Tag Archives housing allowance

What Work Is Eligible For The Clergy Housing Allowance?

by

This is an excerpt from the book The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance, which is available in paperback and Kindle format on Amazon.

Treasury regulations state that,

In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.

Another term the IRS commonly uses for “services which are ordinarily the duties of a minister of the gospel” (since that’s way too long) is “ministerial services.” So, as with everything, in order to determine eligibility for the housing allowance, we need to define ministerial services. IRS Publication 517 states that “Ministerial service, in general, is the service you perform in the exercise of your ministry.” Writing this book is the exercise of my God-given ministry. Does that mean I can take a housing allowance? I wish!

Luckily, they provide further guidance, since that’s about as clear as mud. There are two different purposes for which the US government concerns itself with the definition of ministerial services. One is the housing allowance, which we are discussing, and the other relates to self-employment taxes. As such, the definitions and examples that the government provides for either one apply to the other (in almost all situations). That’s good for us because it gives us a larger body of work to pull from when looking for answers.

Ministerial service is that which you do in the exercise of your ministry. Here are the ministries that you can exercise that qualify you for the clergy housing allowance (and some that don’t): 

Pastors & Church Workers

What we usually think of when we think of a pastor or minister fits well into the IRS’s common definition of someone that conducts religious worship and performs sacerdotal, or priestly, functions. Those activities are hard to define, however, because every religion is different and even denominations within a religion vary widely in their activities and worship. 

Because of this, the IRS doesn’t get into specifics regarding sacerdotal functions and worship. Rather, they leave that up to each minister’s church or denomination. Treasury Regulation § 1.1402(c)-5(b)(2)(ii) allows those definitions to be governed by the tenets and practices of the particular religious body. I appreciate the freedom of religion, but boy does it make my job hard!

Sacerdotal functions usually include things like baptism, performing weddings, and administering communion. These are things that only certain people within the religion are allowed to do. Conducting worship services is similar because in most religions not everyone has the authority to run their regular gatherings. 

The IRS wants to see that your religious body considers you a spiritual leader. You should have special authority and act on it. While there is some ambiguity regarding those that qualify for the housing allowance, the IRS is very clear about some people that don’t. 

According to IRS Publication 517, ministers of music or education and those who serve in administrative or other functions who aren’t authorized to perform substantially all of the religious duties of an ordained minister in your church (even if commissioned as a minister of the gospel) are not eligible to take a housing allowance. As you can see, having authority is key. Overseeing the worship department is not enough. If your church doesn’t view you as a pastor, neither does the US government. 

Workers In Religious Organizations

When it comes to working with religious organizations like religious boards and societies (and their integral agencies), they have a little more to say. First of all, the organization has to be under the authority of a religious body such as a church or denomination. The organization doesn’t have to be directly controlled by the church, though. They consider any organization organized for and dedicated to carrying out the tenets and principles of a faith in accordance with the faith’s rules to qualify. 

However, you can’t just slap a fish on it and call any organization Christian. Your church or denomination probably has certain requirements or sanctions governing the creation of their institutions, and those must be followed for your organization to be legitimate.

Within the organization, you have to also perform legitimate work for it to qualify as ministerial services. Being the janitor for a religious society is not enough. You need to control, conduct, or maintain the organization (and not the kind of maintenance that janitors provide). 

What they mean is that you need to be involved in directing, managing, or promoting the activities of the organization. Likely, it will require a leadership position within the organization. You can run a department within your denomination’s Missions Board, and though you aren’t preaching and burying people, you are performing ministerial services in the eyes of the IRS. Is this getting complicated enough for you yet? Keep reading, it gets even better!

Pastors In Secular Settings & Government

You don’t actually have to work in a church or religious organization for your activities to qualify as an exercise of your ministry. As long as you’re conducting worship and performing sacerdotal functions, those are ministerial services even if performed in secular society. 

A good example of this is campus ministries. Most colleges are not religious organizations by any stretch of the imagination. Yet, many pastors work on campuses leading services and counseling students. These campus ministers are pastors through and through, and the IRS does not deny it.

The same does not ring true for government workers, though. If you are a US military chaplain, your services do not constitute ministerial services for the sake of the clergy housing allowance. You are considered to be functioning as a commissioned officer, not a minister exercising his ministry. Also, a chaplain in a state prison or government-owned hospital that is a government employee is considered to be acting as a civil servant of the state and not as a minister of the gospel. We’ve got to keep church and state separate, after all. 

