A Housing Allowance offers ordained ministers 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 minister’s retirement plan.
The amount that a religious leader can utilize for their housing allowance varies depending on their housing circumstances. All expenses are considered proactively. Ministers 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.
For qualifying ministers, the housing allowance is an invaluable tax benefit—in fact, according to attorney and Church Law & Tax senior editor Richard Hammar, it’s “the most important tax benefit available to ministers.”
In October 2017, however, a federal judge in Wisconsin ruled the ministerial housing allowance was unconstitutional, reasoning that it showed a preference for religion. The parsonage allowance, a separate benefit, was not affected by the decision.
The federal court’s decision regarding the housing allowance is currently being appealed to the US Court of Appeals for the Seventh Circuit. Were the Seventh Circuit to affirm the lower court’s decision, clergy in Illinois, Indiana, and Wisconsin would be immediately affected. There are scenarios in which such a decision also could get applied nationally.
It’s Valuable—Especially for Smaller Churches
The median housing allowance for full-time senior pastors breaks down as follows by church income:
- $250,000 or less per year: $20,000 housing allowance
- $251,000 to $500,000 per year: $24,000 housing allowance
- $501,000 to $750,000 per year: $27,500 housing allowance