04.4 - Clergy Compensation - Housing Allowances
by Scott Selman
But the one who hears and does not act is like a man who built a house on the ground without a foundation.
Luke 6:49 (NRSV)
The clergy housing allowance provision of Section 107 of the Internal Revenue Code is perhaps the most important vehicle available to clergy for reducing individual income subject to Federal income taxes. The housing allowance provision enables clergy to exclude (rather than deduct) from taxable income a portion of the pastor’s income used to provide housing.
Clergy housing allowances are referred to by many names, including housing allowance, utilities allowance, utilities/housing allowance, parsonage allowance, rental allowance, housing allowance in lieu of parsonage, and possibly others. Each of these terms is subject to the provisions of Section 107. Housing allowances for incidental housing expenses and utilities expenses are commonly provided in addition to the rent-free use of a local church parsonage.
The tradition of the North Alabama Conference is for local churches to designate one or both of the following housing allowances:
- A housing/utilities allowance is provided for incidental housing expenses and utilities expenses paid by the pastor. Incidental housing expenses include personal expenses for furnishings, maintenance, decorations, insurance, and other costs, but do not include rental or mortgage payments. Housing/utilities allowances should be determined based on consultations with the pastor about possible incidental housing expenses and reference to historical data concerning the cost of utilities.
- A housing in lieu of parsonage allowance is provided only for pastors that do not live rent-free in a church-owned parsonage and should be based on reasonable estimates of the local cost of housing.
Housing Allowance Resolution
The local church must approve the pastor’s specific housing allowance in advance. This is usually achieved by having the charge conference or local church administrative council adopt a housing allowance resolution prior to the beginning of the period covered by the allowance. Churches may wish to include language in the resolution that allows the resolution to remain in effect for future periods unless subsequently changed.
Sample wording to include in applicable minutes documenting a local church’s consideration and approval of the pastor’s housing allowance is presented below:
The charge conference (or administrative council) of Local United Methodist Church on the _____ day of __________, 20__, on motion duly made and seconded, adopted the following resolution:
“Rev. _______________ (first and last name) shall receive a total annual housing allowance of $ __________, including $__________ for housing/utilities expenses and $__________ for housing in lieu of parsonage expenses (if applicable), for the year _____ and all future years, unless otherwise provided, in addition to the rent-free use of the residence located at ____________________ for the same period (if applicable) so long as he (or she) is the pastor of Local United Methodist Church.”
In determining the amount of an allowance, consideration should be given to the types of housing expenses the pastor will likely incur. Does the pastor live in his or her own home or live in a church-owned parsonage? Does the pastor pay the utilities or does the church pay the utilities? Will the pastor incur incidental housing expenses in order to provide and maintain a residence?
Housing Allowance Limitations
There are three limitations that apply to the exclusion of housing allowances from Federal taxable income. The amount of income that may be excluded from the pastor’s taxable income is limited to the lesser of:
- the pastor’s specific housing allowance as approved by the local church,
- the actual total housing expenses incurred, or
- the fair rental value of the property, including furnishings and utilities.
Actual housing expenses are the actual out-of-pocket expenses paid by the pastor to provide and maintain a residence. Pastors should keep detailed records of expenses associated with housing/utilities allowances and housing in lieu of parsonage allowances, including receipts, in order to support their housing allowance exclusion in the event of an audit by the Internal Revenue Service (IRS).
The fair rental value of the pastor’s residential property is determined based on the local real estate market. If the pastor rents his or her home, then the rent paid is conclusive as to the fair rental value, unless adjustments are necessary for consideration of furnishings and utilities. If the pastor lives in a parsonage or owns his or her home, then references can be made to local real estate listings for guidance. Also, a local real estate agent may be consulted and asked to prepare a statement for the church as to the estimated fair rental value (including furnishings and utilities) of the pastor’s parsonage or residence.
Other Considerations
- Clergy housing allowances may not be excluded from income subject to social security taxes. In addition, the fair rental value of a church-owned parsonage provided to the pastor rent-free is subject to social security taxes.
- Any unused portion of a clergy housing allowance is taxable to the pastor. Unused amounts may be reported by reducing the amount of the allowance excluded from the pastor’s Form W-2 at the end of the year or by reporting the unused amount as “other income” on the pastor’s tax return.
- Housing allowances apply only to the pastor’s primary residence. The IRS does not allow exclusion of income for housing expenses incurred on two different homes at the same time.
- Clergy couples living in the same home may not exclude income for housing expenses on a combined basis greater than amounts appropriate for their joint residence.
- Only persons who are considered a “minister of the gospel” in accordance with Section 107 of the Internal Revenue Code are eligible for the clergy housing allowance exclusion. This is an important consideration for ordained clergy serving in administrative positions with local churches or extension ministries.
- United Methodist deacons may be eligible for housing allowances if they are “ministers of the gospel” for Federal income tax purposes.
- Part-time local pastors and clergy serving in less-than-full-time appointments are eligible for housing allowances proportional to housing allowances for comparable full-time appointments.
- Pensions paid by the General Board of Pension and Health Benefits are designated as housing allowances for retired clergy by the annual conference. However, these payments do not qualify as a housing allowance for surviving spouses of retired clergy.
- The IRS does not require local churches to report clergy housing allowances on the pastor’s Form W-2, but housing allowances may be reported in Box 14 of Form W-2.
Additional information about clergy housing allowances, including a list of housing allowance questions and answers, is provided in the General Council on Finance and Administration Tax Packet at www.gcfa.org/tax-packet.