Church Assigned Positions

Even if you aren’t performing typical pastoral duties and you aren’t working for a religious organization, if you were directed by your church to take the position, it can count as ministerial services. The services must be assigned or designated by the church to qualify. 

Be careful about trying to twist this provision in your favor if you have secular employment, though. This situation only works if your church assigned you to the position for reasons directly related to the purposes of the church. People with secular employment have gone back and had their church “assign” it, and it hasn’t ended well for them. 

Work In A Religious School

Administrative duties and teaching responsibilities in a church school, college, or university qualify as ministerial services for the sake of the pastoral housing allowance. The key is that it must be a religious school. The same duties in a non-church school do not qualify. However, if a secular school provides you with faculty lodging, it may be tax-exempt because of another rule. IRS Publication 525 can give you more information about that. We only care about the pastoral housing allowance in this book.

Theological Students

If you are a theological student, just acting like a pastor is not enough to qualify you for the clergy housing allowance. When serving a required internship as a part-time or assistant pastor you can’t exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. 

Traveling Evangelists

Traveling evangelists who are ordained ministers are eligible to take a housing allowance from the money given to them by churches located away from their home community. This comes from Revenue Ruling 64-326, which allows for the housing allowance of an ordained minister to be paid by multiple churches. All of the same rules apply, so it must be designated in advance in writing and used to maintain a permanent home. 

Missionaries

For missionaries who are ordained, licensed, or commissioned ministers, all of the same rules apply. Whether or not a missionary should claim a housing allowance, though, will depend on their personal tax situation. There are a lot of complex rules surrounding Americans abroad and they are beyond the scope of this book. 

If you’re a missionary, just know that you’re still subject to US taxes no matter where you live and you really should work with a tax preparer or financial planner that understands expat taxation. If you try to do it yourself, you’ll either die of boredom or make costly mistakes. The costly mistakes can even happen if you work with a professional if they’re not experienced in working with Americans abroad. Please, please, please, believe me on this one. And thank you so much for what you’re doing. The rest of us really admire and appreciate it.

If you want to learn more about the clergy housing allowance, pick up a copy of The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance on Amazon today!

2

Who Is Eligible For The Clergy Housing Allowance?

by

One of the greatest financial benefits available to pastors is the housing allowance exemption. This comes in two forms: the minister’s cash housing allowance and parsonage allowance. These allow “ministers of the gospel” to exempt all of their housing expenses from federal income taxes. That can be worth quite a bit of money, so who are these “ministers of the gospel” that are eligible to take advantage of it?

The Bible calls us all to be ministers of the gospel but I don’t think that’s what the IRS has in mind. And “gospel” is a very Christian word but you know the US government would not give special benefits to Christians and not other religions. That would be unconstitutional. So who is eligible for this awesome tax benefit, then?

IRS Definition Of A Minister

The IRS defines a minister as:

Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. 

If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. 

As you can see, there are two main components to being a minister eligible for the housing allowance. You have to have the right authority and participate in the right activities. Let’s break those down for more clarity:

You Need The Necessary Authority

You must be ordained, commissioned, or licensed and it has to be by a religious body constituting a church or church denomination. However, the law does not spell out what constitutes a church or denomination. Rather, our definitions are based on case law, or previous court rulings.

There are two things that have been established as the bare minimum for something to be called a church:

  1. A body of believers or communicants

  2. The body of believers assembles regularly in order to worship

On top of that, assembling to worship must be the main purpose of the body of believers. Because of this, schools that have chapel services do not qualify because their purpose is educational and their worship services are incidental. Also, faith-based companies that have regular Bible studies or devotionals for their employees do not qualify because their purpose is business and their religious gatherings are incidental.

Once you determine that your church or denomination qualifies, you have to make sure the position they have given you qualifies. You must be “ordained, commissioned, or licensed.” If you have the same authority as someone with one of those titles but lack the title, you could argue that you are eligible for the housing allowance. Jewish cantors did and won the right to claim a housing allowance.

You Need To Provide Pastoral Services

Treasury regulations state that,

In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel.

Just having the right title is not enough to qualify you for the housing allowance exemption. It must be given to you in exchange for your services which are ordinarily the duties of a minister of the gospel, or simply “ministerial services” as the IRS often refers to them.

