For almost 100 years, since the Revenue Act of 1921, pastors in the United States have had the privilege of living in employer-provided housing without having to pay income taxes on it. Back then, it was common practice for churches to provide a home, or parsonage, for their pastors. 

By the 1950s, it wasn’t quite as common. As the number of churches increased, many simply did not have the funds to provide a parsonage. This forced the pastors to find their own place to live and pay for it out of their taxable income. 

Congress felt that this was unfair discrimination between pastors, that some didn’t pay income taxes on their housing while others did. So, in 1954, they expanded the law to include the payment of a “rental allowance paid to him [the minister] as part of his compensation, to the extent used by him to rent or provide a home.” This leveled the playing field and created what is now called the clergy cash housing allowance or clergy rental housing allowance.

How It Works For Pastors Without A Parsonage

This is how the cash rental housing allowance works if your church does not provide you with a parsonage:

1. You go buy or rent a place to live.
   
   
2. You calculate your housing expenses, including rent, mortgage, utilities, furniture, etc.
   
   
3. You ask your church to designate that amount (your calculated expenses) as a housing allowance.
   
   
4. The church makes an official designation.
   
   
5. When the church pays you your salary, the portion that was designated as a housing allowance does not appear on your pay stub as taxable income and is not reported to the IRS- but they still give you the money.
   
   
6. You track your housing expenses throughout the year.
   
   
7. At the end of the year, your church will let you know what your housing allowance was for the year, either with a letter or on Box 14 of your W-2 (NOT Box 1).
   
   
8. If your housing allowance exceeded your housing expenses for the year, then you have to add that back into your taxable income when you file your tax return. Learn how to do that here. 
   
   

How It Works For Pastors With A Parsonage

If you live in a parsonage, then you are already getting your housing income tax-free. But, if you read the section above, you’ll see that those without a parsonage can include things like utilities and furniture in their housing allowance. What if your church doesn’t pay for those things for you and you purchase them out of pocket? Then, you can take advantage of both a parsonage allowance and a cash housing allowance. They are not mutually exclusive.

Taking a cash housing allowance when you live in a parsonage is much like taking the rental allowance for those providing their own homes. This is how it works:

1. Calculate the housing expenses that you are paying for out of pocket. This could be utilities, furniture, pest control, etc. 
   
   
2. Ask your church to designate that amount (your calculated expenses) as a cash housing allowance.
   
   
3. The church makes an official designation.
   
   
4. When the church pays you your salary, the portion that was designated as a housing allowance does not appear on your pay stub as taxable income and is not reported to the IRS- but they still give you the money.
   
   
5. You track your housing expenses throughout the year.
   
   
6. At the end of the year, your church will let you know what your housing allowance was for the year, either with a letter or on Box 14 of your W-2 (NOT Box 1).
   
   
7. If your housing allowance exceeded your housing expenses for the year, then you have to add that back into your taxable income when you file your tax return. Learn how to do that here. 
   
   

I’ve heard that some churches are not comfortable with the idea of providing a cash housing allowance if they are already providing their pastor with a parsonage. If you run into this, you should simply (and kindly and humbly) educate the decision-makers at your church about what the law entails and how it can save you a lot of money in taxes at no expense to the church. I think sometimes churches don’t realize that they have nothing to lose in designating a housing allowance for their pastor. 

Who Is Eligible For A Housing Allowance

That is how the cash or rental housing allowance works. Before requesting one, though, it’s important to verify that you are eligible for one and the expenses you have in mind are also eligible. You can learn about all of the eligibility requirements here. 

Don’t forget to check out our Housing Allowance Calculator!