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 guidance.
If 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 living there (for example, for utilities or furnishings), then have the church designate a portion of the pastor’s 2020 compensation as a “parsonage allowance.” This should be done in December of 2019 so that it will be effective for all of 2020. Parsonage allowances cannot be designated retroactively.