If you’re a pastor in a church, what the IRS wants to see is that you do things like baptize people, perform weddings, administer communion, and run church services. Things that not just anyone in the church is allowed to do. 

The IRS doesn’t get into a lot of specifics about it because different religions vary greatly. They do, however, state that ministers of music or education and those who serve in administrative or other functions who aren’t authorized to perform substantially all of the religious duties of an ordained minister in your church (even if commissioned as a minister of the gospel) are not eligible to take a housing allowance. 

There are some other positions that qualify as providing ministerial services besides just being a traditional pastor:

  • Workers in Religious Organizations. You must have a leadership or key role in an organization that is under the authority of a church or denomination and exists to carry out the tenets and principles of the faith. An example would be a denominational missions board or religious society.

  • Pastors in Secular Settings. If you do the duties of a pastor but outside the church in a secular setting, that still qualifies. An example of this would be a campus minister.

  • Chaplains. Chaplains in church-related or nonprofit health and welfare institutions are eligible for the housing allowance. Chaplains in government-owned hospitals or with the US military are not eligible because they are said to be functioning as government employees and not ministers.

  • Church Assigned Positions. Even if you aren’t performing typical pastoral duties and you aren’t working for a religious organization, if you were directed by your church to take the position, it can count as ministerial services. The services must be assigned or designated by the church to qualify. 

  • Work in a Religious School. Administrative duties and teaching responsibilities in a church school, college, or university qualify as ministerial services for the sake of the pastoral housing allowance. The key is that it must be a religious school.

  • Traveling Evangelists. Traveling evangelists who are ordained ministers are eligible to take a housing allowance from the money given to them by churches located away from their community as long as it is designated in advance in writing and used to maintain a permanent home. 

  • Missionaries. Missionaries are eligible for the housing allowance just as pastors are.

So, to be eligible to claim a ministerial housing allowance you need to have been given authority by a qualifying religious body and you need to receive it in exchange for pastoral services that you provide. 

Don’t forget to check out our Housing Allowance Calculator and Housing Allowance Book!

0

How The Housing Allowance Can Hurt Pastors With Families

by

The clergy housing allowance is touted as the greatest tax benefit available to pastors. And it really is a great benefit. I learned back in 2019, though, that it can have a dark side. Not a Darth Vader using the Force to crush you kind of a dark side, more like a “If I hadn’t claimed so much, I’d be $1,000 richer” kind of dark side. The problem is how it can affect the Additional Child Tax Credit, which is a major benefit for pastors with children.


How The Clergy Housing Allowance Affects The Child Tax Credit

One of the provisions of the tax reform that passed 5 or so years ago, one of the few points that everyone liked, was the doubling of the Child Tax Credit (CTC). Kids used to be worth $1,000 each and now they are worth $2,000. That still doesn’t feel like enough when your child is laying on the floor screaming, but hey, it’s something, so let’s be thankful for it.

The CTC is credited against your federal income taxes. On your Form 1040, you add up all your income, subtract the standard or itemized deduction, and end up with your taxable income. That taxable income determines your federal income tax. The CTC is then subtracted from the tax so that you won’t have to pay as much.   

Income

-Standard/Itemized Deduction

=Taxable Income

Income Tax

-Child Tax Credit (and other credits)

=Taxes Due

The housing allowance lowers your taxable income, which lowers your federal income tax. In fact, I know a lot of pastors are able to completely erase their taxable income between the housing allowance and deductions. No income means no tax due, which means you don’t get to take advantage of the CTC.

But why does that matter if you’ve eliminated your tax bill anyway?

How Income Affects The Additional Child Tax Credit

It doesn’t, really. What matters is the Additional Child Tax Credit (ACTC). The ACTC is the refundable portion of the CTC. That means that it isn’t simply used to cancel out part of your tax bill. The government will actually give you the money, even if you didn’t owe any income taxes in the first place.

On your 2022 tax return, up to 75% of the CTC qualifies for the refundable ACTC. That means the government is willing to pay you up to $1,500 per child. If you have a big family, that is a big deal.

Where the housing allowance comes into play is that your ACTC is limited by your income. It is limited to 15% of your income over $2,500. So, if you use the housing allowance to reduce your income, you also reduce your eligibility for this refund.

