Are missionaries who raise their own support without affiliation with an agency able to designate a housing allowance and, therefore, exclude it from taxable income?
First, in order to qualify for a housing allowance, one has to be properly classified as a minister (see 2015 blog post relating to this topic).
Second, the housing allowance designation needs to be prospectively designated by a 501(c)(3) organization.
According to the IRS Ministers Audit Technique Guide,
“The exclusion under Internal Revenue Code §107 only applies if the employing church [including a mission agency] designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister's employment contract, the church minutes, the church budget, or any other document indicating official action. Treas. Reg. §1.107-1(b).”
The IRS Publication 1828 also states, "The minister’s church or other qualified organization must designate the housing allowance by official action taken in advance of the payment." Missionaries without affiliation with an agency are considered the employees or independent contractors of individual congregations which have authority to designate housing allowances. Accordingly, the churches supporting a missionary who has no agency affiliation may designate housing allowances.
Third, the excludable amount is subject to a three-part test. The lesser of a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance [in aggregate by the missionary's supporting churches], or (c) the fair rental value of the home is the excludable amount.
See past MinistryCPA posts regarding this topic: