what is a parsonage allowance 
a parsonage allowance is a sum of money awarded by the same governing board of a house of worship to its minister to offset housing expenses for tax purposes this allowance is exempted from the recipient s gross income 1 a parsonage allowance may also be called a rental allowance or housing allowance it is important to note that a minister doesn t necessarily mean a christian as defined by the irs a minister can be christian jewish muslim or any other religion 2understanding the parsonage allowancesection 107 of the internal revenue code irc allows the minister of a religious body to exempt some or all of a housing allowance from gross income for income tax purposes 3as compensation for ministerial services provided a minister may receive ministerial income a portion of which includes a rental or housing allowance the minister can exclude from gross income the lesser of the following amounts if the payment is greater than the actual expenditure the minister is responsible for reporting and paying taxes on the correct amount of income 1 that is any excess or unused portion of the housing allowance should be reported on the minister s annual tax return as income on line 7 of form 1040 in addition the payments officially designated as parsonage allowance must be used in the year received 4covered expensesparsonage allowances only apply to a minister s primary residence and do not include commercial property or vacation homes housing expenses that are eligible to be excluded from income include ministers living in parsonages provided by the church may have part of their compensation designated as a tax free parsonage or housing allowance to cover the cost of furniture purchase and repair as well as other expenses related to maintenance that are not reimbursed by the church employer if a home equity loan is used to pay for expenses related to the parsonage it can be included as part of the minister s parsonage allowance however suppose the home equity loan is used to cover post secondary tuition expenses or other costs not eligible as a parsonage expense in that case the loan cannot be included as a parsonage allowance in addition to home equity loans used to pay off non housing expenses the cost of food clothing domestic help and cleaning services are not part of a minister s parsonage allowance a minister who has a parsonage allowance and itemizes deductions may also deduct mortgage interest and property taxes from income taxes the parsonage allowance is a tax exemption from income while mortgage interest and property taxes are tax deductions from income self employed ministeralthough parsonage allowance is deducted for federal income tax purposes it is not deducted for self employment tax purposes parsonage allowance and or the fair market rental value of a parsonage provided to a pastor must be included as self employment earnings subject to the self employment tax 2retired ministers may be eligible for the parsonage allowance eligible clergynote that although someone in a church may be referred to as a minister the irs may not regard that individual as a minister for tax purposes while ordained ministers are more likely to be eligible for a parsonage allowance exemption commissioned and licensed ministers are less likely to be treated as ministers by the irs 2also secular employers cannot give an employee working in a non ministerial role a tax free housing allowance even if the employee is a minister in the church 2furthermore the irs does not differentiate an active church minister from a retired one 5 thus retired ministers may request that distributions from their 403 b plan be designated in whole or in part as a parsonage allowance example of a parsonage allowancefor example assume an ordained minister receives an annual income of 50 000 from a church providing a parsonage if the fair rental value of the onsite parsonage is 15 000 annually the minister s gross income would be 50 000 for federal income tax purposes but it would be 65 000 for self employment tax purposes a parsonage can be a rental or it can be a home with a mortgage and the church provides a parsonage allowance in the case above the 15 000 can be used towards the rent and utilities or if the house has a mortgage towards the loan payment 6parsonage allowance faqslike other retirement plans a 403 b 9 plan is a defined contribution retirement plan used by evangelical churches or church organizations this plan is not subject to erisa requirements the church as the employer may contribute to the plans and this type of plan offers distribution methods for retired ministers too 7no you cannot take a housing allowance distribution if you roll over your 403 b 9 into a 401 k or an ira it is recommended that retired clergy members do not move their 403 b funds to take tax free distributions if you roll over your funds out of your 403 b you will not be able to claim a housing allowance 89a parsonage allowance is an exclusion that can be taken from gross income for income but not self employment tax purposes according to the irs website it cannot be taken as a deduction on your taxes because the allowance is not considered earned income 10in addition members of the clergy who receive a parsonage allowance must include the amount of the fair rental value of a parsonage or housing allowance for social security coverage purposes according to the internal revenue service 11