Under 26 U.S.C. § 107, a minister of the gospel is allowed to exclude from gross income: (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities. For a more detailed explanation, read IRS Publication 517 “Social Security and Other Information for Members of the Clergy and Religious Workers”
A Housing Allowance offers ordained, commissioned, or licensed Ministers and Religious Leaders (Exodus 18:21-22; Deuteronomy 1:13-15; Acts 6:2-6; Ephesians 4:11; 1 Corinthians 12:28; 1 Timothy 3:1-13) the ability to deduct a portion of their gross income they spend on housing costs from their federal income taxes. Housing allowances can include all big-ticket housing expenses, such as mortgage payments, rent, utilities, home insurance, home improvements, and so much more. Furthermore, this housing allowance can extend into a servant-leader’s retirement plan.
The amount that a minister can utilize for their housing allowance varies depending on their housing circumstances. All expenses are considered proactively. Servant-leaders can build in a housing allowance for the time they served before the next budget year.
What Expenses Can Be Used to Justify the Housing Allowance Exclusion?
Generally, any expense to provide or maintain the home can be used to justify the housing exclusion. Regulations do specifically state that expenses for groceries, paper products, personal toiletries, personal clothing, and maid service cannot be used. Ministers may legitimately include the following:
- Rent, principal payments, or down payments plus the cost of buying the home;
- Taxes and mortgage interest (even if these are includable as itemized deductions);
- Utilities (heat, electric, basic telephone, water, etc.);
- The purchase of furniture, appliances, dishes and cookware, and decorating items including rugs, pictures, curtains, bedspreads, sheets, towels, etc.;
- Insurance on the home and contents; and
- Miscellaneous expenses including improvements, repairs and upkeep of the home and its contents, snow removal, lawn mowing, light bulbs, cleaning supplies, etc.
You can designate up to 100% of a minister’s salary for a housing allowance
The IRS does not place a limit on how much of a minister’s compensation may be designated as a housing allowance by the employing church. In a few instances, as much as 100% of the compensation may be designated.
Experts in church tax law such as Richard Hammar J.D., LL.M, CPA states in his book Church & Clergy Tax Guide, “No limit has been placed on the amount of a minister’s compensation that can be designated by a church as a housing allowance (assuming that the amount is reasonable).”
CPA Bill O’Connell, founder of Wisdom Over Wealth, stated, “in certain circumstances designating all salary as housing allowance is not only acceptable but encouraged”