Retired ministers who receive pension or retirement benefits related to their past ministerial service may be able to exclude all or part of a designated housing allowance from their taxable income.
This tax benefit can significantly reduce the taxable portion of retirement income, but specific IRS requirements must be met. Understanding how the exclusion works can help ensure you're reporting your retirement distributions correctly.
Can Retired Ministers Exclude a Housing Allowance?
Yes.
The IRS allows retired ministers to exclude a qualifying housing allowance from income when the retirement payments are received because of past ministerial service. This treatment is based on IRS guidance, including Revenue Ruling 63-156.
To qualify, the housing allowance must be officially designated by the retirement plan, pension board, church, or denominational organization before the payments are made.
How Much of the Housing Allowance Can Be Excluded?
You may exclude the smallest of the following three amounts:
- The designated housing allowance.
- Your actual qualified housing expenses.
- The fair rental value of your home, including furnishings and utilities.
Any amount that exceeds the lowest of these three limits must be included in taxable income.
What Housing Expenses Qualify?
Qualified housing expenses generally include costs associated with providing and maintaining your primary residence, such as:
- Mortgage payments or rent
- Real estate taxes
- Homeowners insurance
- Utilities (electricity, gas, water, sewer, trash service)
- Furnishings and appliances
- Repairs and maintenance
- HOA dues
Keep records of all housing-related expenses in case the IRS requests documentation.
How Does the Housing Allowance Affect Form 1099-R?
Retirement income is typically reported on Form 1099-R.
If part of your retirement distribution qualifies as a housing allowance:
- Box 1 generally shows the total distribution received.
- Box 2a may be blank or may not reflect the housing allowance exclusion.
- You are responsible for determining the excludable amount based on IRS rules and your records.
The taxable portion of the distribution is the amount that remains after subtracting the allowable housing allowance exclusion.
How Do I Enter a Retired Minister Housing Allowance in the Program?
Step 1: Navigate to Form 1099-R
Go to:
- Federal Section
- Income (Select My Forms)
- 1099-R, RRB, SSA
- Add or Edit a 1099-R
Step 2: Enter Your Form 1099-R Information
Enter the information exactly as shown on your Form 1099-R.
For Box 1 (Gross Distribution), enter the full amount reported on the form.
Step 3: Determine the Taxable Portion
Subtract the allowable housing allowance exclusion from the gross distribution.
Example
- Box 1 Gross Distribution: $20,000
- Allowable Housing Allowance Exclusion: $8,000
- Taxable Amount: $12,000
Step 4: Enter Box 2a
Enter the taxable portion of the retirement distribution in Box 2a (Taxable Amount).
Using the example above, you would enter $12,000.
Step 5: Complete Box 2b
Check the box labeled:
"Taxable amount not determined"
This indicates that you calculated the taxable amount based on the ministerial housing allowance exclusion.
Step 6: Enter Remaining Form Information
Complete all remaining fields from Form 1099-R as they appear on the form.
Select Continue to save the entry.
Complete the Clergy Tax-Free Income Worksheet
After entering the Form 1099-R information, complete the Clergy Tax-Free Income Worksheet.
This worksheet allows the program to properly account for the housing allowance exclusion when calculating your taxable income.
Important Rules to Remember
The Housing Allowance Must Be Designated in Advance
A housing allowance must be officially designated before the retirement payments are made. It cannot be established retroactively.
Keep Documentation
You generally do not send receipts or expense records with your tax return. However, you should maintain documentation showing:
- The designated housing allowance amount
- Your actual housing expenses
- The fair rental value of your home
Not All Retirement Income Qualifies
Only retirement distributions attributable to past ministerial service are eligible for the housing allowance exclusion.
Retirement income from non-ministerial employment does not qualify for this special tax treatment.