For many pastors, the housing allowance is one of the most valuable tax benefits of ministry. What a lot of ministers don’t realize is that the benefit doesn’t have to end on the day they retire. Under long-standing IRS rulings, a retired minister may be able to exclude part, or even all, of his or her church retirement income from federal income tax as a housing allowance. Here’s how it works and what to do before the new year.
The basic rule
Section 107 of the Internal Revenue Code allows a minister to exclude from gross income a rental or housing allowance paid as part of compensation for ministerial services. IRS Publication 517 confirms that this applies in retirement as well: a retired minister may exclude the part of his or her pension that was designated as a rental allowance.
Two IRS revenue rulings set out how this works. Revenue Ruling 63-156 recognized that a denomination’s governing body may establish a retirement fund and designate a portion of a retired minister’s pension as a housing (parsonage) allowance. Revenue Ruling 75-22 extended that treatment to a national church body that controls a retirement fund, treating the fund as acting on behalf of the local churches the minister served.
Who designates the allowance?
A working pastor’s housing allowance is designated by the church board or congregation. In retirement, the designation usually comes from the denominational pension board or church retirement plan that pays the benefit. Many denominational plans, including 403(b)(9) church retirement plans, offer a formal designation process. Some, such as GuideStone, allow retired ministers to request that up to 100% of their retirement income be designated as housing allowance.
If your plan has a designation procedure, follow it each year as instructed, and keep a copy of the designation with your tax records. Like any housing allowance, the designation must be made in advance; it can’t be applied retroactively to income you have already received.
How much can you exclude?
A designation of 100% doesn’t mean 100% is tax-free. The same limits that apply to active ministers apply in retirement. If you own your home, the excludable amount is the smallest of:
- The amount officially designated as a housing allowance;
- The amount you actually spent to provide a home during the year; and
- The fair rental value of the home, including furnishings, plus the cost of utilities.
Housing costs generally include mortgage or rent payments, property taxes, homeowner’s insurance, utilities, furnishings, and repairs. Any amount designated above the lowest of these limits must be reported as taxable income. That is why it’s worth keeping a simple log of your housing expenses throughout the year, just as you did while you were serving a congregation.
Good news on self-employment tax
During active ministry, the housing allowance is excluded from income tax but still subject to self-employment tax. In retirement, the picture is better. IRS Publication 517 lists pension payments or retirement allowances received for past ministerial services, and a parsonage allowance provided after retirement, among the amounts that are not included in net earnings from self-employment. In other words, a properly designated retirement housing allowance is generally free of both income tax (within the limits above) and SECA.
Watch out for IRA rollovers
This is one of the most common and costly mistakes we see. The housing allowance in retirement depends on the payments coming from a church or denominational plan that can make the designation. Once retirement savings are rolled over into a regular IRA, distributions from the IRA are generally no longer eligible for housing allowance treatment, because an IRA custodian isn’t a church body able to designate a housing allowance. Before moving money out of your denomination’s plan, talk with a clergy tax professional about what you might give up.
What about surviving spouses?
The housing exclusion is tied to ministerial services. IRS Publication 517 notes that a surviving spouse generally can’t exclude the rental value of church-provided housing unless it’s for ministerial services the spouse performs or performed. If you are planning with your spouse, ask how survivor benefits from your plan will be taxed so there are no surprises later.
Steps to take before January
- Contact your plan administrator to confirm whether a housing allowance designation is available and how to request it for 2027.
- Estimate your 2027 housing costs, including any planned repairs or new furnishings, and compare them with your home’s fair rental value.
- Keep good records of what you actually spend, along with your plan’s designation letter.
- Get advice before any rollover or change in how you take retirement distributions.
Retirement after years of faithful service should be a season of rest. A little planning now can help make sure your housing allowance continues to serve you well.
If you need guidance that is tailored specifically to your unique situation, we encourage you to connect directly with Pro Advisor Support. Their experienced team specializes in assisting clergy and church organizations with complex tax, payroll, bookkeeping, and HR matters. Whether you have detailed questions about compliance, deductions, or planning strategies, they can provide expert advice and walk you through the next steps with clarity and confidence.
Clergy Financial Resources
Tax | Payroll | Bookkeeping | HR | Consulting
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421.0101
This article provides general information and is not tax or legal advice. Tax law changes frequently, and every minister’s situation is different. Please consult a qualified tax professional before acting on this information.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
For more information or if you need additional assistance, please use the contact information below.
Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
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