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Publication 517

Income Tax: Income and Expenses(p9)

Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently.
Note.For purposes of this section, references to members of the clergy are only to ministers or members of a religious order.

Income Items(p9)

The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here.

Offerings and Fees(p9)

If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it isn't taxable to you.

Outside Earnings(p9)

If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. For more information, see Pub. 526.

Exclusion of Rental Allowance and Fair Rental Value of a Parsonage(p9)

Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Services include:
This exclusion applies only for income tax purposes. It doesn't apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings.

Designation requirement.(p9)

The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. It must designate a definite amount. It can't determine the amount of the housing allowance at a later date. If the church or organization doesn't officially designate a definite amount as a housing allowance, you must include your total salary in your income.
If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination doesn't effectively designate a housing allowance for you. The local congregation must officially designate the part of your salary that is a housing allowance. However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency.
An official designation of an amount as a housing or rental allowance may be shown in an employment contract, in the minutes of a church or qualified organization, in a budget, or any official action taken in advance of payment of the allowance. A designation is sufficient if it permits a payment to be identified as a payment of a rental or housing allowance as distinguished from salary or other remuneration.
Informal discussions don't amount to an official designation. However, the facts and circumstances of a designation may demonstrate that the designation was official.
A church or employing organization may report the rental allowance or fair rental value of the parsonage (and utilities) in box 14 of Form W-2.

Rental allowances.(p9)

If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if:
The amount you exclude can't be more than the fair rental value of the home, including furnishings, plus the cost of utilities.

Fair rental value of parsonage.(p9)

You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. However, the exclusion can't be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost.


Rev. Joanna Baker is a full-time minister. The church allows her to use a parsonage that has an annual fair rental value of $24,000. The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Her actual utility costs during the year were $7,000.
For income tax purposes, Rev. Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage).

Home ownership.(p9)

If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of:
Excess rental allowance.(p9)
You must include in gross income the amount of any rental allowance that is more than the smallest of:
Include this amount in the total on Form 1040, line 7. On the dotted line next to line 7, enter "Excess allowance" and the amount.
You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040).

Retired ministers.(p10)

If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. However, a minister's surviving spouse can't exclude the rental value unless the rental value is for ministerial services he or she performs or performed.

Teachers or administrators.(p10)

If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you can't exclude from your income a housing allowance or the value of a home that the college provides to you.
If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. In Pub. 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits.
If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but aren't authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion doesn't apply to you.

Theological students.(p10)

If you are a theological student serving a required internship as a part-time or assistant pastor, you can't exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister.

Traveling evangelists.(p10)

You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements.


If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income.

Earnings—Members of Religious Orders(p10)

Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who:
See Members of Religious Orders, earlier, under Social Security Coverage.

Foreign Earned Income(p10)

Certain income may be exempt from income tax if you work in a foreign country or in a specified U.S. possession. Pub. 54 discusses the foreign earned income exclusion. Pub. 570, Tax Guide for Individuals With Income From U.S. Possessions, covers the rules for taxpayers with income from U.S. possessions. You can get these free publications from the Internal Revenue Service at or from most U.S. embassies or consulates.

Expense Items(p10)

The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here.

Ministerial Trade or Business Expenses as an Employee(p10)

When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses).
You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. See Pub. 529 for more information on this limit.
However, you can't deduct any of your employee business expenses that are allocable to tax-free income (discussed next).

Expenses Allocable to Tax-Free Income(p10)

If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. You can't deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance.


This rule doesn't apply to your deductions for home mortgage interest or real estate taxes on your home.

Figuring the allocation.(p10)

Figure the portion of your otherwise deductible expenses that you can't deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:
 Tax-free rental or parsonage allowance 
 All income (taxable and tax free) earned from your ministry 
When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person.
Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax.


Rev. Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person.
Rev. Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows:
($10,000 ÷ $40,000) x $3,500 = $875
Rev. Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows:
($10,000 ÷ $40,000) x $500 = $125

Required statement.(p10)

If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. The statement must contain all of the following information.
See the attachments prepared for the Comprehensive Example, later. Following the example, you will find blank worksheets for your own use.

Health Insurance Costs of Self-Employed Ministers(p11)

If you are self-employed, you may be able to deduct the amount you paid in 2016 for medical and dental insurance and qualified long-term care insurance for you, your spouse, your dependents, and any child you may have who, as of the end of the tax year, had not attained age 27.
For purposes of this deduction, your child must be an individual who is your son, daughter, stepson, stepdaughter, or eligible foster child. An individual who has been legally adopted by you (or placed with you for adoption) will be treated as your child.
If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. See the Instructions for Form 1040 to figure your deduction.
The following special rules apply to the self-employed health insurance deduction.

More information.(p11)

For more information about the self-employed health insurance deduction, see chapter 6 in Pub. 535.

Deduction for SE Tax(p11)

You can deduct one-half of your SE tax in figuring adjusted gross income. This is an income tax deduction only, on Form 1040, line 27.
Don't claim this deduction in figuring net earnings from self-employment subject to SE tax.

Income Tax Withholding and Estimated Tax(p11)

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her wages or salary. However, your salary isn't subject to federal income tax withholding if both of the following conditions apply.
If your salary isn't subject to withholding, or if you don't pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income.
You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return.
Determine your estimated tax by using the worksheets in Pub. 505, Tax Withholding and Estimated Tax. Pay the entire estimated tax for 2017 or the first installment by April 18, 2017. See Form 1040-ES for the different payment methods. The April 18 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. For more information, see chapter 2 of Pub. 505.
If you perform your services as a common-law employee of the church and your salary isn't subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due.