A letter ruling by the Commissioner, although dealing with allowable expenses, makes it clear that Virginia (VA) follows federal law.
According to VA Ruling 12-141 (specifically the paragraph discussing IRC § 107 posted below) it appears they follow federal law when it comes to housing allowance for ministers or clergy.
Pursuant to IRC § 107, an individual who qualifies as a minister of the gospel can exclude a housing allowance, subject to certain limitations, from gross income. According to documentation provided by the Taxpayers, an amount spent for housing was excluded from the husband's income for federal income tax purposes. Because the housing allowance was not included in the Taxpayers' FAGI, it would not also be deductible as an ordinary and necessary expense paid or incurred on behalf of a trade or business during the taxable year.
This simply put, this means that housing allowance is excluded for VA income up to the amount it was used for the cost of housing which is exactly how it is treated for federal purposes. For this reason the unused housing allowance should be included as part of your VA income.
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