Background. 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 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. Many ministers rent a home or live in a church-owned parsonage. The portion of their ministerial income that is designated in advance by their employing church as a housing allowance is nontaxable in computing federal income taxes to the extent it is used to pay housing expenses. For ministers who rent a home, such expenses include rent, utilities, insurance, and furnishings. For ministers who live in a parsonage, such expenses may include utilities and furnishings (if not paid for by the church). Ministers who rent a home or who live in a parsonage may incur housing expenses in excess of their housing allowance. If so, their employing church should consider amending their housing allowance for the remainder of the year.