The housing allowance is the most important tax benefit available to ministers. But many ministers do not take full advantage of it because they (or their tax adviser or church board) are not familiar with the rules. What can church leaders do to help? Consider the following recommendations.
1. Your minister lives in a church-owned parsonage. Ministers who live in a church-provided parsonage or manse 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 by the church as a "parsonage allowance"—to the extent that it is used to pay for parsonage related expenses such as utilities, repairs, and furnishings and does not exceed the fair rental value of the home (furnished, plus utilities).
Recommendation. If your pastor lives in a church-provided parsonage or manse, and incurs any out-of-pocket expenses in living there (for example, for utilities or furnishings), then have the church designate a portion of the pastor's 2016 compensation as a "parsonage allowance." This should be done in December of 2015 so that it will be effective for all of 2016. Parsonage allowances cannot be designated retroactively.
Example. Your youth pastor lives in a church-provided parsonage. He is expected to pay his utilities, and provide his furniture. His compensation for 2016 will be $35,000. In its December 2015 meeting, the church board designates $3,000 of this amount as a "parsonage allowance." The youth pastor has parsonage expenses of at least $3,000 in 2016 (for utilities and furnishings). At the end of the year, the church treasurer issues the youth pastor a W-2 reporting only $32,000 as church compensation. The parsonage allowance is not taxable (assuming that it was used for parsonage expenses) for income tax reporting purposes.