Is the Housing Allowance a deduction or exclusion?

The housing allowance is an exclusion from income, not a deduction. This means that the amount claimed is never reported to the Internal Revenue Service (IRS) as part of your annual income. A housing allowance can be taken only if the amount to be excluded is officially designated as a housing allowance by your congregation or church organization through a resolution, meeting minutes, or a budget before compensation is paid for the tax year to which it applies. If you are a retired clergyperson, your pension may designate the housing allowance for your pension payments. However, you are not necessarily entitled to exclude from your income the entire amount designated as a housing allowance. You may exclude from your income only the smallest of the following amounts:

• the amount designated in advance of your expenditures as your housing allowance for the current tax year;
• the amount spent for your primary residence (mortgage principal and interest, utilities, taxes, insurance, furnishings, maintenance, etc.); or
• the current fair rental value of your home, including furnishings, plus the current year cost of your utilities (no matter whether your home is owned or rented).

If you are a pastor living in a parsonage provided by the church, you may exclude the annual fair rental value of the parsonage from your gross compensation for federal income tax purposes. In addition to the free use of the parsonage, your church may grant you a parsonage or parsonage allowance to pay for things such as furniture or utilities. Make sure you meet with your church prior to the current tax year to designate your parsonage or housing allowance. You may not exclude from income any expenses incurred before the allowance is designated for a given tax year, so get it documented before January 1 each year to maximize your eligible expenses.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com