Clergy should make sure their church designates an adequate portion of their salary for a housing allowance. This is considered the most important tax benefit available to clergy. The housing allowance is not subject to federal income tax, but it is subject to Social Security tax under SECA.
One aspect that makes the housing allowance a great tax benefit is that you can deduct the housing allowance from your gross income, which means it is an "above-the-line" deduction. In other words, you do not have to itemize your deductions to take advantage of this tax benefit.
Several rules apply to this tax benefit. For instance, the church must designate a certain amount of the salary for the housing allowance in advance of the payment (never retroactively after the payment is made). A good routine would be to make sure that, every year, the church designates the housing allowance before the beginning of the calendar year in some kind of official capacity, such as in the minutes of a meeting and a formal business letter to the minister.
Clergy can take advantage of this tax benefit whether they own or rent housing, or even if they live in a church-owned parsonage. Whatever the situation, however, the allowance cannot be for more than the "fair rental value" of the residence, including not only rent or mortgage payments, but also utilities, maintenance and provided furniture. (Make sure to keep receipts of all such housing expenses.) Don't go out and buy a mansion right away though: The allowance must be a portion of your salary and so cannot amount to more than the "reasonable" pay for your services.
Any portion of the housing allowance that is not used toward housing, utilities and furniture is taxable income. Say a church provides $20,000 per year for the housing allowance, but when the minister adds up all the mortgage payments, utility costs and maintenance costs, it only amounts to $18,000. In this case, the minister would only be able to deduct $18,000 from his taxable income, and the extra $2,000 would count as taxable income like the rest of the minister's salary.
In other words, you are allowed to exclude from your taxable income whichever is lowest: your housing allowance amount, your actual housing expenses or the fair rental value of your home.