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. 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.
- A parsonage is a dwelling (home or apartment) provided to a minister by the governing board of a house of worship.
- A minister's parsonage allowance is exempt from gross income.
- Parsonage allowance must be used in the year it is allocated to the clergy member.
- The amount deducted may cover reasonable housing costs.
- If the house of worship has its own parsonage, part of the costs of maintenance may be deductible.
Understanding the Parsonage Allowance
As 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:
- The amount officially designated (in advance of payment) as a housing allowance
- The amount actually used to provide or rent a home
- The fair market rental value of the home
If the payment is greater than the actual expenditure, the minister is responsible for reporting and paying taxes on the correct amount of income. 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.
Parsonage 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:
- Mortgage payments (principal and interest)
- Rent payments
- Property insurance
- Property taxes
- Payments for utilities and service delivery
- Homeowners’ association dues
- Remodeling expenses
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.
Although 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.
Retired ministers may be eligible for the parsonage allowance.
Note 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.
Also, 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.
Furthermore, the IRS does not differentiate an active church minister from a retired one. 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 Allowance
For 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.
Parsonage Allowance FAQs
What is a 403(b)(9) Plan?
Like 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.
Can You Take a Housing Allowance Distribution if You’ve Rolled Over Into an IRA or 401(k)?
No, 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.
Is a Parsonage Allowance an Exclusion or a Deduction?
A 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.
In 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.