Fall Is Clergy Housing Allowance Time! Sensible Stewardship

It’s fall! That means it’s time to check in on your housing allowance—both for 2024 and 2025.

Fall is an important time to review your current housing allowance because most of the year has passed, but there’s still enough time if you want to do something more. Your housing allowance is limited to the lesser of:

1. The fair market rental value of your furnished home.

2. The amount officially designated in advance by your church.

3. Your actual eligible expenses.

4. 100% of ministerial compensation.

By this time of year, you should be focusing on the second and third points above. How much do you have designated, and how much have you spent? If you’re right on track with your current spending to use up your entire designated amount, then just keep doing what you’re doing. If you have projects to do around your house or big purchases to make, you might want to push them off until 2025 and increase your designated allowance for next year.

What if your spending hasn’t kept up with your designated allowance? What if it looks like you’ll have a lot of housing allowance left unspent at the end of the year? In that case, you have several options. The first is to complete any house projects or large purchases you’ve been considering before the end of the year. If there’s something that you’ve been planning on doing, that’s a great way to make the most of your housing allowance in 2024.

However, if you haven’t had anything in mind you were planning on doing, don’t just go out and spend money to avoid paying income taxes. Spending $100 that you don’t need to is costlier than paying the $20 or so that you’ll owe in taxes by not claiming it as a housing allowance (actual savings vary based on your individual tax situation). If you have excess housing allowance at the end of the year, it’s very easy to add it back into your taxable income when you file your return. Be aware this situation could result in an underpayment of income tax which might trigger the need to pay penalties and interest, so adjust your withholding and/or estimated tax payments for the remainder of the year.

Reconciling your spending with your current designated allowance isn’t the only thing you should be doing this time of year. It’s also important to start looking forward to next year. How much housing allowance should you request for 2025? What costs have gone up? What projects or large purchases do you want to make?

The first step in determining how much housing allowance to request is to estimate your anticipated expenses. I usually recommend increasing your estimate by 10% when you make your request to allow for unexpected expenses that pop up. Requesting less than you spend means that you’ll unnecessarily pay taxes on some of your income.

As you consider how much to designate as a housing allowance for 2025, it’s important to remember the four limitations mentioned above. Now is when the first and last points come into play. For the last point, your housing allowance cannot be more than your ministerial compensation. This particularly applies to bivocational pastors who get most of their income from a secular job. Your housing allowance cannot come from your secular income—it is limited to what your church pays you.

Your housing allowance is also limited by the fair market rental value of your home, which is the first point above. For this one, it’s important to note that it refers to your home in its current state—furnished, with lights and electricity. The IRS does not specify how to calculate the fair market rental value, so you can choose any logical, reasonable method. An easy way is to have a local real estate agent give you an estimate. Another option is to use an online estimate and increase it by the cost of renting furniture. All in all, as long as you’re being reasonable and logical, the IRS likely won’t argue with you.

As the seasons change and the end of the year draws near, take a moment to review your 2024 housing allowance and start planning for 2025.

Amy Artiga is a Certified Financial Planner (CFP), a Certified Kingdom Advisor™, and author of the clergy personal finance blog PastorsWallet.com. Send questions for Amy to benefits@nazarene.org.

Note: This material is provided for informational purposes only. The author and NBUSA do not provide tax, legal, or accounting advice.