Q&A: Amending a Housing Allowance

Our pastor would like the church to increase his housing allowance due to the fact that he will be incurring more housing expenses than expected this year. Can our church board amend the allowance for the rest of the year, or must he wait until next year?

Ministers do not pay federal income tax on the amount of their compensation that is designated in advance by their employing church as a "housing allowance." But there are limits. For ministers who own or rent their home, a housing allowance is nontaxable only to the extent that it is used to pay housing expenses and does not exceed the fair rental value of the home (furnished, plus utilities).

Sometimes ministers incur more housing expenses than they anticipated during the year, which may mean that their housing allowance is not enough to cover all of their housing expenses. Often this is due to unforeseen housing expenses, or to the purchase of a new home. For whatever reason, if a minister's housing expenses exceed the church-designated housing allowance, then the minister may not be receiving the full value of this important tax benefit.

To amend your minister's housing allowance you will need to pay attention to the following rules:

• Proper authorization. Be sure the amended housing allowance is authorized by the same group (usually the church board or congregation) that designated the original housing allowance.

• In writing. Be sure the amendment is duly recorded in the minutes of the group that approves it. The minutes should be dated, and recorded at or shortly after the meeting in which the amendment is approved.

• Prospective application. An amended housing allowance only operates "prospectively." That is, it takes effect on the date it is approved, through the rest of the year. It cannot apply retroactively. To illustrate, a pastor's housing expenses turn out to be $15,000 for 2020, but the housing allowance designated by the church was only $10,000. In December of 2020 the pastor asks the church board to retroactively increase the housing allowance for 2020 to $15,000. This cannot be done.