You make the call

Question: John is a retired minister and has been receiving a pension from the church from which he retired. The pension specifically designates a housing allowance which is equal to the historical amount of his actual housing expenses when he was an active minister. His actual expenses for maintaining the home are lower than the fair rental value of the home and qualify to be excluded from his income as a retired minister. In December of last year, John died. His widow, Mary, is continuing to receive John’s housing allowance. Mary has asked how the housing allowance will be treated for tax purposes now that John has passed away. Mary has never worked as a minister. Can Mary keep excluding the housing allowance from income?

Answer: No. Mary can’t exclude the housing allowance from her income. While the housing allowance is excludable from income for ministers under §107 and not subject to self-employment tax if paid to a retired minister, the housing allowance becomes taxable income to a surviving spouse. Only surviving spouses who receive their own housing allowance for services performed as a minister may continue to exclude the housing allowance payments.