What happens if I spend less than my designated housing allowance?
Reviewed by Paul McWilliams, CKA®, financial advisor to pastors, churches, and ministry organizations.
Any designated allowance you did not actually spend on qualifying housing expenses (or that exceeds your home's fair rental value) is taxable income, and you, not the church, are responsible for reporting it.
Here is how it works. Your church excludes the full designated allowance from Box 1 of your W-2, because it has no way of knowing how much you actually spent. At tax time, you compare the designation to your actual expenses and to fair rental value. If the designation is the largest of the three, the difference is "excess allowance."
Per IRS Publication 517, you report the excess on Form 1040 (or 1040-SR), line 1h ("Other earned income"), and write "Excess allowance" and the amount on the dotted line next to it. Tax software typically has a clergy section that handles this entry for you.
Example: your church designated $28,000, but you only spent $22,000 on housing and your fair rental value was higher than both. You exclude $22,000 and report $6,000 as taxable wages on line 1h.
Two practical notes:
- The allowance must be used in the year it is received; you cannot carry unused allowance into next year.
- There is no penalty for designating a bit high and reporting the excess; it is far better than designating too low, which cannot be fixed retroactively.