|Clergy Tax Facts|
Clergy Housing/Parsonage/Manse Allowance
The housing allowance exclusion comes from Code section 107. This provision was first included in the tax code in 1921. It was revised in 1954 and again in 2002.
When there is a housing allowance, the pastor determines the amount of compensation to be set aside
for housing allowance and submits it to the church finance committee. The committee must annually include the amount to be designated for housing in the committee minutes prior to the beginning of the new tax year. The pastor assumes full responsibility for complying with IRS definitions of "cost to provide a house."
When a parsonage is provided for the pastor, all utility costs and repairs are paid by the church. It is
recommended that congregations with a parsonage also provide for a housing equity allowance. The
purpose of this allowance is to provide financial resources for a pastor to purchase housing upon retirement,
or when a new call or appointment requires purchase of a home.
When there is a parsonage, it is recommended that a furnishing allowance also be provided. This is
nontaxable income to be used for household expenses. The church finance committee must designate this amount
A housing allowance paid to you as part of your salary is not income to the extent you use it, in the year received, to maintain and furnish a home. The amount of the housing allowance that you can exclude from your income cannot be more than the reasonable compensation for your services as a minister. The church or organization that employs you must officially designate the payment as a housing allowance before the payment is made. A definite amount must be designated; the amount of the housing allowance cannot be determined at a later date. If no part has been officially designated, you must include your total salary in your income.
Expenses of providing a home include rent, house payments, furniture payments, costs for a garage, and utilities, but not limited to. They do not include the cost of food, personal items, personal gifts or maid service, are eligible under IRC 107. This housing exclusion is only available for federal tax purposes and is subject to social security tax.
This is one of the greatest benefits available to clergy today. A housing allowance paid is not included in gross income to the extent it is used to furnish and maintain a home in the year received. Unfortunately, many churches fail to designate a portion of their minister's compensation as housing or parsonage/manse allowance, and thereby deprive him/her of a very important tax benefit.
Although a housing allowance may be used to purchase a home, it may not be used to shelter's a minister's entire salary from tax. The IRS has ruled that the housing allowance exclusion is limited to an amount equal to the fair rental value of a home, including furnishings and appurtenances such as a garage, plus the cost of utilities. To the extent that a greater amount is designated as a housing allowance, the designation will be ineffectual, even if the excess amount is actually spent on a down payment for the purchase of a home.
A minister who owns his own home and does not incur any costs for rent, mortgage, insurance, property taxes, etc., is not entitled to exclude the amount of his housing allowance.
If you own your home and you receive a housing allowance as part of your pay, the exclusion cannot be more than the smaller of the following:
- The amount actually used to provide a home,
- The amount officially designated (in advance of payment) as a rental or housing allowance,
- The fair market rental value of the home, including furnishings, utilities, garage, etc., or
- An amount which represents reasonable pay for your services as a minister.
Have you paid off your mortgage?
You may be able to exclude from your gross income other eligible housing expenses directly related to providing a home. Qualifying expenses include utilities, repairs, improvements, furnishings, property taxes and insurance. Any additional mortgage that does not apply to improvements on your home cannot be excluded from gross income.
Do you have a home equity loan?
The percentage of a home equity loan used to make improvements or remodel your residence is eligible to apply toward housing expenses. For example, suppose you receive a $50,000 home equity loan and use $25,000 of the loan for qualifying housing expenses such as repairs or improvements. Because $25,000 is 50% of the total loan amount, you can claim 50% of your loan payments as eligible housing expenses.
Have you refinanced your mortgage?
If you used some of the mortgage proceeds for eligible housing expenses, the percentage of the loan used to pay for qualifying housing expenses (like repairs or remodeling) is eligible to apply toward housing expenses. For example, suppose your new mortgage amount is $250,000, which includes your former mortgage amount of $50,000 plus $40,000 to be used for repairs or improvements. Because $90,000 is 36% of the total loan amount, 36% of your loan payments can be considered eligible housing expenses.
Parsonage / Manse
A parsonage/manse allowance paid to you as part of your salary is not income to the extent you use it, in the year received, to maintain and furnish a parsonage/manse. The church or organization that employs you must officially designate the payment as a parsonage/manse allowance before the payment is made. A definite amount must be designated; the amount of the parsonage/manse allowance cannot be determined at a later date. If no part has been officially designated, you must include your total salary in your income.
The major tax break granted to members of the clergy is the income exclusion for rental value of parsonages. Ministers may totally exclude the value of a parsonage that is provided them in kind by the congregation. But, where a cash, parsonage, or manse allowance is paid, a minister must include in income the amount that he has not used during the tax year to pay rent or otherwise maintain and furnish a home. Fair rental value of the parsonage, utilities paid by the church, parsonage, utilities, and furnishing allowance is subject to social security tax.
If housing is provided to you by your congregation, the parsonage or manse exclusion cannot be more than what is reasonable pay for your services, and is limited to the fair market rental value (including furnishings, utilities, garage, etc.) of the home. This FRV limitation generally does not come into play when a home is provided.
FRV (Fair Rental Value): Should be determined objectively and between unrelated parties, what it would cost to rent a comparable home (including furnishings and utilities) in a similar location. The fair rental value of a parsonage/manse is determined for social security purposes only. This should be reasonable, but conservative.
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Clergy should not view this information as a substitute for professional advice. This information is subject to change, due to administrative rulings or interpretations and or technical corrections by the IRS. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.