure that you are entering expenses on an annual basis by multiplying monthly expenses by the number of months they have or will cover.

Downloadable .PDF Document

If you just want a real piece of paper to write on, click the download button above and print out the document. It includes spaces for the most common housing expenses and several open spaces for your own unique expenses.

Downloadable Excel Spreadsheet

For Excel users who want to personalize their calculations or save them for the future, click the above link to download a .xlsx document. It’s set up to automatically add up your housing expenses as you plug them in. 

Minister Housing Allowance Limitations

It’s important to remember that just because you spent a certain amount on housing expenses for the year, that doesn’t automatically qualify them for the clergy housing allowance. The IRS has placed limits on how much can be claimed. 

You may only claim the lesser 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 which represents reasonable pay for your services.
  
  

To learn more about calculating the fair market rental value of your home, go here. 

What To Do If Your Housing Allowance Is Off

If you’ve been spending more than expected and don’t have a lot of designated allowance left for the remainder of the year, you may want to put off purchases and projects. Anything you spend above what was previously designated for the year will come out of your taxable income and you will receive no tax benefits. It may be worthwhile to postpone fixing your deck or buying that new oven until January and request a higher allowance for 2020 to cover it. 

What if you haven’t spent as much as you expected? If your housing allowance exceeds your expenses for the year, now might be a good time to tackle your list of house projects. Paint that bathroom you’ve been eyeing, do that landscaping project you’ve been considering or finally buy your wife that new down comforter she’s had her heart set on. Your tax-exempt allowance has already been designated, so you might as well make the most of it.

If you still haven’t spent your entire designated amount by the end of the year, you will need to add it back into your taxable income when you file your tax return in the spring. Luckily, that’s not nearly as intimidating as it sounds. This article details step by step just how to do it.

I hope you find these resources helpful. If you have any questions, ask in the comments or send me an email!

For almost 100 years, since the Revenue Act of 1921, pastors in the United States have had the privilege of living in employer-provided housing without having to pay income taxes on it. Back then, it was common practice for churches to provide a home, or parsonage, for their pastors. 

By the 1950s, it wasn’t quite as common. As the number of churches increased, many simply did not have the funds to provide a parsonage. This forced the pastors to find their own place to live and pay for it out of their taxable income. 

Congress felt that this was unfair discrimination between pastors, that some didn’t pay income taxes on their housing while others did. So, in 1954, they expanded the law to include the payment of a “rental allowance paid to him [the minister] as part of his compensation, to the extent used by him to rent or provide a home.” This leveled the playing field and created what is now called the clergy cash housing allowance or clergy rental housing allowance.

How It Works For Pastors Without A Parsonage

This is how the cash rental housing allowance works if your church does not provide you with a parsonage:

1. You go buy or rent a place to live.
   
   
2. You calculate your housing expenses, including rent, mortgage, utilities, furniture, etc.
   
   
3. You ask your church to designate that amount (your calculated expenses) as a housing allowance.
   
   
4. The church makes an official designation.
   
   
5. When the church pays you your salary, the portion that was designated as a housing allowance does not appear on your pay stub as taxable income and is not reported to the IRS- but they still give you the money.
   
   
6. You track your housing expenses throughout the year.
   
   
7. At the end of the year, your church will let you know what your housing allowance was for the year, either with a letter or on Box 14 of your W-2 (NOT Box 1).
   
   
8. If your housing allowance exceeded your housing expenses for the year, then you have to add that back into your taxable income when you file your tax return. Learn how to do that here. 
   
   

How It Works For Pastors With A Parsonage

If you live in a parsonage, then you are already getting your housing income tax-free. But, if you read the section above, you’ll see that those without a parsonage can include things like utilities and furniture in their housing allowance. What if your church doesn’t pay for those things for you and you purchase them out of pocket? Then, you can take advantage of both a parsonage allowance and a cash housing allowance. They are not mutually exclusive.

Taking a cash housing allowance when you live in a parsonage is much like taking the rental allowance for those providing their own homes. This is how it works:

1. Calculate the housing expenses that you are paying for out of pocket. This could be utilities, furniture, pest control, etc. 
   
   
2. Ask your church to designate that amount (your calculated expenses) as a cash housing allowance.
   
   
3. The church makes an official designation.
   
   
4. When the church pays you your salary, the portion that was designated as a housing allowance does not appear on your pay stub as taxable income and is not reported to the IRS- but they still give you the money.
   
   
5. You track your housing expenses throughout the year.
   
   
6. At the end of the year, your church will let you know what your housing allowance was for the year, either with a letter or on Box 14 of your W-2 (NOT Box 1).
   
   
7. If your housing allowance exceeded your housing expenses for the year, then you have to add that back into your taxable income when you file your tax return. Learn how to do that here. 
   
   

I’ve heard that some churches are not comfortable with the idea of providing a cash housing allowance if they are already providing their pastor with a parsonage. If you run into this, you should simply (and kindly and humbly) educate the decision-makers at your church about what the law entails and how it can save you a lot of money in taxes at no expense to the church. I think sometimes churches don’t realize that they have nothing to lose in designating a housing allowance for their pastor. 

Who Is Eligible For A Housing Allowance

That is how the cash or rental housing allowance works. Before requesting one, though, it’s important to verify that you are eligible for one and the expenses you have in mind are also eligible. You can learn about all of the eligibility requirements here. 

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

I recently had a friend run some reports on my website to see how people are finding me. One of the most popular things that people search for, I learned, is “minister housing allowance calculator.” Now, I’ve written a lot about the clergy housing allowance, how to take one in retirement, what to do if you take too much, and things like that.

But people weren’t looking for articles about the minister housing allowance. They were looking for a calculator. They were saying, “C’mon, Amy, don’t just tell me how to do it. Give me the tools to actually do it!”

And I’m so obedient that I did just that. You asked for it, and now you have it:

The Pastor’s Wallet Housing Allowance Calculator

You can follow that link to try it out or just click on it from the menu at the top of this website.

How To Use The Minister Housing Allowance Calculator

It’s pretty easy to use. There are a bunch of categories of expenses that are covered under the pastoral housing allowance. All you have to do is input how much each category costs for you. Not every category will apply, so just use the ones that fit your situation. This is what it looks like:

For example, if you live in a parsonage, you won’t have anything to put into the Mortgage Payment or Rent categories. If you do live in a parsonage, only add in the expenses that you pay yourself. If your church pays your water bill, you can’t claim that as a part of your cash housing allowance.

At the bottom, there will be a total that shows your anticipated housing expenses for the year. It’s pretty hard to anticipate everything exactly and claiming too small of a housing allowance can lead you to pay taxes unnecessarily. So, it is commonly recommended to request about 10% more than your expected expenses to cover surprise expenses. The Pastor’s Wallet Minister Housing Allowance Calculator calculates that for you too.

Minister Housing Allowance Limitations

This calculator helps you calculate your housing expenses for the year. However, you may not be able to claim the whole amount as a clergy housing allowance. It is important to remember that the housing allowance 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 which represents reasonable pay for your services.
  
  

So, before requesting your housing allowance based on your anticipated expenses, you need to figure out if they are lower or higher than the fair market rental value of your home. You can read all about how to do that here.

Then, once you figure out how much you can claim you need to get it officially designated. If your church doesn’t have it in writing somewhere that you’re getting a housing allowance, then you’re not getting one. Everything they give you will be considered taxable income. Do your calculations and then make sure your church makes it official.

Try out the calculator and let me know what you think. I hope you find it helpful!

Is there anything else you wish I had on this website? Let me know in the comments or by emailing amy@pastorswallet.com.