Taxable Income

-$2,500

x15%

=Limit on Additional Child Tax Credit

How It Plays Out In Real Life

(This is for illustrative purposes only and does not include things that are immaterial to the subject at hand, such as self-employment taxes and the deductible part of them.)

Let’s say you’re married, you have three children, and you earn $50,000 a year. You take half of that as taxable income and half as a tax-exempt housing allowance. Your tax return would show $25,0000 as income that would be completely eliminated by subtracting the $25,900 standard deduction. So, after the deduction you show no income and, therefore, no income taxes are due.

If you don’t owe income taxes then you can’t take the CTC. However, the ACTC is still available to you. The maximum that you could be eligible for is $4,500 (3 kids x $1,500). But there is still that income limitation.

To calculate your ACTC, you first take your earned income, which was $25,000 in this example. Then subtract $2,500 and you end up with $22,500. You then calculate 15% of that amount, which is $3,375. That is your ACTC. In this example, your housing allowance cost you $1,125 in ACTC ($4,500-$3,375).

$25,000

-$2,500

x0.15

=$3,375 maximum ACTC allowed

What would happen if you had only taken $15,000 as a housing allowance instead of $25,000? On Form 1040 you would have ended up with $9,100 of taxable income ($35,000 income – $25,900 standard deduction). The income tax on that is $908. However, the CTC would have canceled that out and you would not have ended up owing any more than before.

How does the lower housing allowance affect the ACTC?

$35,000

-$2,500

x0.15

=$4,875 new maximum ACTC allowed

Your new limit is $4,875, which is more than the $4,500 you are eligible for. So, lowering your housing allowance increases your ACTC to $4,500. That’s $1,125 more that you get back without increasing your tax bill at all. What could you do with an extra $1,125?

What Should A Pastor Do?

Remember, the clergy housing allowance is a benefit available to you. There is no requirement that you take it. The IRS isn’t going to come after you, mortgage statement in hand. You don’t have to claim a housing allowance and you shouldn’t if it is costing you money.

If you have kids and a lower income, you really need to look into this. Check your 2022 tax return to see if you got the full Additional Child Tax Credit. If not, play around with the numbers. Calculate your tax bill with different housing allowance amounts to see how the final results are affected. Now is a great time to do it since you can use your 2022 return numbers to determine how much of a housing allowance you should be taking in 2023.

Remember, the Bible says that children are a blessing. So let’s make sure you get all of the financial blessings you’re entitled to!

0

Your Top 10 Clergy Housing Allowance Questions Answered

by

The clergy housing allowance is by far the most common topic that I receive questions about. Here are 10 or the most common questions answered to help you get the most value out of your housing allowance:

How does a housing allowance work?

  1. You, the pastor, calculate what your housing costs will be for the year and submit it to your church.
  2. Your church approves the housing allowance and does not include it as taxable income in box 1 of your W-2.
  3. You track your housing expenses throughout the year. Add any excess housing allowance to your taxable income on your tax return when you file.
  4. If you have not opted out of Social Security you need to include the housing allowance amount as income when calculating your self-employment taxes.

What expenses can be included in the housing allowance?

A housing allowance can cover:

  • Down payment on a home purchase
  • Mortgage principal and interest payments
  • Property taxes
  • Homeowner’s insurance
  • Structural maintenance and repair
  • Landscaping, gardening and pest control
  • Furnishings (purchase, repair, replacement)
  • Utilities (gas, electricity, water, internet) and trash collection
  • Land telephone line
  • Cable TV expenses
  • Homeowner’s association dues/condo fees

Is the housing allowance the church’s or the pastor’s responsibility?

It is the pastor’s responsibility. The church’s only role is designating and paying the allowance. The pastor must calculate the allowance, document expenses and include the proper housing allowance amounts when filing his or her tax return.

Is a housing allowance considered income for tax purposes?

Not for income tax, but for self-employment taxes. If you have opted out of Social Security you do not pay self-employment taxes so your allowance does not affect your taxes. Housing allowances are exempt from most state income taxes, but you should double check with your particular state.

How much is exempt from federal income taxes?

The IRS specifies that only the lesser of the following can be excluded from your gross income:

  • the amount actually used to provide or rent a home;
  • the fair market rental value of the home (including furnishings, utilities, garage, etc.);
  • the amount officially designated (in advance of payment) as a housing allowance; or
  • an amount which represents reasonable pay for your services.

