In 1921, the United States Congress passed the Revenue Act of 1921 that allowed a clergyman to have a housing allowance as long as the church owned the home. It did not allow, however, a clergyman who owned or rented a home on his own to have a housing allowance. It wasn’t until 1954 that that provision changed.
Under these provisions available for a “minister of the gospel,” gross income does not include: (1) the fair rental value of a church-owned or church-rented home furnished as part of his compensation, or (2) a cash housing allowance paid as part of the clergyman’s compensation. The housing allowance may provide funds for rental or purchase of a home, including down payment, mortgage payments, interest, taxes, repairs, furniture costs, garage costs, and utilities. Ministers receiving cash housing allowances also may claim deductions on their individual income tax returns for mortgage interest and real estate taxes on their residences even though such expenditures were allocable, in whole or in part, to tax-free receipt of the cash housing allowance. While excluded from income taxes, the fair rental value or cash housing allowance is subject to Social Security/Medicare taxes.
Two groups are honored by the United States for their service to the country – the military and the clergy. Both groups receive tax-free allowances to the extent the money is used to pay for housing-related items.
Items that are considered for a Housing Allowance
Mortgage payments (principal and interest)
Real Estate Taxes
Home Owners Association Fees
Home insurance / Umbrella liability insurance
Repairs, lawn care, maintenance, furnishings, utilities, heating costs, telephone, cable, light bulbs, etc.
Refinance fees, down payments, appraisals, recording fees, closing costs
Food is not eligible
Advance Designation, Form W-2, Social Security Taxes
A Housing Allowance needs to be designated in advance of payment. Since it is often difficult to estimate the dollar value that will be spent over a year, it is often best to set a higher figure than anticipated. Only the lower figure of the designation or the actual dollar amount spent can be used. If the designated amount is higher than the actual dollar amount spent, the excess of the designated amount needs to be added back into income when completing annual income tax forms.
If a clergyman lives in a parish home, the rental value of the home together with utilities is calculated and designated.
Housing Allowances are listed in Box 14 of a W-2. Sample W-2
Housing Allowances are not exempt from Social Security/Medicare taxes and are added together with income to calculate these taxes on Schedule SE.
Most states consider Housing Allowances to be tax-free as well.
A number of efforts have been launched over the last few years to abolish the Housing Allowance provisions for the clergy. So far those efforts have not been successful.
© 2014 by Fr. Michael T. Kontogiorgis