Clergy Housing Allowance

Clergy can have a portion of their paycheck designated as a housing allowance; this normally only applies to deacons because priests have residences provided to them. This allowance is income tax free, but not free from self-employment tax. Items that can be claimed include rent or mortgage payments (principal, interest, taxes, and insurance), utilities, capital improvements, repairs and maintenance, and interior furnishings.

 The allowance is limited to the lowest of the following three restrictions:

    • the amount designated in advance by the employer
    • the fair rental value of the residence
    • the actual expenses incurred in providing for the residence. 

A deacon who receives a tax free housing allowance is required to reduce business expense deductions in proportion to tax-free income to total income. For example, a deacon with a $20,000 salary has a tax-free housing allowance of $12,000. His ratio of tax-free income to total income is 60% (12,000/20,000). The deacon can only deduct 40% of unreimbursed business expenses. 

It is strongly recommended that the clergyman consult a tax accountant when setting up a tax-free housing allowance.