When should I request my housing allowance?

You should get your housing allowance approved prior to the beginning of the year or at the beginning of the year so that you don’t miss out on any of the benefits. An allowance can be approved at any time during the year, but only expenses incurred after the approval will be eligible for the housing allowance.

Is it better to overestimate or underestimate my housing allowance?

Overestimate. If you underestimate your expenses you cannot go back and increase your housing allowance. However, if you overestimate, you can make a correction by including the excess amount as taxable income when you file your taxes.

Can I change my housing allowance from year to year?

Most definitely. If your housing expenses change from year to year so should the allowance you request. When you plan on making a large purchase, such as a bed, deck or house, your requested allowance should include that amount. If you end up not making the purchase, you will simply adjust down the allowance when you file your taxes. If you don’t include the large expense, you will unnecessarily pay taxes on that amount.

Can I still take the mortgage interest deduction?

Yes. Receiving a housing allowance does not preclude you from deducting your home mortgage interest and real estate taxes if you itemize deductions.

Do I need to document my housing expenses?

Yes! Keep all receipts, bills, etc. that apply to your housing allowance. The IRS loves paper trails and if you get audited without one it could get ugly.

0

How Much Housing Allowance Can A Pastor Claim?

by

One of the benefits of being a pastor is getting to claim an income tax-free housing allowance. Not having to pay income taxes on part of your income can be a great benefit, so it’s one I always recommend that pastors maximize. But how do you maximize it?

What Is The Maximum Allowed Housing Allowance?

The first step in maximizing your housing allowance is knowing how much you’re allowed to claim in the first place. There are limits and some people have ended up in tax court for disregarding them. 

Your maximum allowed housing allowance is the least of:

  • the amount actually used to provide or rent a home;
  • the fair market rental value of the home (including furnishings, utilities, garage, etc.);
  • the amount officially designated (in advance of payment) as a housing allowance; or
  • an amount that represents reasonable pay for your ministerial services.

How To Calculate Your Housing Allowance Limit

Therefore, to figure out what size of housing allowance you’re eligible for, simply calculate each of the above amounts and go with the lowest. If your mortgage payment is $2,000 a month but you could only rent the home for $1,500, then your housing allowance is limited to $1,500 a month. But, if your church has only designated $1,450 a month for your housing allowance, then that’s the most you can claim. 

If you find that the lowest number is your designated housing allowance, that’s an easy fix. Ask your church to designate a higher housing allowance for you. You can start claiming it the moment they have made the designation official. 

Your housing allowance is also limited to an amount that represents reasonable pay for your ministerial services. That means that if you only work ten hours a week at the church, then you cannot claim a $75,000 housing allowance. I don’t think the IRS would consider $150 an hour “reasonable” compensation for your service.

Remember, also, that those services only include ministerial services. If you are a bi-vocational minister, you can only claim a housing allowance from your ministerial income. If your expenses can justify it, though, you could claim your entire ministerial income as a housing allowance and use your secular income for all of your other expenses. Also, it doesn’t matter how you are paid for your ministerial services. Whether it’s by W-2 or 1099 does not matter.

How Much Housing Allowance Should You Request?

To determine your housing allowance, you should calculate both your anticipated expenses and the fair market rental value of your home. Then request the lesser amount. When calculating anticipated expenses, it is wise to include an extra 10% or so to cover things that come up unexpectedly, like a new crib or repairing termite damage. 

Some pastors regularly request the fair market rental value of their home even when it is higher than their anticipated expenses. They do this to ensure that they maximize the exclusion. The risk with this is that if your expenses are significantly lower, you will have to add the excess to your taxable income when you file your return and could end up owing a lot of taxes. 

Also, retirement account contribution limits are often tied to income. Claiming a higher housing allowance reduces your taxable income. That could unnecessarily limit the amount you can save for retirement in a tax-advantaged account. Usually, by the time you realize your taxable income will be higher (because you didn’t use the whole allowance), it’s too late to put more into retirement. 

Try out the Pastor’s Wallet Housing Allowance Calculator. Just make sure to include any large purchases that you have planned for the year, such as a new refrigerator or deck. If you live in a parsonage or other church-provided housing, only calculate those expenses that you, yourself, pay for. You can also learn about calculating the fair market rental value of your home here.

