Ministers can claim a portion of income tax-free as a housing allowance. But, you must follow specific guidelines and then report and maintain the allowance. Reporting and maintenance will be covered in next week’s post as Part 2.
The rules regarding housing allowances are:
- Housing (also called parsonage or rental) allowance for ministers is excludable from gross income for income tax purposes, but is not excludable from the self-employment tax which affects ministers.
- The amount excludable is the least of these three amounts:
- Fair market rental value (including furniture, utilities, garage, etc.)
- Agreed upon/designated allowance
- Actual allowable costs incurred
- Whether renting or owning, the exclusion amount cannot be more than what is considered reasonable pay for ministerial services.
- The amount of allowance that is not eligible for exclusion is considered part of wages for income tax purposes (Form 1040, line 7).
Housing allowances for ministers are one of the red flags for the IRS. Failure to follow the rules exactly can result in taxes, penalties and interest.