What is true about Judy's housing allowance as a member of the clergy?

Judy's housing allowance as a member of the clergy is treated differently under the tax code compared to standard income. The correct understanding is that specific parts of her housing allowance can be excluded from taxable income, given that she meets certain requirements set by the IRS. In this case, the correct answer indicates that the housing allowance is automatically not taxable.

For clergy members, the housing allowance can be excluded from income to the extent that it is used to pay for qualified housing expenses, along with the amount of the allowance that does not exceed the fair rental value of the home. This unique treatment is designed to support individuals serving in religious roles, allowing them to manage their living expenses without the same tax burden that applies to conventional wages.

The other options misinterpret the nature of the housing allowance. For instance, stating that the allowance must be fully included in her income misrepresents the rules for clergy housing allowances, while the assertions regarding partial exclusion and reporting as capital gains do not fit the specific tax guidelines provided for clergy.