I recently wrote about potential tax deductions for residents of continuing care retirement communities (CCRCs), also known as life plan communities. Depending on your personal tax situation, you may be able to deduct a portion of your CCRC entry fee and some of your ongoing monthly fees, since they can qualify as prepaid medical expenses. But if you are a retired member of the clergy, there is an additional tax benefit you should consider: the minister’s housing allowance.
The minister’s housing allowance
The federal tax code allows a portion of a clergyperson’s compensation to be designated in advance by their employing church as a housing allowance. That designated amount, when properly used for housing expenses, is excluded from federal income tax. The exclusion cannot exceed the fair rental value of the home, including furnishings and appurtenances, and it must be used for housing-related costs.
When a church provides a parsonage or manse as part of compensation, the rental value of that housing is likewise excluded from taxable income. It’s important to understand that the housing allowance is an exclusion from income rather than an itemized deduction—meaning the amount is not reported as part of gross income on your federal return.
Housing allowances from a 403(b) retirement savings account
If you are a retired minister with a 403(b) retirement account maintained by a religious organization, you may be able to designate part of your 403(b) distributions as housing allowance. When eligible, that portion of the distribution can be excluded from taxable income, effectively making it tax-free for federal income tax purposes.
As with active-duty housing allowances, this benefit is treated as an exclusion from income. The denomination’s board of pensions or another authorized governing body typically designates distributions from a minister’s 403(b) as housing. However, the retired minister must determine and report the actual housing allowance amount on Form 1040 or 1040-SR when filing federal taxes.
The amount you claim as excluded must be the lesser of your actual housing expenses for the year or the fair rental value of the home. Also, the housing allowance applies only to income that is attributable to your service as a clergyperson. Funds rolled or transferred into a 403(b) from other retirement accounts generally are not eligible for designation as ministerial housing allowance if those funds were not accumulated from ministerial earnings.
Qualified housing expenses
For retired clergy using the housing allowance exclusion, a variety of costs can qualify as housing expenses. Typical qualifying items include:
- Down payments on a home
- Rent and mortgage payments (principal and interest)
- Real estate taxes
- Property insurance
- Utilities such as electricity, gas, water, sewer, trash, local telephone charges, and internet
- Furnishings and appliance purchases and repairs
- Structural repairs and maintenance
- Yard maintenance
- Home equity loan payments used for housing expenses
- Routine maintenance items such as household cleaners, light bulbs, and pest control
- Homeowners’ association dues
By contrast, several items generally do not qualify as housing expenses for the exclusion. These commonly include:
- Food
- Cleaning services or domestic help
- Costs related to a second home, vacation property, business property, or farm
- Home equity loan payments used for non-housing purposes
Who qualifies for the minister’s housing allowance?
Eligibility for the retired minister’s housing allowance typically depends on meeting a series of tests related to ministerial credentials, compensation, and retirement account activity. Generally, you are more likely to qualify if all of the following apply:
- You held ministerial credentials with a religious fellowship or denomination.
- You received compensation for ministerial duties.
- You have a 403(b) retirement account associated with that religious fellowship or denomination.
- You made contributions to the 403(b) from ministerial earnings.
- You are retired as defined for tax purposes and eligible to receive distributions from the 403(b), usually no earlier than age 59½ except in specified circumstances.
If you meet these criteria and are eligible to receive 403(b) distributions, you may be able to claim the housing allowance exclusion for qualifying distributions. Consult your plan documents and a tax professional to confirm timing and eligibility rules for distributions.
Housing allowances for CCRCs or nursing homes
The retired minister’s housing allowance can apply to certain CCRC expenses. For example, an entrance fee paid to move into a retirement community may be treated as a housing expense in the year you move in, allowing you to exclude that amount from taxable income to the extent it qualifies. Note that the entrance fee exclusion applies in the year of move-in and generally cannot be prorated across multiple tax years. Whether there is a dollar limit on the portion of an entrance fee that qualifies depends on circumstances and should be discussed with your tax advisor.
For ongoing monthly CCRC fees, a retired clergyperson may exclude from taxable income the portion of the fee that represents housing. Fees or portions of fees for meals, healthcare, nursing services, housekeeping, and other non-housing services are not eligible for the housing exclusion. CCRCs can typically provide an itemized statement that identifies which portions of the monthly fee are attributable to housing versus other services.
Similarly, if a retired clergyperson resides permanently in a nursing home, the housing allowance can be applied only to the housing portion of nursing home charges. Charges for food and medical care generally do not qualify. The nursing home administrator can usually provide the housing portion of monthly payments. Be aware that if you apply the housing allowance against nursing home costs, you cannot simultaneously apply it to a separate home occupied by a spouse.
Always consult a tax professional
The minister’s housing allowance can provide meaningful federal income tax savings for retired clergy, especially when applied to CCRC entrance fees, housing portions of monthly fees, or nursing home housing charges. Tax law governing clergy compensation and retirement distributions is complex and fact-specific, so it is essential to consult with an experienced tax advisor who understands clergy tax rules and how the retired minister’s housing allowance interacts with retirement accounts and CCRC arrangements.
Keep these additional points in mind:
- The federal housing allowance exclusion applies only to your primary residence.
- A spouse’s income cannot be included in your housing allowance exclusion.
- Surviving spouses are not eligible to claim the exclusion.
- You are responsible for accurately calculating the exclusion and retaining documentation to support the amounts excluded in case of IRS inquiry or audit.
Disclaimer: The information in this article is for informational purposes only and should not be construed as legal or tax advice. Consult your legal and tax advisors before making any decisions related to the retired minister’s housing allowance, CCRC entry fees, monthly fees, or related federal and state tax implications.