The Pastor's Study
QUESTION: What is the income exclusion available for ministers of the gospel by use of a parsonage or housing allowance?
ANSWER: Section 107 allows a minister of the gospel to exclude from income the rental value - including utilities - of a home the church furnishes as part of his or her compensation (a parsonage) or the rental allowance it pays under the same circumstances to the extent the minister uses the allowance to rent or provide a home. The home or rental allowance the church provides must be as payment for services that ordinarily are the duties of a minister of the gospel. The services ministers perform are sacerdotal functions, such as the conducting of religious worship and the control, conduct, and maintenance of religious organizations (including religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body.
On May 20, 2002, Congress passed the Clergy Housing Allowance Clarification Act of 2002, and President George W. Bush signed it into law. One of the purported purposes of the new law was to support the constitutionality of the parsonage allowance. The parsonage allowance is now limited to the fair rental value of a minister's home.
Some churches and religious nonprofit organizations provide a parsonage for the minister's use. The value of the use of an employer-provided home is generally taxable to the recipient. However, because the home is part of the minister's compensation for services provided in the exercise of ministry, the value is excluded for income tax purposes (but not for self-employment tax). In addition, the organization may designate a portion of the minister's cash compensation as a nontaxable housing allowance for furnishing, utilities, and other maintenance items.