The most important tax benefit available to ministers who own or rent their homes is the minister s housing allowance exclusion. Unfortunately, many churches fail to designate a portion of a minister s compensation as a housing allowance, and thereby deprive ministers of an important tax benefit. Federal tax law permits ministers who own or rent a home to exclude from gross income that portion of their compensation that is designated in advance as a housing allowance by their church, and that is actually spent on housing expenses. Under no circumstances can a church designate a housing allowance retroactively.
Ministers are responsible for substantiating their housing expenses.
Otherwise, all or a portion of the housing allowance designation is included in gross income. Although the costs of a mortgage qualify as part of the housing allowance, costs associated with refinancing a principal residence or with a home equity loan qualify only if the proceeds are used for acquiring or maintaining a principal residence. The tax guide includes a worksheet for ministers that makes estimating a yearly housing allowance easy. New in 2000. In one of the most unexpected clergy tax cases in recent years, the United States Tax Court ruled that a housing allowance is nontaxable for income tax reporting purposes so long as it is used to pay for housing-related expenses.