Pastor A's church provides a parsonage rent-free to the pastor, along with paying for all utilities, maintenance and repairs on the parsonage. The church gives Pastor A a letter each year stating the fair rental value of parsonage and paid utilities. If the church, however, fails to designate these payments as housing allowances until April, but continues to cover these expenses from January through March, would these payments be counted as taxable or nontaxable to the Pastor during those months?
A clergy housing allowance must be designated in advance and in writing in order to be effective and, thus, qualify for exclusion from taxable income. Adjustments to a housing allowance may only be made prospectively. Richard Hammar covers this topic extensively in his annual Church & Clergy Tax Guide.