The housing allowance is the most important tax benefit available to ministers. But many pastors do not take full advantage of it because either they or their church are not familiar with the rules. Here's what you can do to help.
If your minister lives in a church-owned parsonage
Ministers in a church-provided parsonage can exclude from their income for federal income tax reporting purposes (1) the fair rental value of the parsonage and (2) the portion of their compensation designated in advance as a "parsonage allowance"—to the extent that it is used to pay for parsonage-related expenses and does not exceed the fair rental value of the home (furnished, plus utilities).
If your pastor incurs out-of-pocket expenses (e.g., for utilities or furnishings), designate a portion of the pastor's 2016 compensation as a "parsonage allowance." Do this in December of 2015 so that it will be effective throughout 2016. Parsonage allowances cannot be designated retroactively.