A minister cannot exclude income as a housing allowance unless the church designated it before the minister earned income for ministerial services. In other words, it has to be designated in advance (prospectively), not retroactively. However, a church may change a housing allowance during the year as long as the change is prospective.
Example: Reverend Smith's church forgot to designate a housing allowance for him in 2012 and doesn't discover the problem until 2013. It is too late for the church to designate an allowance for the 2012 tax year, and Reverend Smith cannot exclude any expenses he spent on housing from income on his 2012 tax return.
Example: Reverend Smith’s church discovers in October 2012 that it forgot to designate a 2012 housing allowance for him. The church can designate a housing allowance for him for the rest of the year. But the church can't designate more than he’ll earn for ministerial services the rest of the year. Designations have to be made before ministers earn compensation (prospectively), not retroactively.
For more information, visit the Ministers' Tax Guide