Housing Allowance Changes
By Raul Rivera
As the year moves forward, many pastors and church leaders are reflecting on what’s working and what might need a fresh look. One area that often gets overlooked? The housing allowance.
For ministers, the housing allowance is one of the most valuable tax benefits available. But if it’s not properly designated or maintained, it can lead to missed opportunities or even IRS complications.
At StartCHURCH, we’ve helped thousands of churches get their housing allowance set up correctly. And what we’ve learned is simple: whether it’s the beginning, middle, or end of the year, taking time to check in and course-correct is invaluable.
Why the Housing Allowance Still Matters
The housing allowance allows ordained, licensed, or commissioned ministers to exclude part of their compensation from federal income tax—but only if it’s been properly designated in advance. That designation must come from the church and be recorded in the board minutes.
This isn’t a benefit that can be applied retroactively. If a housing allowance wasn’t in place earlier this year, a minister can’t claim it for those months. But a church can establish or revise the allowance for the remaining months of the year.
When Should You Consider Making a Change?
A mid-year adjustment is not only allowed, in many cases, it’s needed. You should consider updating the housing allowance if:
- The minister moved or bought a new home. New housing expenses mean the original estimate might be outdated.
- The minister’s salary changed. Raises, bonuses, or new compensation packages should prompt a fresh designation.
- Your church forgot to designate one. If a housing allowance was never set for this year, now’s the time to do it for the rest of the year.
These aren’t just administrative tasks—they’re opportunities to care well for your ministry team and stay compliant.
How to Make a Mid-Year Adjustment
Making a change mid-year isn’t complicated, but it must be done right. Here are the three steps:
1. Board Approval
The housing allowance must be officially approved by the church’s governing body, such as the board of directors or elders. Be sure to include the designated amount and the effective date in the official minutes.
2. Reasonable Calculation and Full Designation
After board approval, the next step is to determine the housing allowance amount. Start by estimating the minister’s actual housing costs for the rest of the year. This includes expenses such as:
- Mortgage or rent
- Utilities
- Property taxes and insurance
- Repairs, maintenance, and furnishings
These numbers help create a realistic picture of the minister’s housing needs. But here’s what’s critical to understand: the IRS doesn’t allow ministers to claim more than they’re eligible for, even if the church approves a higher amount. At tax time, a minister can only exclude the lowest of:
- The amount actually spent on housing
- The fair rental value of the home (including utilities and furnishings)
- The amount officially designated by the church
That third point often causes churches to miss the full benefit. The IRS doesn’t limit the amount a church can designate. But if the church designates a lower number than what the minister actually spends or qualifies for, that lower number becomes the cap. Getting that third point right can be so valuable, in fact, that you may never have to make another mid-year adjustment to the housing allowance again.
For example, if a minister has $35,000 in qualifying housing expenses but the church only designated $25,000, then $10,000 of that benefit is lost. The IRS won’t allow the minister to claim more than what was designated, no matter what their actual costs were.
That’s why we recommend that churches designate 100% of the minister’s expected income as housing allowance. This doesn’t mean the entire salary will be tax-free—it simply ensures the church isn’t the limiting factor. When the year ends, the W-2 form will reflect only the amount the minister is actually allowed to exclude, based on IRS rules. This approach is clean, compliant, and maximizes the benefit.
3. Clear Communication
Once your new housing allowance is in place, be sure to keep your own records in order. Save receipts, utility bills, mortgage statements, and any documents that support your housing-related expenses. These records are essential when it comes time to file your taxes or respond to an audit.
Pitfalls to Avoid
Even well-meaning churches can make simple mistakes that cost their ministers real money. Here are three to watch for:
- Trying to backdate the allowance. IRS rules prohibit retroactive designation.
- Lack of documentation. Without meeting minutes, receipts, and accurate records, an audit can become a nightmare.
- Underestimating the benefit. Some think of the housing allowance as a bonus. It’s not. It’s part of the minister’s regular pay, designated for housing, and treated differently for tax purposes.
It’s Not Too Late
We believe every church can get this right. Even if you didn’t set up a housing allowance at the start of the year, you can still take action now for the months ahead. A mid-year update could mean meaningful tax savings for your minister and greater peace of mind for your board.
If you’re unsure how to proceed, we’re here to walk you through it. At StartCHURCH, we’ve helped thousands of churches just like yours. Let us help you make sure your housing allowance is working for you, not against you.
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