I asked my friend Maria (who is also a CPA) a few questions about the housing allowance.  Her answers are quite informative.

Me:  Does the portion of the pay package designated as "housing allowance" affect the Adjusted Gross Income (AGI)?

Maria:  Yes-- it is not included as a part of the AGI.

This is huge; the AGI is the primary determinant of the tax owed for Federal Income Tax.  Since the housing allowance is not factored into the AGI, the AGI necessarily remains a lot lower than the total salary package.  This, by the way, is THE way that the housing allowance is a tax benefit to ordained pastors.

Me:  Is the AGI the primary determinant for tax brackets?

Maria:  Yes.  The amount you are taxed is based on your AGI.

Me:  So a pastor's salary package will have to be pretty high to move him out of the 15% tax bracket?

Maria:  Yes. 

This is also huge.  For a typical pastor's family (married filing jointly), the AGI must be $61,300 or higher to shift up to the next tax bracket (the 25% bracket).  But assuming that the housing allowance represents 1/4 to 1/3 of the total pay package, a pastor's housing + cash salary would have to total $76,000 (or more, depending on the amount of the housing allowance) to exceed this. 

Depending on the circumstances (for example, in an area where housing costs are exceptionally high), it's possible for the package to be well over $100,000 and the pastor to remain in the 15% tax bracket.

Maria's comment sums it up well: "It's a really big benefit."

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