If there’s one tax perk that sets clergy apart, it’s the housing allowance. This IRS-approved benefit lets you exclude a portion of your income from federal income tax to cover housing costs—whether you rent, own, or live in a parsonage. With the April 15, 2025, deadline approaching, now’s the time to ensure you’re maximizing this deduction for your 2024 return. At Clergy Tax Advisors, we’ve guided countless ministers through this process, and our year-round planning approach makes it even easier. Here’s how to lock in every dollar you’re entitled to before you file.
Step 1: Confirm the Designation
The housing allowance only works if your church designated it before the tax year (or retroactively, if your governing body allows). Check your employment contract, church board minutes, or a separate written statement. It should specify an amount—like “$20,000 for 2024”—and be approved in advance. No designation? You can’t claim it, even if you spent the money. If this slipped through the cracks, ask your church to act fast—our year-round services at clergytaxadvisors.com/year-round-clergy-tax-planning/ ensure this is set up right for 2025.
Step 2: Calculate Your Actual Expenses
The IRS caps your exclusion at the lesser of three amounts: (1) the designated allowance, (2) your actual housing expenses, or (3) the fair rental value of your home (furnished, plus utilities). Start by totaling your 2024 costs: mortgage or rent, property taxes, insurance, utilities (electricity, water, internet), repairs, and even furniture or appliances bought for the home. Keep receipts—bank statements, utility bills, or credit card records—to back it up. If your expenses exceed the designation, you’re limited to the designated amount, so accuracy is key.
Step 3: Understand Fair Rental Value
This often-overlooked limit trips up clergy. The exclusion can’t exceed what your home would rent for on the open market, including furnishings and utilities. Check local listings or consult a realtor for a ballpark figure. If your designated allowance is $25,000 but the fair rental value is $20,000, you’re capped at $20,000—even if you spent more. Document this to avoid IRS scrutiny.
Step 4: Report It Correctly
Your W-2 should exclude the housing allowance from Box 1 (wages) but note it in Box 14 (e.g., “Housing: $X”). If it’s in Box 1 by mistake, get an amended W-2 from your church. The allowance still counts toward self-employment tax (Social Security/Medicare), so include it on Schedule SE. Miss this, and you’ll underpay—a costly error we help clients avoid year-round.
Step 5: Double-Check for Excess
If your church designated more than you spent or the fair rental value, the excess is taxable income. For example, if they set aside $30,000 but you spent $28,000 (and fair rental value matches), $2,000 goes back into your taxable wages. Adjust your return accordingly—proactive planning with us can prevent this mismatch in future years.
Bonus Tip: Plan for 2025
Before you file, estimate your 2025 housing costs and ask your church to adjust the designation. Mid-year changes are allowed if documented, giving you flexibility. Our team specializes in aligning these projections with your ministry’s budget, a cornerstone of our year-round clergy tax planning.
The Payoff
Maximizing your housing allowance isn’t just about saving money—it’s about stewarding your resources for ministry. A few hours now can mean hundreds (or thousands) of dollars back in your pocket, all within IRS rules. Don’t leave this benefit on the table as you race to the deadline. Need help crunching the numbers or setting up next year’s plan? Visit clergytaxadvisors.com/year-round-clergy-tax-planning/ to connect with experts who get clergy taxes. Let’s make 2024 your most tax-savvy year yet.