There’s a song called “Home Sweet Home” that many of us know. It has the lyrics: “Be it ever so humble, there’s no place like home.” Our family often sings this as we pull into our driveway after being away on a trip. These words come from a song written in 1823, and it became very popular in the U.S. during the Civil War, especially among soldiers who were far from home. Just like those soldiers, we all know that being away from home can be hard and the joy we feel when we return.
Having a home (no matter how humble) is something many take for granted. For pastors, though, the situation can be a little different. Some churches offer housing for pastors, which is helpful, but as pastors get older and think about retirement, the idea of church-provided housing has a downside. Where will the retired minister live after his/her service is complete? More churches are realizing this and are now helping pastors buy their own homes instead. They do this by offering a housing allowance.
What is a Housing Allowance?
A housing allowance is money given to pastors to help them buy a home or cover housing costs. It can also give them some big tax advantages if set up correctly.
According to tax rules, if a pastor rents or owns a home, they can exclude (or not pay taxes on) a housing allowance as long as it meets certain conditions. The allowance cannot be more than what is considered a reasonable amount for housing, and it must be the lowest of these three things:
- The actual amount the pastor spends on housing from their income.
- The amount the church officially says is for housing.
- The fair rental value of the furnished home, plus utilities.
The housing allowance can also be exempt from most state taxes, but it is still subject to self-employment tax (SECA tax) (Martin, p. 67).
Housing Allowance for Church-Owned Homes
If a pastor lives in a house provided by the church, the housing allowance can cover other costs too, like furniture, personal property insurance, and utilities (if the pastor pays for them personally). When these costs are properly designated as housing allowance, it can save the pastor a lot of money on income taxes.
Housing Allowance in Retirement
Many pastors are not aware that the housing allowance can also be used after they retire. For pastors who are part of The Wesleyan Pension Fund, they can get up to 100% of their pension designated as a housing allowance. This means their pension distributions can be used to help pay for housing costs, just like when they were working. But the same rules as above apply regarding how much can be excluded, and anything over that amount will be taxed as regular income.
It’s also important to know that when a pastor retires, pension payments are not subject to SECA tax, which can save even more money.
Note: This housing allowance benefit only applies to the pastor themselves, not to anyone who inherits the pension, unless that person is also a minister.
In Summary:
A home is a big part of life, and pastors can really benefit from understanding how a housing allowance works—whether they are still working or in retirement. This allowance can save a lot of money in taxes and help make sure they have a place to call home, now and in the future.
Just like the song says, “There’s no place like home,” and for pastors, having the right kind of housing arrangement can make all the difference.
References:
https://Home Sweet Home: About the Song – Ballad of America retrieved on 11.06.24.
Martin, Michael. 2023 Ministers Tax and Financial Guide. Copyright 2022 by ECFA (Evangelical Council for Financial Accountability).
https://Wesleyan Pension Fund – The Wesleyan Church, Housing Exemption, retrieved on 11.10.24.
Financial contributor: Sherry Gorveatte, DBA
Executive editor: Rev. Johanna Rugh
Curator of content: Rev. Carla Working
