Housing allowance for pastors: Definition & tax implications

As a pastor, you play a critical role in caring for and shepherding your flock. And that includes an obligation to guide your congregation with finances. You bear the responsibility of ensuring that the church maximizes its financial resources while also fairly compensating its many staff members—including you.

One important nuance of church finances and pastoral compensation is the minister’s housing allowance. This benefit can get confusing with its specific requirements and many tax implications. Let’s break down what the housing allowance means for you.

A housing allowance for clergy or pastors is a portion of your salary designated for housing expenses. To be used properly, it must be spent on things like rent, mortgage, home insurance or furnishings (we'll provide a full list later). In some cases, a housing allowance is simply the rent-free use of church property. This non-monetary compensation is how the housing allowance started to take form in tax laws. Churches that don't have property available for pastors' living arrangements still may want to offer to help. They can account for this in their pastor's compensation package by including an allowance to pay for housing.

One benefit of the minister’s housing allowance is that you pay income tax on less of your compensation. That's because the IRS lets pastors designate housing allowances as an income tax exclusion since it's money that's meant to pay for a job-related benefit rather than being take-home pay. It's important to note, though, that while this housing allowance isn't taxed for the pastor's income purposes, either the church (as your employer) or you (as a self-employed person) still must pay employment taxes on this amount.

To take advantage of the housing allowance exclusion, you must have details about the allowance in writing before you're paid. Typically, this is done with an employment contract or payroll records that clearly show the amount of your income that has been designated as housing allowance. You don't need to produce this documentation when you file taxes, but you'll need them if you're audited.

A housing allowance cannot be added in hindsight, nor can it exceed your "fair pay" for work as a pastor. For example, let's say the fair pay for your pastoral services is $3,000 per month. If the church also gives you a housing allowance, it has to be less than that. Your total compensation, then, might be set at $5,000 per month with up to $2,000 per month for housing expenses.

When you file income taxes, you'll identify all housing expenses up to the allowance amount and exclude them from the total compensation you receive. If you were paid the full housing allowance in advance and end up spending less, you’ll have to enter “Excess allowance” and declare the remainder as taxable income on Form 1040, Line 1h. You can spend more than the allowance, but you won't be able to exclude anything beyond the designated allowance amount from your income.

How do different tax laws affect you and your congregation?

Let's break down tax implications and answer your questions.

Go to our Tax Tips for Pastors Guide

The first hurdle is distinguishing who's eligible for a church housing allowance. The IRS requires you to be "licensed, ordained or commissioned" as a ministry leader involved in direct ministry. While this is broad enough to cover most ministers, reverends, priests, pastors and clergy, it's wise to talk to a tax professional to know exactly when a housing allowance can be offered.

A housing allowance isn't intended to be a write-off for anything beyond the actual costs of a pastor's primary residence, so the IRS has specific regulations for how much a housing allowance can be. It must be the least amount among these three options:

1. Amount the church allocated as a housing allowance. This may not cover the entire cost of housing in your area, but the amount you take off your taxable income cannot be higher than this designated amount. 

2. Total housing expenses actually incurred. This can go beyond actual mortgage payment or rent cost to include utilities, furnishings and taxes on the primary residence, but you cannot designate any income spent on non-housing expenses as an allowance. 

3. Fair market rental value of a furnished home in the area. Even if you spend a significant amount on housing, this cap can prevent pastors from excluding an excessive amount from their income for a housing allowance. 

These ways to calculate a housing allowance for pastors aim to set reasonable guidelines. While it might be nice to be able to treat a large portion of your compensation as a housing allowance, it needs to reflect the value of the housing you have and need.

When deciding what is a fair housing allowance, it's standard to consider average costs for:

• Rent or mortgage 

• Property taxes 

• Insurance coverage 

• Homeowner association fees 

• Utilities 

• Furnishings 

• Repairs and improvements 

• Maintenance and cleaning 

Using the allowance for upgrades, furnishings or services beyond what's necessary or average can be a gray area, so it's best to consult with a tax professional.

Keep in mind that whatever amount is set for the housing allowance, it can't be altered in that year even if prices go up. In future years, you can plan to adjust the allowance at the start of the year, but it always should be based on anticipation of annual cost increases rather than retroactively making up for other allowances being too low in previous years.

Approaching a housing allowance can be a lot like setting a budget. There's no requirement to spend a certain amount on rent vs. utilities, but ballparking categories can guide you to determine what you may need.

Let's say you’re given a housing allowance of up to $2,500 per month. You might break it down like this:

• Rent or mortgage: $1,500 

• Property taxes: $300 

• Renter or homeowner insurance: $150 

• Utilities: $300 

• Repairs or new/replacement furnishings: $150 

• Lawn care/snow removal: $100 

Perhaps one month, you don't use anything for repairs, furnishings or lawn care. You could keep that as miscellaneous money to use the following month in case your HVAC unexpectedly breaks. Ultimately, expenses for a pastor's housing allowance can be spread across the whole year in any category, but to keep from spending too much or too little, keeping a budget can help.

From understanding tax benefits for pastors to figuring out if now is the right time for a church loan, many financial considerations go into leading your congregation, and shepherding those in it to be wise stewards of all they’ve been given. This includes providing leadership around a variety of topics, including giving generously and forging a path of financial stability.

Working with a local Thrivent financial advisor who understands church finances—as well as a trusted tax professional—can help you reach your goals, and in turn, provide financial clarity and guidance to those you lead.