A designated portion of a pastor’s compensation can be treated as a housing allowance, allowing it to be excluded from federal income tax. This exclusion applies to amounts used to pay for rent, mortgage payments, utilities, property taxes, and repairs. The allowance cannot exceed the reasonable compensation for the pastor’s services or the actual expenses incurred for housing. For instance, a pastor receiving a $60,000 salary with a designated $20,000 housing allowance who spends only $15,000 on housing can only exclude $15,000 from income tax.
The proper designation and execution of this benefit provides significant financial advantages to clergy, enabling them to allocate resources towards housing needs without incurring additional tax liabilities. Historically, this provision has been a way to support those in ministry, recognizing the often-modest salaries they receive. Furthermore, it can assist in attracting and retaining qualified individuals to serve in pastoral roles.
