What’s the difference between a Cash Housing Allowance and a Housing Exclusion?

Roy Caudill probably gives the best explanation for the difference between a Housing Allowance and a Housing Exclusion. I share this in the video. What actually makes things so confusing is that there is little consistency in terminology…which I blame on the IRS. It’s pretty common for the IRS to say that a pastor can exclude their allowance. Over the last 15 years, I’ve been very careful with my terms.

  • Housing Exclusion: This is the part of a pastor’s salary that is designated for housing expenses. This isn’t an additional amount paid out. It just lessens the amount reported to the IRS as taxable income. Sometimes this is called a Parsonage Allowance. I don’t like that because that can make it seem like an additional amount paid out.
  • Housing Allowance: This is an additional amount paid out in lieu of providing a parsonage. The church sets this amount. It is not taxable for Federal Income Tax purposes. It can either be included with the pastor’s paycheck or in a separate check.
  • Utilities Allowance: Sometimes pastors that live in a parsonage are paid an extra amount to cover utilities. In the Dakotas UMC, we do this for Cable/Internet/Phone. We had about six parsonages and everyone wanted a different package. Because we got tired of being the cable police, we just paid everyone a set amount for a Utilities Allowance so we wouldn’t have to worry about if everyone’s cable package was fair. This is not taxable for Federal Income Tax purposes.
  • Equity Allowance: I’ve rarely seen this, but some churches that have a parsonage will pay their pastor an extra amount for them to save up to buy a house in retirement. This is taxable for Federal Income Tax purposes. Some churches just pay this to the pastor and trust that it’s being invested. Others hold it in their own investment account until the pastor retires.

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