Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Parsonage Allowance

What it is:

In the tax world, a parsonage allowance is income earned by members of the clergy but excluded from gross income.

How it works (Example):

Let's say John Doe is a pastor at the XYZ Church. He earns $25,000 a year. The church also gives him a $50,000 parsonage allowance per year, which he uses to pay his mortgage, utilities and grocery bills.

When John Doe files his tax return at the end of the year, he can exclude the $50,000 parsonage allowance from his gross income. The church must be sure to designate the $50,000 as a parsonage allowance, however.

Why it Matters:

The IRS taxes ministers' wages, offerings and fees they receive from performing marriages, baptisms, funerals, etc. A parsonage allowance is tax-deductible when it comes to calculating income taxes, but it is not tax-deductible when it comes to self-employment tax. If John Doe were a self-employed pastor, his parsonage allowance would therefore become taxable.