Clergy Housing Allowance
A Tax Exclusion
About This Course
Make sure you have the right information about this important tax exclusion:
- The Who, What, When, Where, and How of calculating and reporting
- Example IRS forms with directions for inputting income and housing allowances correctly
- Information on what qualifies, what doesn’t qualify, and determining fair market rental value
- The Clergy Housing Allowance as it applies to different types of housing
Approximately 10 minutesLearn More Launch Course
The clergy housing allowance can make a big difference in your taxes. As a cleric, you are allowed to exclude your housing allowance from federal income tax. In other words, your taxable income is reduced by the permitted amount of the allowance. The housing allowance can only be used for qualifying expenses on your primary residence.
What are the IRS limitations on clergy housing allowance exclusions?
If you live in your own home, the IRS rules state that your clergy housing allowance is the lowest of the:
- Amount designated in the vestry resolution,
- Actual cash spent on housing, or
- Fair market rental value, furnished plus utilities
If you live in church-provided housing, the fair market rental value of the church-provided housing plus utilities is not included on your W-2 for Federal taxes. You must include on the 1040SE the fair market rental value, furnished plus utilities, for SECA taxes.
How do I calculate my housing allowance?
Own or rent your primary home
- Keep a record of the three housing allowance methods with your tax records in case you are audited.
- Keep a copy of the annual vestry resolution. Note that it is not the vestry or governing board’s decision as to the amount you can designate as a housing allowance. The vestry or governing board’s only responsibility is to vote its approval of that housing allowance designation and to document its action in the minutes of the meeting. You determine the amount by estimating the amount that you anticipate spending to provide yourself with a primary home.
Throughout the year, keep a record of what you actually spent on housing. — See the most up-to-date Clergy Tax Return Preparation Guide for details of what expenses are considered qualified housing expenses.
Determine the fair market rental value, furnished plus utilities. It can be done by either:
- Contacting a real estate agent to provide you with an estimate of what your house would rent for as it is furnished. Then add utilities, or
- Checking the cost of local rentals in your area for housing of your type. Add the cost of utilities and furnishings. You can check out a furnishing rental company to estimate the cost of furniture.
Use the lowest of the three methods as your clergy housing allowance designation when preparing your taxes.
Get an estimate of the fair market rental value as discussed above.
Do not assume that you can use The Church Pension Fund’s assessment value for church-provided housing for the IRS housing allowance. The fair market rental value and housing assessed under The Church Pension Fund Clergy Pension Plan are not calculated the same way and probably differ.
I set my vestry resolution too low. Can I change it to reflect the higher actual expenses?
The vestry resolution can be changed, but prospectively (going forward) only.
- If your vestry resolution is lower than your actual dollars spent, you can only claim expenses up to the vestry resolution (or fair market rental value, furnished plus utilities, if lower than the resolution) for the time the vestry resolution is in place.
- You can have the vestry increase the allowance for the time going forward and claim the higher amount, up to fair market rental value, furnished plus utilities.
What if my vestry does not pass a resolution?
During the time that there is not a resolution, you will not be able to claim the clergy housing allowance exclusion.
- Be sure to get a resolution passed right away for the rest of the year.
- It is a good idea to add a “safety net” to the end of your resolution stating the resolution is in effect until a new one is passed the next year.
- See the most up-to-date Clergy Tax Return Preparation Guide for an example of vestry resolutions.
I kept my primary residence, but have a temporary one for my interim work. Can I claim both housing costs?
You can only claim one residence for the housing allowance. The residence you claim is dependent on how long the interim assignment lasts.
- If the interim position is expected to last for more than one year (even one day longer), the interim residence will be considered the primary residence for tax purposes from the first day in the position.
- The housing allowance will then be based solely on housing costs at the new location and “out-of-town” living expenses will not be eligible for business expense reimbursement.
- If the interim position continues for one year or less, then the original home continues to be the primary residence for housing allowance purposes.
- You may ask the vestry of the interim congregation to designate a portion of your compensation as a housing allowance based on your primary residence. In such cases, the housing provided at the interim location can be treated as reimbursable business expenses rather than as compensation.
Is the housing allowance excluded from SECA tax?
No, the value of the clergy housing allowance is not excluded from SECA tax.
Can I claim a clergy housing allowance in retirement?
In retirement, clergy may still be eligible to claim the clergy housing allowance.
- Your pension distributions from The Church Pension Fund Clergy Pension Plan (e.g. pension benefit, 13th check, and resettlement benefit) are designated as eligible for the clergy housing allowance exclusion by the Board of Trustees of The Church Pension Fund each year.
- Some distributions from The Church Pension Fund Retirement Savings Plan (RSVP) can also be designated as a clergy housing allowance. Note, however, that you must contact Fidelity to request the designation and ensure that they send your Form 1099-R with the “Taxable amount not determined” box checked.
- If you earn wages working as a minister in retirement, you can have the governing body designate some or all of the wages as housing allowance.
- You will be eligible to exclude the lowest of the actual cash spent on housing, the fair market rental value of the home furnished plus utilities, or the housing allowance designated (Church Pension Fund Distributions and eligible RSVP withdrawals).
Upon the cleric’s death, a surviving spouse will not be able to claim the clergy housing allowance for any payments from The Church Pension Fund or the cleric’s RSVP that are made to them.
- Set your vestry resolution equal to your calculated fair market rental value, furnished plus utilities, to be sure you don’t set the resolution too low.
- Use a credit card (that you pay off each month) when purchasing items or services that can be included in the housing allowance calculation. It provides you with a clear record of your actual expenses.
- Your clergy housing allowance and the housing that is assessed under The Church Pension Fund Clergy Pension Plan are not calculated in the same way and may not be the same amount.
This material is for informational purposes only and is not intended as investment, tax, financial, legal or other advice. Your personal decisions should be based on the recommendations of your own professional advisors.