During my recent class on Completing the Ministerial Support Form, a question came up about the difference between the blank for “Housing Allowance in Lieu of Parsonage,” and the blank for Utility/Parsonage Exclusion.” I will do my best explain the purpose for two separate blanks and their purpose and use.
The Housing Allowance is an exclusion to Gross Compensation, and is given when the church does not have a parsonage in which the pastor may reside. In early days of Methodism and still today, Elders itinerate; that is, move after a time to another appointment made by the bishop. To make those moves possible on a timely basis, churches provide a furnished parsonage for the pastor and family. As appointments are becoming longer, and as more pastors are not elders and do not itinerate, more churches are either renting or selling their parsonages. The Discipline still requires the church to provide the pastor with housing, so churches are opting to provide a “Housing Allowance” in addition to the Gross Salary.
Instead just adding the amount to the salary, the separate listing of a Housing Allowance meets the IRS rules that allow ministers to not include housing in figuring their Income Tax. Social Security and Medicare are another matter that I will cover in another blog.
For instance, if a church gave a pastor a Gross Salary of $60,000 and a Housing Allowance of $20,000, the $20,000 is not counted as taxable income. BUT, if the church simply adds $20,000 to the Salary of $60,000 for a Gross Salary of $80,000, the entire amount is now taxable.
The amount of a Housing Allowance is set by the church in consultation with the pastor.
Housing Allowance
A licensed, commissioned, or ordained minister who performs ministerial services as an employee may be able to exclude from gross income the fair rental value of a home provided as part of compensation (a parsonage) or a housing allowance provided as compensation if it is used to rent or otherwise provide a home. A minister who is furnished a parsonage may exclude from gross income the fair rental value of the parsonage, including utilities. However, the amount excluded can’t be more than reasonable compensation for the minister’s services.
A minister who receives a housing allowance may exclude the allowance from gross income to the extent it’s used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, and other expenses directly relating to providing a home. The amount excluded can’t be more than reasonable compensation for the minister’s services.
If you own your home, you may still claim deductions for mortgage interest and real property taxes. If your housing allowance exceeds the lesser of your reasonable compensation, the fair rental value of the home, or your actual expenses directly relating to providing the home, you must include the amount of the excess in income.
In order to be able to exclude the housing allowance from income, the minister’s employing organization must officially designate the housing allowance as such before paying it to the minister.
The fair rental value of a parsonage or the housing allowance is excludable only for income tax purposes. The minister must include the amount of the fair rental value of a parsonage or the housing allowance for social security coverage purposes.
Topic No. 417 Earnings for Clergy
ALLOWED HOUSING EXPENSES
Mortgage principal and interest payments
Mortgage down payment and closing costs or home purchase price
Rent
Real estate taxes
Homeowners or renters insurance
Homeowners association dues
Condo fees
Home improvements
Structural maintenance and repairs (roof, paint, deck)
Upkeep of the home and its contents
Utilities: heating, electricity, water, sewer, garbage, gas, basic home telephone, internet
Cable TV
Furniture (purchase, repair, and replacement)
Appliances (purchase, repair, and replacement)
Dishes and cookware
Decorating items such as pictures, rugs, mirrors, curtains
Bedspreads, sheets, and towels
Yard care tools: lawnmower, shovel, fertilizer. etc.
Yard services: snow removal, tree trimming, landscaping and gardening
Pest control
Cleaning supplies, paint, and light bulbs
NOT ALLOWED
Groceries
Servants
Maid service
Personal items
Personal gifts
Paper products (plates, napkins, etc., not toilet paper)
Personal toiletries
Personal clothing
Cell phone service
https://pastorswallet.com/what-expenses-qualify-for-the-ministers-housing-allowance/
Is the Housing Allowance a deduction or exclusion?
The housing allowance is an exclusion from income, not a deduction. This means that the amount claimed is never reported to the Internal Revenue Service (IRS) as part of your annual income. A housing allowance can be taken only if the amount to be excluded is officially designated as a housing allowance by your congregation or church organization through a resolution, meeting minutes or a budget before compensation is paid for the tax year to which it applies. If you are a retired clergyperson, your annual conference is the church entity that designates the housing allowance for your pension payments. However, you are not necessarily entitled to exclude from your income the entire amount designated as a housing allowance. You may exclude from your income only the smallest of the following amounts:
the amount designated in advance of your expenditures as your housing allowance for the current tax year;
the amount spent for your primary residence (mortgage principal and interest, utilities, taxes, insurance, furnishings, maintenance, etc.); or
the current fair rental value of your home, including furnishings, plus the current year cost of your utilities (no matter whether your home is owned or rented).
If you are a pastor living in a parsonage provided by the church, you may exclude the annual fair rental value of the parsonage from your gross compensation for federal income tax purposes. (In the absence of Internal Revenue Code section 107(1), you would owe income tax on the fair rental value of the parsonage, even though you do not pay rent to live there.) In addition to the free use of the parsonage, your church may grant you a parsonage or housing allowance to pay for things such as furniture or utilities. Make sure you meet with your church prior to the current tax year to designate your parsonage or housing allowance. You may not exclude from income any expenses incurred before the allowance is designated for a given tax year, so get it documented before January 1 each year to maximize your eligible expenses.
https://www.wespath.org/retirement-investments/clergy-taxes-housing-allowance/clergy-housing-allowancehttps://www.wespath.org/retirement-investments/clergy-taxes-housing-allowance/clergy-housing-allowance
The Utility/Parsonage Exclusion, on the other hand, is a reduction of Gross Salary for income tax purposes. IRS rules allow the the deduction of expenses for maintaining a home including the cost of utilities, cleaning, repairing, and general expenses related to keeping up a home up to the amount actually spent or the amount of the exclusion, whichever is lesser. Any amount of exclusion not spent must be reported as regular income.
The Utility/Parsonage Exclusion is usually, but not always, given when the church does provide a parsonage. This amount is established by the pastor and deducted from gross salary in figuring taxable income. This exclusion is given to help cover utilities and furniture and housekeeping costs, and is typically less than a complete Housing Allowance.
For instance, a church provides a parsonage for the pastor and family and a Gross salary of $60,000. The pastor decides that utilities and other housekeeping expenses may come to $5,000. The pastor enters this amount on the Ministerial Support form under the blank for Utilities/Parsonage Exclusion. The pastor must keep records of expenditure for tax purposes. Any amount of exclusion not spent must be added to taxable income.
It is possible that a church may give a Housing Allowance AND a Utility Exclusion, in which case both blanks would be used.
I hope this makes sense and helps pastors to understand the purpose of the two different forms of housing help available to them.
Basic Church Administration 