Information on Housing Allowances for Pastors
Ministers can benefit from a tax-exempt housing allowance. All expenses for housing including furniture and maintenance can be legally deducted if you plan in advance and provide adequate record-keeping. While a minister's housing allowance is exempt from federal and state income taxes, it is still subject to self-employment tax.
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Eligible Ministers
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Not every religious employee is eligible for a tax-exempt housing allowance. A minister is defined by the IRS as a person who is a "duly ordained, commissioned, or licensed minister of a church." Beyond receiving credentials from a religious institution, a minister is one who conducts services, administers sacraments and maintains the religious organization. Seminary faculty also qualifies.
Legal Deductions
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Ministers are allowed to claim all of the expenses for a residence. This includes mortgage or rent payments, homeowner's insurance premiums, property taxes, utilities, furnishings, flooring, pictures, window coverings, landscaping, tools, repairs, remodeling, cleaning supplies and anything else used to maintain or furnish the residence. Basically everything on the property can be claimed except for food, clothing or maid service.
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Plan Ahead
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A minister's housing allowance must be set once per year and recorded in the official minutes of the church board or advisory body. You can claim any amount up to 100 percent of your salary, but not exceeding your salary. Plan in advance by setting your housing allowance at a greater amount than what you estimate using. Include any major expenses like home improvements or down payments. If at tax time, you have not used all of your housing allowance for housing expenses, you can pay income tax on the difference at that time. If your housing expenses exceed your housing allowance, you cannot claim them at tax time. It's more advantageous to set your housing allowance too high rather than too low.
Record Keeping
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Like other deductions, the IRS requires proof of claimed housing expenses through written receipts. Mortgage statements, rental records and store receipts should be kept together to offer evidence of your housing expenses and to expedite your tax preparation. If you use accounting software for your personal expenses, it is helpful to create a category exclusively for housing expenses. The IRS simply wants a total amount of expenses. It's not necessary to itemize your housing expenses, but it is necessary to have documented proof of each expense.
Buying cleaning supplies, light bulbs, furnace filters and other maintenance items in bulk can help with record-keeping. Rather than saving many receipts throughout the year, you will have fewer receipts to handle.
Tax Time
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While you are not required to pay income tax on your housing allowance, you must keep records of your stated housing allowance and your actual housing expenses. Typically, your housing allowance is reported to the IRS on your W-2 form from the church. You must include any unused portion of your housing allowance under wages and salaries on Form 1040.
Ministers who are homeowners can claim mortgage interest and property taxes as part of their housing allowance. Ministers can also deduct mortgage interest and property taxes from their income tax as well. This is a legal "double deduction" for eligible ministers.
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