The housing allowance. It’s one of the biggest benefits for ministers, but not everyone knows how to take advantage of it. Before the beginning of the calendar year, ministers should make sure they have a board resolution from the consistory stating the dollar amount of their salary that will be allotted for housing allowance.
Before I give you an example of what that might look like, a quick primer could be helpful for how to calculate your housing allowance, so that you can receive the maximum tax benefit available to you while staying within the bounds of the law. For new clergy, setting your housing allowance can feel confusing and daunting, especially because there is a subjective element to it. Additionally, many classis and regional synod minimum salary guidelines use percentages to describe housing allowance rates. They are helpful for setting a salary, but are not relevant when you’re actually doing your taxes. For tax purposes, your housing allowance will be based on your unique circumstances, and I’m going to do my best to make it as simple as possible to understand in this article.
Determine your fair rental value
I’ll start with the part I like the least: determining the fair rental value of your home. I like numbers because they are objective. I don’t like determining the fair rental value of my home because it’s subjective. The idea is that you need to figure out what the annual rental rate for your home would be, if someone were to be renting it. While this is a hypothetical number, there are ways of getting the most accurate figure possible. One way is to go to Zillow and find rental homes close to yours that have similar specs. Another option would be to ask a realtor for help determining what they would try to rent your home for. You can even request a formal letter from them, justifying the amount, so that you have documentation should you ever need it.
Why do this step first? This number will be the maximum amount you can claim as housing allowance. For example, if you were to buy a home this year, and put down a huge down payment, if the amount you spent exceeds the fair rental value, you can only claim up to the lesser of the two amounts.
Parsonage friends, I’m not forgetting about you. If you are living in a parsonage, you also need to know the fair rental value of your home. That number likely won’t have as much impact for calculating your housing allowance, but unfortunately it will be calculated in your self-employment taxes (which is a subject for another day).
Determine your actual expenses
Now that you know your fair rental value, you know the maximum amount you can claim—but that doesn’t necessarily mean you can claim that full amount on your tax return. If you own a home, it’s time to calculate what you actually spend annually, including mortgage, taxes, property maintenance, and home improvements. This would also be a good time to plan ahead if there are any home improvement projects you would like to do in the coming year, and factor those into the budget as well. Ideally, you’d like to get as close as possible to your fair rental value, for the full tax advantage. That will be possible for some, and not for others—everyone’s situation is different.
If you live in a parsonage, the amount you will be able to claim is likely much less. When I lived in a parsonage, in addition to the housing that was provided me, the church directly paid for the utilities, lawn care, and major property upkeep. So other than a few elective utilities and some redecorating, the amount we could claim was much lower than it is now that we’re homeowners.
If you’re a minister in your first call, and are not sure what your actual expenses will be, I recommend being conservative in your estimate during your first year. You can always adjust it the following year, but you don’t want to be in a position of owing the IRS a lot of money come tax time. However, there are different schools of thought there. RCA Minister Rev. Ben Bruins writes, ” I suggest that pastors (even in their first year) designate the maximum amount of housing allowance permissible using fair market rental value. The actual use of the housing allowance can be reported on that year’s taxes. If their actual expenses were lower than the designated housing allowance, then that difference will be treated as regular income. But, there is no penalty for not using all of one’s housing allowance (as long as you report that in your taxes) and so much to gain/save!” The bottom line is Know Thyself. If you are disciplined about saving money so that you have enough to pay in at tax time, use every bit of the housing allowance that you can. If it’s not easy for you to keep track of this, and you aren’t likely to have extra money at tax time, play it safe and start small with your housing allowance, or pay in more than enough taxes throughout the year to cover any gap between your designated housing allowance and your actual expenses.
Our friends at ECFA have created a helpful worksheet to aid both ministers who own or rent a home and ministers who live in a parsonage.
Pick your number and get organized
You’ve got your fair rental value number. You have a pretty close estimate of your actual expenses. Pick whichever of those two numbers is lower (I know, bummer) and that will be the number you are committed to for the calendar year. Now you’ll need to come up with a system to stay organized throughout the year. Some people will put housing-related receipts in a shoebox, others will scan receipts and put them in a Google Drive folder. I find that whatever the system you choose, it has to fit your personality and work for you, otherwise it’s too easy to lose track of your housing expenses. Play around with different options until you find a system that works, and then stick to it.
Make your resolution
The amount of your salary that you allot for housing allowance can be up to 100 percent of your salary—but we’ve already covered the limitations in the previous paragraphs. The final step to setting yourself up for success is to have an official board resolution declaring your housing allowance. In the RCA, this would mean that in the minutes of your December or January consistory meeting, a resolution with a specific housing allowance number is voted on and written in the minutes.
Here’s a great tip from the ECFA: “It is recommended that the wording of the resolution be ‘open ended’ so that the designation would be effective from that point forward until it is revised by the church board.”
An example of the resolution for a minister who owns or rents their home could look like this: “The compensation for Rev. _________ shall include $_________ per year designated as housing allowance. This designation shall be effective until modified by the church board.”
The great thing about an open ended resolution is that you only need to create a new resolution when you adjust the number for your housing allowance. It minimizes work for clergy who don’t change their number each year, and covers you if you happen to forget to have your consistory approve the number at the beginning of the year (but that never happens, right?).
Understanding taxes
Here is one last important thing to note. Ministers in the U.S. pay taxes in different “buckets,” which are usually federal income tax, self-employment tax (SECA), and state taxes. The housing allowance you claim is excluded from your federal income tax, and generally your state tax, but not your self-employment tax. For most clergy, the federal income tax savings will be between 10 and 12 percent.
Ministers will still be responsible for paying self-employment tax on their full income, including their housing allowance, at a current rate of 15.3 percent. And unfortunately for ministers living in a parsonage, this is where your fair rental value comes into play. You will be taxed at a rate of 15.3 percent on the fair rental value of your parsonage.
The bottom line
The housing allowance has seen much debate in our court system in the past few years, and after recent rulings, it appears that it is here to stay. It serves as a significant tax benefit to clergy, and with some thorough planning before the start of a new year, it can benefit your personal finances.
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