Setting a housing allowance is one of the most valuable tax benefits available to ministers, but it is also one of the most misunderstood.
Done properly, a housing allowance empowers pastors to exclude certain housing-related expenses from their taxable income—which reduces their overall tax burden.
But if handled improperly, a housing allowance can expose churches and pastors to unnecessary financial and legal risk.
The IRS requires churches to designate a housing allowance in advance and to document it clearly.
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It cannot be applied retroactively, and it must be based on a reasonable estimate of the pastor’s actual housing costs.
While the church plays a critical role in approving and recording the allowance, the responsibility for tracking expenses and staying within IRS limits ultimately rests with the pastor.
Since compliance is so important, church leaders should approach the housing allowance process with care. Each year, boards should review and approve designations, communicate them in writing, and ensure the treasurer knows how to report them correctly.
It’s why we’ve created this downloadable checklist for churches and pastors looking to set and manage a housing allowance.
