Allocating a Housing Allowance | Essential Guidelines for Churches
Understand the essentials of allocating a housing allowance and how churches can ensure compliance with tax regulations.
What Is a Housing Allowance?
Ministers do not pay federal income tax on the amount of their compensation designated in advance by their employing church as a “housing allowance.” However, there are limits:
- For ministers who own or rent a home, the housing allowance is nontaxable only to the extent it is used to pay housing expenses and does not exceed the home’s fair rental value (furnished, plus utilities).
Addressing Insufficient Housing Allowance
Sometimes ministers incur more housing expenses than anticipated, due to unforeseen repairs, buying a new home, or other factors. If a minister’s housing expenses exceed the designated allowance, they may lose the full benefit of this tax provision.
Key Point for Ministers in Parsonages
Ministers living in church-owned parsonages may also incur housing expenses beyond their designated allowance. Churches should consider amending the allowance to cover these additional expenses for the remainder of the year.
How Church Treasurers Can Help
Church treasurers should ensure that housing allowances remain adequate. If a minister’s housing expenses exceed expectations, the church board can amend the allowance to make it larger. This:
- Costs the church nothing, as it simply reallocates the minister’s salary.
- Must be applied prospectively, not retroactively, to comply with IRS regulations.
When to Amend a Housing Allowance
An amendment may be appropriate under circumstances such as:
- Purchasing a new home
- Unexpected repairs or remodeling
- Buying new furnishings or appliances
- Mortgage rate increases or balloon payments
- Property tax or insurance increases
- Rent hikes for ministers renting their home
Key Point: Amending an allowance is optional, but it can prevent unnecessary tax burdens for ministers.
Steps to Amend a Housing Allowance
- Authorization: Ensure the amendment is approved by the same body that designated the original allowance.
- Documentation: Record the amendment in meeting minutes, dated appropriately.
- Prospective Application: Amendments only apply from the date of approval forward.
Example:
Pastor Dave owns a home and had a $15,000 housing allowance designated for 2013. After purchasing a more expensive home mid-year, his monthly expenses increased by $500. The church board can amend the allowance for the remainder of the year, reallocating a portion of his salary as housing allowance without additional cost to the church.
“Safety Net” Housing Allowances
To prevent oversights, churches may adopt continuing resolutions that designate a portion of ministers’ salaries as housing allowances by default (e.g., 40%).
Tip: While useful as a safeguard, these resolutions should not replace annual housing allowance designations tailored to individual circumstances.
FAQs About Allocating a Housing Allowance
What if no housing allowance is designated? Housing allowances can only be applied prospectively. If no designation is made before January 1, the allowance will apply only to expenses incurred after the designation date. What expenses qualify for a housing allowance? Eligible expenses include rent, mortgage payments, utilities, furnishings, repairs, and property taxes. Can housing allowances be amended retroactively? No, IRS rules require that housing allowances apply only to future expenses. Does amending a housing allowance cost the church? No, it is simply a reclassification of the minister’s existing salary.
For more detailed guidance, consult Richard Hammar’s Church & Clergy Tax Guide.
