Ministers do not pay federal income tax on the amount of their compensation that is designated in advance by their employing church as a "housing allowance." But there are limits. For ministers who own or rent their home a housing allowance is nontaxable only to the extent that it is used to pay housing expenses and does not exceed the fair rental value of the home (furnished, plus utilities).
Sometimes ministers incur more housing expenses than they anticipated during the year, which may mean that their housing allowance is not enough to cover all of their housing expenses. Often this is due to unforeseen housing expenses, or to the purchase of a new home. For whatever reason, if a minister's housing expenses exceed the church-designated housing allowance, then the minister may not be receiving the full value of this important tax benefit.
Key Point. Some ministers live in a church-owned parsonage. The portion of their ministerial income that is designated in advance by their employing church as a parsonage allowance is nontaxable in computing federal income taxes to the extent it is used to pay housing expenses. Such expenses may include utilities and furnishings (if not paid by the church). Ministers who live in a parsonage may incur housing expenses in excess of their parsonage allowance. If so, their employing church should consider amending their allowance for the remainder of the year.
How church treasurers can help. If your church designated a housing allowance for your minister (or ministers) for 2013, now is a good time to check the adequacy of the allowance. The key point is this—if a minister's housing expenses are more than expected, and will likely exceed the housing allowance, then the church can amend the allowance to make it larger.