Taxing Lessons Case Summaries

Case — Parsonage Rental Allowance

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TL Case Summ


Can a minister exclude a portion of income as a parsonage or rental allowance?


Taxpayer Says:  His employment agreement provides for a rental allowance that is excludable from his income.

Internal Revenue Service Says: The claimed allowance was not properly designated in accordance with the applicable regulations, and is not deductible.


From Internal Revenue Code Section 61(a)(1): Compensation for services is generally included in gross income.

From Internal Revenue Code Section 107(2): Provides that the gross income of a minister does not include “the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.” As a prerequisite for this exclusion, the taxpayer must establish that there was a designation of the rental allowance pursuant to official church action before payment.

From Federal Tax Regulation 1.107-1(b): The regulations state in pertinent part: The term “rental allowance” means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken * * * in advance of such payment by the employing church or other qualified organization when paid after December 31, 1957. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.


If you’re a licensed, commissioned or ordained minister, you can claim a housing, or parsonage, allowance on your federal income tax return. The allowance means part of the income you earn for your ministerial duties is excluded from federal income taxes (FICA and Medicare taxes do apply unless you have chosen to opt out).

Your employer must designate the amount of your pay that is your parsonage allowance for the tax period, in advance of when you actually receive the money. You can use your parsonage allowance for expenses related to buying or renting a home, and maintaining the home.

In this case, the taxpayer, an ordained minister, was hired as a contract worker, and entered into an employment agreement with a church in September 2005. The agreement specified that the church would provide the taxpayer with a $500 housing allowance for six months from the date of signing.

The taxpayer filed his 2007 federal income tax return, and claimed a $33,126 parsonage allowance, which he excluded from his $80,000 ministerial income. At trial, he presented a second employment agreement, which was dated 2005 and signed by both the taxpayer and the church in 2012. The second agreement clarified the first, with a specific provision for a parsonage allowance beyond 2005.

The IRS says the first agreement is binding, and the taxpayer could not exclude any amount as a parsonage allowance after the six months specified in that agreement.


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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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Sorry, wrong answer :(
Right answer!
For the IRS. The original employment agreement does not designate a rental allowance, and the second employment agreement was executed in 2012 and therefore could not designate a rental allowance before payment in 2007. The taxpayer has therefore not established that the amounts at issue were properly designated as a rental allowance by official church action before payment. Accordingly, the taxpayer has not established that he is entitled to a parsonage allowance. (Editorial note: The court also agreed with the IRS assessment of a 20% accuracy-related penalty.)