0

Claiming A Minister’s Housing Allowance In Retirement

by
Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

The following is an excerpt from my book, The Pastor’s Wallet Complete Guide to the Clergy Housing Allowance:

The IRS says it’s still possible to claim a housing allowance even after you retire and stop receiving a paycheck. Unfortunately, there is no clear law or hard and fast rules about this. There is little guidance and not a lot of certainty, so what we do know is cobbled together from various Revenue Rulings issued by the IRS. 

Even in retirement, the rules that the housing allowance must be provided as payment for ministerial services and designated in advance by a qualifying organization still apply. Based on the information available to us, this is how those two requirements work themselves out in retirement:

The allowance must be provided in payment for services that are ordinarily the duties of a minister of the gospel. According to the IRS, the housing allowance of a retired minister counts because it is paid as compensation for past services. 

Contributions you make to a church retirement plan, usually a 403(b)(9), as a pastor are a part of your pastoral income. So, when you take them out in retirement they are still considered eligible pastoral income. Any pension your church or denomination pays you is something that you earned through your ministerial work and part of your compensation as well. Also, if you use part of your church pension to purchase a commercial annuity, those annuity payments generally qualify for the housing allowance as well, since they were bought with your ministerial income.

You cannot take a housing allowance from an IRA in retirement, even if you used your pastoral compensation to fund it. Neither can you claim a housing allowance from your Social Security benefits, even if you paid into the system as a pastor. I know this is confusing, but that’s just the way the IRS is. Trying to make sense of most tax law is like trying to make sense of a 3-year-old girl. You can learn to live with them but you’ll never actually understand them.

The housing allowance must be officially designated in advance by the employing church or other qualified organization. The IRS has ruled that the board of a national denominational pension fund is qualified to make a housing allowance designation for a pastor. They determined that the pension fund met the requirements of being an “employing church” and the fund trustees were acting on behalf of local churches. Revenue Ruling 63-156 also allows for an independent or nondenominational church to designate a housing allowance for their retired clergy. 

The same ruling addressed pastors with non-church employers as well. Basically, if their income while working was eligible for the housing allowance, then their pension or retirement savings from that same employment should also be eligible during retirement. If that employer was able to designate an allowance for them during their working years, then they can do the same during retirement. However, the IRS has ruled inconsistently on this matter, so there is a risk that they would disallow a housing allowance taken from a non-church employer. 

As during your working years, the housing allowance still must be officially designated in advance. If you anticipate level housing expenses in retirement, it is a good idea to make your request “until further notice” so that you don’t have to worry about resubmitting your housing allowance every year. For some denominations, the annual conference is responsible for passing the designation resolution for retired or disabled clergy, which is then published in the conference journal. It is not uncommon for them to designate 100% of income as housing allowance.

Another thing that doesn’t change in retirement is the fact that only current year expenses qualify for the housing allowance. This is important for retirees because many senior living facilities either require or offer the option for residents to buy-in or pre-pay with a large one-time payment. 

Even if you pay 15-years’ worth of rent at once, you can only claim one years’ worth of rent for your housing allowance. And, if you pre-pay like that, you cannot amortize the payment over 15 years and try to claim a portion of it in subsequent years. We know this because one pastor tried to and the IRS wouldn’t let him. They limited his housing allowance to only the utilities, maintenance and insurance that he paid during that tax year. So, by prepaying housing expenses in retirement (or any time), you essentially forfeit your ability to claim a housing allowance for those expenses that cover more than one year.

IRA Rollovers

One threat to your ability to take a housing allowance in retirement is rolling the money out of the church plan. The common advice among financial advisors when you leave a job, whether to retire or otherwise, is to roll the funds in your employer-sponsored retirement plan into an IRA. This is because IRAs are self-managed and offer more investment options and sometimes lower fees (and some advisors get paid a percentage of them, too). 

If you’re a pastor, DON’T DO IT! 

That’s right, DON’T DO IT!!!

No matter what your advisor says, keep the money in your church’s retirement plan. At least enough to cover your housing expenses for the rest of your life. If you roll your money out of your church plan and into an IRA in retirement, it will no longer be eligible for the housing allowance. Also, if you roll the money from your church plan into a secular 401(k) or 403(b) it will become ineligible for the housing allowance. 

