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Housing Allowance Tax Savings

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
(Source: The 2018 Compensation Handbook for Church Staff, published by Christianity Today’s Church Law & Tax Team)

“The I.R.S. examined 1.4 million individual income tax returns in 2010, about 1 percent of the total number filed. In 2018, the latest year with available data when Republicans started making these claims, audits decreased to 370,000, or about 0.2 percent… The budget office estimated increasing I.R.S. funding would return enforcement to its 2010 levels. Doing so would result in about 1.2 million more audits; of those, 583,000 would target people making less than $75,000.”

The New York Times, “Fact-Checking the Misleading Claim About 87,000 Tax Agents”, November 6, 2022

“…For example, you educate believers on national issues that are central to their belief in the Bible as the inerrant Word of God. Specifically, you educate Christians on what the bible says in areas where they can be instrumental including the areas of sanctity of life, the definition of marriage, biblical justice, freedom of speech, defense, and borders and immigration, U.S. and Israel relations. The bible teachings are typically affiliated with the Republican party and candidates. This disqualifies you from exemption under IRC Section 501(c)(3).”

Stephen A. Martin, IRS Director, Exempt Organizations, Rulings and Agreements