The Minister’s Housing Allowance is one of the key benefits provided by the tax code for credentialed ministers. Based on one simple line of tax code originally set forth in 1921, the allowance provides a powerful way for credentialed clergy to significantly save on their annual tax liability. This benefit extends into retirement if the distributions come from a church-sponsored 403b(9) plan.
HOW DOES THE MINISTER’S HOUSING ALLOWANCE WORK?
For a deep dive, we've created a detailed overview of the Minister’s Housing Allowance, but the basics are simple:
You can have a portion of your annual compensation set aside as a housing or rental allowance, allowing you to exclude from gross income the lowest of the following:
The actual housing expenses you incur during the year,
The amount designated and recorded by your church’s leadership board, or
The fair market rental value of the home fully furnished, plus utilities.
HOW DOES A HOUSING ALLOWANCE IMPACT YOUR RETIREMENT PLANNING?
The Minister’s Housing Allowance is a notable financial benefit throughout your working years, but—if you maintain your ministry credentials—you may continue to reap the benefits throughout your retirement.
One word of caution: The Housing Allowance exclusion in retirement is a feature specific to church-sponsored 403b(9) plans only. Therefore, the only retirement distributions that are eligible to be designated as a Housing Allowance are those paid through a church-sponsored 403b(9) plan.
As a result, if you transfer your Servant Solutions Retirement Plan to a separate retirement account—IRA, Roth IRA, 401(k), etc.—you will forfeit your eligibility for the Housing Allowance, and future distributions from the respective retirement account will be fully taxable.
CAN A RETIRED MINISTER CLAIM A HOUSING ALLOWANCE?
Yes! If your credentials are up-to-date and your retirement funds remain in your Servant Solutions 403b(9) plan, you can have a portion of your distributions designated as a Minister’s Housing Allowance, essentially reducing—or completely eliminating—your tax liability on that portion of your distributions.
CAN I DESIGNATE MY RETIREMENT INCOME AS HOUSING ALLOWANCE?
If you are an eligible retired minister for tax purposes, you may designate all or a portion of your retirement income as a housing allowance. Unlike during your working years, you do not have to declare the amount of your salary to be designated as housing allowance at the first of the year and have your board approve it. In retirement, you can wait until the year has passed and determine the actual amount of housing allowance expense incurred. This is because the Servant Solutions Board of trustees has already taken action to approve a blanket resolution for all retired ministers to allow eligible distributions made by a retiree to be used as housing allowance. Working with your tax advisors, you'll determine the amount of your distributions to designate as housing allowance. The requirements are the same in retirement as in your working years: you'll essentially select the lesser amount of the actual expenses you pay during the year or the fair market rental value of the home fully furnished (including utilities, maintenance expenses, and a variety of other applicable expenses.)
HOW DO DISTRIBUTIONS WORK WITH A MINISTER’S HOUSING ALLOWANCE?
There is no need to notify Servant Solutions in advance, as the amount you claim is determined by you and your tax advisor. A housing allowance can be designated only when it relates to contributions made because of earnings from service as a minister (if funds consist of a combination of ministry and non-ministry contributions/rollovers, then a tax basis must be established for retirement disbursements). Ministers must comply with other IRS rules about the housing allowance. Please contact Servant Solutions with questions about your specific circumstances.
AS A RETIREE, HOW DO I CLAIM THE HOUSING ALLOWANCE WHEN FILING MY TAXES?
Retired ministers who are receiving distributions from their Servant Solutions 403b(9) Retirement Plan will receive a Form 1099-R, which discloses the total annual withdrawals. The form 1099-R will reflect the “Taxable amount not determined” box in section 2b as “checked.” This serves to notify your tax preparer and the IRS that some, or all, of your box 1 gross distribution amount is eligible to be non-taxable. Any excess distributions above what may qualify as housing allowance is the only portion reported as taxable income.
It is the individual minister’s responsibility to determine the amount qualifying as an exclusion from taxes. To the extent that you have verifiable housing expenses, you can lower the taxable withdrawals from the Servant Solutions 403b(9) Retirement Plan.
WHAT IF I HAVE ADDITIONAL QUESTIONS ABOUT THE NEXT STEPS?
We're here to help you every step of the way. If you have questions about how this benefit might apply to you, please let us know. You may contact us via email at info@servantsolutions.org or by phone (800) 844-8983. We look forward to helping you make the best decisions for your individual situation.