Housing allowance DOs and DON'Ts
The practical rules, grouped by the decision you are making.
Most of what goes wrong with a housing allowance is not exotic. It is a designation signed in February for a January that has already been paid, a shoebox of receipts that turns out to be half empty in March, or a pastor who learns in their sixties that the allowance was subject to self-employment tax the whole time.
What follows is the short version of the rules that prevent those. The questions in the FAQ carry the reasoning and the citations. This page is the checklist.
Getting it designated
Do
- Get the designation in writing before any of the money is paid, through board or elder minutes, an employment contract, or an annual resolution.
- Ask for a new designation for each calendar year, because your return is filed on a calendar year even when your church runs on a different fiscal year. Many ministers put the request in during November or December for the year ahead.
- Keep the designation itself with your permanent tax records, not just with that year's receipts. It is the document that proves the exclusion was set up in advance.
- Ask for an adjustment mid-year if your housing costs change. A new designation applies to what you spend after it is approved.
Don't
- Do not claim a housing allowance retroactively. The designation has to come before the payment, and no vote in December can reach back over months already paid.
- Do not rely on a verbal agreement, however sure everyone is that it was decided. If it is not in the minutes or the contract, it is not documented.
- Do not assume a mid-year increase covers the earlier part of the year. It only ever applies going forward.
Working out the amount
Do
- Take the least of three: the amount your church designated in advance, what you actually spent on housing, and the fair rental value of your home furnished, plus utilities.
- Estimate fair rental value as what a stranger would pay to rent your home as it stands today, furnished, with utilities included. Comparable local listings, a local agent, or recent rents for similar homes are the usual ways in.
- Build a cushion into next year's estimate. Around 10 percent is common, and it is what covers the water heater nobody planned for. The estimator in MHA Tracker uses 10 percent by default.
- Revisit the number every year, and after anything that changes your housing: a move, a purchase, a major repair, a change in the size of your family.
- Estimate and request the amount yourself. You know your housing costs and your church does not, so the figure should come from you even though the church is the one that formally designates it.
Don't
- Do not treat the designated amount as the answer. It is a ceiling, and only what you actually spend comes out of your taxable income.
- Do not add planned furniture or future improvements to fair rental value. It is the value of the home as it stands, not as you hope it will be.
- Do not ask for more than reasonable compensation for your ministerial work. A housing allowance larger than the rest of your pay invites questions you would rather not answer.
- Do not under-request either. A designation set too low quietly costs you the benefit on money you really did spend, and the shortfall cannot be repaired later in the year.
Which costs count
Do
- Count what you actually paid, from your own pocket, during the year.
- Count the ordinary costs of providing a home, from the mortgage or the rent down to the light bulbs.
Don't
- Do not count expenses for any home but the one you live in. A second home, a vacation home, a rental property, a business property, or a farm does not qualify.
- Do not count the part of a repair that somebody else paid for. If insurance covered a new roof, your deductible is the housing expense, not the whole project.
- Do not count a home equity loan payment unless the borrowed money went to housing. Remodeling the kitchen qualifies. Paying tuition does not.
Usually counts
- Rent, or mortgage payments of principal and interest
- Down payment and closing costs on a home purchase
- Property taxes, and homeowners or renters insurance
- Homeowners association or condominium dues
- Electricity, gas, water, sewer, and trash collection
- Basic home telephone service and internet
- Cable television
- Furniture and appliances, whether bought, rented, or repaired
- Household goods such as dishes, cookware, linens, towels, curtains, and rugs
- Repairs, maintenance, and improvements
- Decorating, including paint, wallpaper, flooring, and ceiling fans
- Lawn care, snow removal, and pest control
- Cleaning supplies and carpet cleaning
Does not count
- Groceries, food, and meals
- Toiletries, cosmetics, and personal care
- Clothing and dry cleaning
- Domestic help and housekeeping labor
- Gym memberships and fitness costs
- Personal gifts
- Paper products such as tissues and paper towels
- Pet food and veterinary bills
- Car payments, fuel, and other transportation
- Health insurance and medical bills
- Life insurance premiums
- Childcare and education
The line that clergy tax writers draw on utilities and devices is whether the thing is attached to the home. A landline is, and it is generally treated as qualifying. Cell phone service is not, and generally is not. Newer categories are genuinely unsettled: the IRS has not addressed streaming services, and no ruling covers portable devices. Where a category is unsettled, the cautious course is to leave it out of your total and ask a tax professional who works with ministers.
Reporting it on your return
Do
- Report any excess allowance as income on Form 1040, line 1h, marked “Excess allowance”. That is the part your church designated and you did not spend.
- Include the housing allowance when you work out self-employment tax on Schedule SE, unless you hold an approved exemption on Form 4361 or Form 4029.
- Deduct mortgage interest and property taxes on Schedule A if you itemize, even though you paid them with money that was never taxed. Publication 517 says this plainly.
Don't
- Do not expect the allowance in Box 1 of your W-2. Your church should leave it out, although it often appears in Box 14 for information.
- Do not confuse an exclusion with a deduction. An exclusion is never reported as income in the first place. A deduction is reported and then subtracted.
- Do not forget self-employment tax. This is the surprise that catches the most ministers: the allowance is out of income tax and still inside SECA.
- Do not assume consumer tax software handles a clergy return correctly. Several popular programs need the housing allowance and the self-employment tax entered by hand.
Whether you qualify at all
Do
- Confirm both halves. You need to be ordained, commissioned, or licensed by a recognized religious body, and you need to be performing ministerial duties such as conducting worship or administering the sacraments.
- Know that a retired minister can still exclude an allowance designated out of a church retirement plan distribution.
Don't
- Do not assume the job title is enough. “Minister” on a business card is not a credential, and the duties have to match.
- Do not assume a student pastor or an intern qualifies. Without ordination, commissioning, or licensing, the allowance is not available yet.
- Do not worry about W-2 against 1099. Employment status does not decide eligibility. Ministerial service does.
- Do not designate an allowance out of secular pay. If you are bi-vocational, only the compensation for ministerial services can carry it, although you may designate that income and live on the other.
- Do not claim one at all if your church cannot pay you. With no ministerial income there is nothing to designate.
Choosing how much to ask for
Do
- Look at the whole picture before maximizing. A larger exclusion lowers your taxable income, and some benefits are calculated from that number.
- Model it both ways with your tax professional if you have children and a modest income, because a larger allowance can reduce the Additional Child Tax Credit.
- Keep retirement contributions in mind. Excluding more income can limit what you are allowed to put into tax-advantaged retirement accounts.
Don't
- Do not set it once and forget it. A designation that made sense three years ago is usually wrong now.
- Do not assume bigger is always better. Overestimating leaves you owing income tax on the excess, and possibly penalties and interest if your quarterly estimates were built on it.