02 Mar Limitations on the Housing Allowance
After reading about the Housing or Parsonage / Manse Allowance, you may be thinking, “if I designate my entire salary as a Housing Allowance, would it all be excluded from federal income taxes?” IRS has already addressed this by limiting the Allowance to the least of the following:
- The amount designated
- The actual housing cost
- The fair rental value of the home, including furniture, utilities, and improvements.
Example:
- The Church designates $20,000 of William’s salary as a housing allowance.
- William’s actual housing expenses for the year total $17,000.
- The fair market rental value of the home (including furnishings and utilities) totals $14,000.
- Even though the Church designated $20,000 as a Housing Allowance, only $14,000 of William’s compensation is considered nontaxable when calculating income tax.
Even if you could hypothetically designate 100% of your salary towards housing, you would be limited by the actual amount you spent during the year or by the fair rental value. If the housing allowance designated by the church exceeds the amount that can actually be claimed, the excess should be reported as “other income” on your return.
Upon retirement, the IRS allows credentialed ministers of all established church denominations to declare a housing allowance on distributions from their 403(b) retirement accounts. That means the portion of your distributions used for housing expenses is excludable from gross income for income tax purposes. This can save you significant money during retirement. The IRS limitation also applies to these distributions.
Original content by clergyfinancial.com. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.