What Is a Parsonage Allowance?
Let me explain what a parsonage allowance is. It's a sum of money that the governing board of a house of worship provides to its minister to cover housing expenses. For tax purposes, this allowance is excluded from the minister's gross income. You might also hear it called a rental allowance or housing allowance.
Remember, when I say 'minister,' it doesn't just mean a Christian one. According to the IRS, a minister can be from any religion—Christian, Jewish, Muslim, or others.
Key Takeaways
A parsonage is simply a home or apartment that the house of worship provides to the minister. The allowance for it is exempt from gross income. You have to use the parsonage allowance in the year it's given to you. The deductible amount covers reasonable housing costs. If the house of worship owns the parsonage, some maintenance costs might be deductible too.
Understanding the Parsonage Allowance
Section 107 of the Internal Revenue Code lets ministers exclude some or all of their housing allowance from gross income for income tax. As part of your compensation for ministerial services, you might receive income that includes this allowance. You can exclude the smallest of these: the amount designated in advance as housing allowance, the amount you actually spend on housing, or the fair market rental value of the home.
If the allowance exceeds what you actually spend, you need to report and pay taxes on the excess as income on your Form 1040. Also, you must use the designated payments in the year you receive them.
Covered Expenses
This allowance applies only to your primary residence, not to commercial properties or vacation homes. Eligible expenses include mortgage payments, rent, property insurance, taxes, utilities, homeowners' association dues, and remodeling.
If you live in a church-provided parsonage, part of your compensation can be designated as tax-free for things like furniture and maintenance not reimbursed by the church. You can include home equity loans in the allowance if used for parsonage-related expenses, but not for things like tuition or other non-housing costs.
Expenses like food, clothing, domestic help, or cleaning services don't count. If you itemize deductions, you can also deduct mortgage interest and property taxes separately—the allowance is an exclusion from income, while those are deductions.
Self-Employed Minister
For federal income tax, the parsonage allowance is deducted, but not for self-employment tax. You must include the allowance or the fair market rental value of a provided parsonage in your self-employment earnings, which are subject to self-employment tax.
Important Note on Retired Ministers
Retired ministers can be eligible for the parsonage allowance.
Eligible Clergy
Not everyone called a minister in a church qualifies under IRS rules. Ordained ministers are more likely to be eligible, while commissioned or licensed ones might not be. Secular employers can't provide a tax-free housing allowance to ministers in non-ministerial roles.
The IRS treats active and retired ministers the same for this purpose. So, if you're retired, you can designate distributions from your 403(b) plan as parsonage allowance.
Example of a Parsonage Allowance
Take this example: An ordained minister gets $50,000 annual income from a church that provides a parsonage with a fair rental value of $15,000. For federal income tax, gross income is $50,000, but for self-employment tax, it's $65,000.
The parsonage could be a rental or a mortgaged home, and the allowance covers rent, utilities, or loan payments accordingly.
Parsonage Allowance FAQs
What is a 403(b)(9) Plan? It's a defined contribution retirement plan for evangelical churches or organizations, not subject to ERISA. The church can contribute, and it offers distribution options for retired ministers.
Can You Take a Housing Allowance Distribution if You’ve Rolled Over Into an IRA or 401(k)? No, rolling over your 403(b)(9) to a 401(k) or IRA means you can't claim the housing allowance. I recommend not moving those funds if you want tax-free distributions.
Is a Parsonage Allowance an Exclusion or a Deduction? It's an exclusion from gross income for income tax but not self-employment tax. You can't deduct it because it's not earned income. You must include the fair rental value or allowance for social security coverage.