The only chance you might have to reverse such a mistake would be to start working as a pastor again for a church that offers a qualified retirement plan. Then you might have the option to roll your IRA or other retirement account back into the church’s plan. Once the money is back in a church plan, it may again be eligible for a housing allowance. However, there’s no guarantee that the IRS would allow that.

So, I’m going to stick with my initial advice: DON’T DO IT!

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
0

How Does The Minister’s Housing Allowance Affect Social Security Retirement Benefits?

by
Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga

Here at Pastor’s Wallet, we talk a lot about the clergy housing allowance because it’s such a unique benefit for pastors. In fact, I even wrote a book on the topic, as you can see from the above graphic. Today, we are going to talk about how the housing allowance affects Social Security benefits. 

You see, your housing allowance is considered compensation for your ministerial services. However, there are a lot of different programs that use compensation numbers and only about half of them count the housing allowance in their calculations. What about Social Security?

Does The Housing Allowance Count As Compensation For Social Security Purposes?

The housing allowance affects different aspects of Social Security retirement benefits in different ways. Let’s take a look at our two main concerns regarding compensation and Social Security; benefit accumulation and taxability of benefits.

Benefit Accumulation

As you’ve read in other posts on this blog, Social Security benefits are awarded based on a worker’s earnings history. They look at your top 35 years’ worth of earnings and add in zeroes if you have less than 35 years of work history. Those earnings that they use to calculate benefits DO include your housing allowance. 

Both the cash housing allowance and the parsonage allowance count as income when calculating Social Security retirement benefits. Even if you only get paid $20,000 per year, if you also live for free in a parsonage that is worth $20,000 a year, your Social Security earnings report will show that you had $40,000 of income. 

How does the Social Security Administration know how much your parsonage is worth? You tell them on Schedule SE. All pastors are required to pay Social Security and Medicare taxes as if they were self-employed. That means, instead of having an employer withhold and pay those taxes through the FICA system, you have to calculate them on Schedule SE along with your regular tax return and pay them that way. Thus, your housing allowance is included and affects your Social Security retirement benefits. To see what the Social Security Administration has on file as your personal earnings history, set up an account with them at ssa.gov

Taxability of Benefits

While you’re working and earning money, your income affects the size of the Social Security retirement benefit you will be eligible for in the future. Then, once you start collecting your benefit, your income affects whether or not that benefit is taxed. 

Yes, you may have to pay taxes on your Social Security retirement benefits. The percentage of your benefits that are taxed depends on your income and there are three different tiers. For 2021, a single person’s Social Security benefits are not taxed if their provisional income is under $25,000 (it is $32,000 for a married couple). For single tax filers earning between $25,000 and $34,000 or married couples earning between $32,000 and $44,000, up to 50% of benefits may be taxable. Above those limits, up to 85% of your Social Security benefits can be subject to income taxes.  

This will affect you if you or your spouse start to collect Social Security benefits while you are still working. The big question for pastors is, does your housing allowance count as income? Will your housing allowance make more of your Social Security benefits taxable?

It’s your lucky day, the answer is no. The income used to calculate the taxability of Social Security benefits is called “provisional income.” When calculating provisional income, you pull your income numbers from the front of Form 1040 and Schedule 1 and the housing allowance does not appear on either of those. All that to say, your cash housing allowance or parsonage allowance should not increase the taxability of your benefits. 

Work With A Professional

If you’re trying to figure out your taxes and Social Security benefits, I recommend working with a professional who understands the ins and outs of clergy tax issues. Most tax professionals do not understand these issues, so make sure to find one who does. 

How can you determine if a tax professional understands clergy taxes? Ask these two questions:

  1. Are pastors employees or self-employed for Social Security tax purposes?
  2. Is a pastor’s church salary subject to income tax withholding?


If they don’t answer these two questions correctly, look elsewhere. Chances are, you will know more than they do (because you read this blog, of course!). In case you’re wondering, here are the answers to the questions:

  1. Pastors are always self-employed for Social Security tax purposes. Learn more.
  2. Pastors are not subject to income tax withholding. Learn more.

For a list of reader-recommended (I have not worked with them personally) tax preparers, check out the end of this article. I myself do not prepare tax returns.

Purchase The Complete Guide to the Clergy Housing Allowance by Amy Artiga
0