The housing allowance exclusion is the most important tax benefit available to ministers. To save taxes, make sure your church properly designates a housing allowance. A housing allowance may be available to ministers who own their own homes, who rent or who live in a rent-free church-owned parsonage. However, it is available only for a principal residence, not for a second home or vacation home. Your housing expenses could change significantly with a move. A housing allowance must be compensation for ministerial services and should not exceed a minister’s reasonable compensation. Ministers must substantiate their actual housing expenses. Otherwise, all or part of the housing allowance designation is included in gross income. Your church should designate your housing allowance in writing for the remainder of the year; based on estimates you give the church. Then the church should designate your housing allowance in writing at the end of each calendar year for the New Year. Ministers who own their own homes may exclude from income the lowest of these three amounts for federal income tax purposes:
- The amount designated by the church; or
- Actual housing expenses (including mortgage payments, utilities, property taxes, insurance, furnishings, repairs and improvements); or
- The annual fair rental value of the home (furnished, including utilities).
Ministers must include the value of their housing allowance (even if living in a parsonage) for SECA purposes although they do not count it for federal income tax purposes.