How to Calculate Your Housing Allowance
The IRS currently allows pastors to deduct from their ministry-related salary a portion designated for housing. If, for example, you work for a church and are paid $50,000 annually, you may deduct from that salary an amount that has been designated for housing. If that is $10,000, then your taxable income for that year would be $40,000 instead of $50,000. Assuming you are in the 12% tax bracket, this allowance reduces your taxable income by $1,200.
Over my years in ministry, I’ve heard a number of pastors express confusion regarding their housing allowance. While there is an abunandance of infomation available on the topic, this article will give you a quick and easy guide on how to utilize this financially-advantageous deduction.
Before calculating the amount you are able to legally deduct from your salary, be sure the following are true:
- You fit the IRS definition of “Ordained Pastor.” You can do an internet search and find this; however, it is important to note that simply working for a church does not allow you to take a housing allowance. If you are audited, you will need to provide documentation from you denomination or church confirming that you have been ordained into the pastoral ministry.
- A board or committee in your church has approved the designated amount. The deacons, trustees, elders, finance committee, personnel committee, or some other appropriate body within the church must agree to the housing allowance you have designated. The group needs to record this approval in their minutes and you should fill out a housing allowance form and have the chairman of this group sign the form.
- The housing allowance is always forward-looking. In other words, the approval of your housing allowance for this year should have happened in December of last year. You cannot retroactively designate your housing allowance. You will determine an amount for the next year, and your salary going forward will be divided between your regular salary and your housing allowance.
Assuming those are true, how, then, do you calculate this amount? According to the IRS, this amount must be the lesser of the following:
- The actual amount you spend on housing. This includes your mortgage, insurance, utilities, furnishings, lawn equipment, and anything else spent to maintain your home.
- The fair rental of the home (with furnishings) plus utilities. This can be slightly more challenging to determine an exact dollar amount. Some ministers use the 1% rule: if your home’s value is $200,000, then the rent (fully furnished) would be $2,000 per month. Add in the cost of utilities, multiply this by 12, and your housing would be $24,000 plus the cost of utilities.
Another way to calculate this number is to go to a housing website (i.e., zillow.com) and find the fair rental value of the home. You can then increase this number by 10% for it renting as a furnished home, then add utiltiles. Each year I will look up what Zillow estimates as the monthly rental cost and print out that page for my files.
- The amount designated by the board or committee in your church. While this number is typically determined by the ordained pastor, the amount claimed for housing cannot exceed this approved amount. For example, let’s say your annual salary is $50,000. In December of 2024, you request a $10,000 housing allowance from your elder board for the year 2025. They approve (they should always approve since it costs the church nothing and the pastor is the one responsible to the IRS for proving the legitimacy of the amount). However, in 2025, you actually spend $20,000, and the fair rental value is $20,000. In December of 2025, you realize that you could have asked for $20,000 of your pay to be designated as housing, but you didn’t. Too bad. You cannot go backwards and reallocate a portion as housing.
Parenthetically, you are allowed to make mid-year adjustments, but it must always be on your salary going forward. With board approval, you may in June change your housing allowance for the second half of the year. For example, assume your total pay is $1000 per week. Previously, $250 per week was designated for housing, and $750 was salary. You may, going forward, designate $400 for housing and $600 for salary.
Again, it is important to note that the IRS allows you to designate the lesser of these amounts. Let’s say that you inherit $100,000 and decide to pay off your remaining mortgage balance of $50,000. However, the fair rental value of your home is $25,000 a year. You may not designate $50,000 of your salary as housing even though you are spending that amount.
As well, if you determine that you will spend $25,000 next year, but at the end of the year you realize that you’ve only spend $20,000, when you file taxes you must list $5,000 as “additional income.” For this reason, I always recommend pastors to request a higher-than-expected housing allowance from their board. Any unused portion can be added as addtional income.
One final caveat: I’m not an accountant or a tax attorney. This article communicates the current IRS allowances for pastors as I understand them. Please consult with your own accountant or attorney before filing taxes.