A licensed, commissioned, or ordained minister who performs ministerial services as an employee may be able to exclude from gross income the fair rental value of a home provided as part of compensation (a parsonage) or a housing allowance provided as compensation if it is used to rent or otherwise provide a home. A minister who is furnished a parsonage may exclude from gross income the fair rental value of the parsonage, including utilities.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it’s used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, and other expenses directly relating to providing a home. The amount excluded can’t be more than reasonable compensation for the minister’s services.
If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses directly relating to providing the home, you must include the amount of the excess in income.
In order to be able to exclude the housing allowance from income, the minister’s employing organization must officially designate the housing allowance as such before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable only for income tax purposes. The minister must include the amount of the fair rental value of a parsonage or the housing allowance for social security coverage purposes.
When reporting gross income for federal income tax purposes, clergy can exclude a portion of their income designated by their church or salary paying unit as a “housing allowance” under Section 107 of the Internal Revenue Code (IRC). To be excludible, amounts designated as a housing allowance must be used to provide housing. In addition, there are limits on the amount that can be excluded. Note that a portion of the income of virtually all wage earners is used to pay for housing. What makes the housing allowance unique is that some of the income used to provide housing can be excluded from gross income for federal income tax purposes.
Also, clergy who live in a parsonage provided by the church do not have to report the fair rental value of the parsonage as income. (Note this “free” housing provided to clergy generally would be taxable compensation for lay employees.) The housing allowance is sometimes called a “parsonage allowance” for clergy who are provided with a parsonage and a “rental allowance” for clergy who rent their home.
Example: A church pays its pastor an annual salary of $35,000. In addition, she is provided the rent-free use of a furnished home owned by the church. The parsonage’s annual fair rental value is $10,000. The church and pastor do not have to report the $10,000 fair rental value as income for federal income tax purposes. However, the $10,000 is subject to SECA tax.
Clergy Financial Resources offers several options to help you with your tax questions or filing. Pro Advisor below is a great option to get started.
- Pro Advisor I Tax Support
This support service provides you comprehensive answers to your notice questions. This support service is available at a flat rate of $45.00 for each 30-minutes session.
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
Fax: (888) 876-5101