Parsonage Allowance

What Is a Parsonage Allowance?

A parsonage allowance is a sum of money granted by similar overseeing board of a place of love to its priest to offset housing expenses. For tax purposes, this allowance is exempted from the beneficiary's gross income. A parsonage allowance may likewise be called a rental allowance or housing allowance.

It is important to note that a pastor doesn't be guaranteed to mean a Christian. As defined by the IRS, a clergyman can be Christian, Jewish, Muslim, or some other religion.

Understanding the Parsonage Allowance

Segment 107 of the Internal Revenue Code (IRC) permits the pastor of a strict body to exempt some or all of a housing allowance from gross income for income tax purposes.

As compensation for clerical services gave, a priest might receive pastoral income, a portion of which incorporates a rental or housing allowance. The priest can bar from gross income the lesser of the accompanying amounts:

• The amount formally designated (in advance of payment) as a housing allowance
• The amount really used to give or rent a home
• The fair market rental value of the home

Assuming that the payment is greater than the genuine expenditure, the pastor is responsible for reporting and paying taxes on the right amount of income. That is, any excess or unused portion of the housing allowance ought to be reported on the clergyman's annual tax return as income on line 7 of Form 1040. Also, the payments formally designated as parsonage allowance must be utilized in the year received.

Covered Expenses

Parsonage allowances just apply to a clergyman's primary residence and do exclude commercial property or vacation homes. Housing expenses that are eligible to be excluded from income include:

• Mortgage payments (principal and interest)
• Rent payments
• Property protection
• Property taxes
• Payments for utilities and service conveyance
• [Property holders' association dues](/mortgage holders association-expense hoa)
• Rebuilding expenses

Priests living in parsonages given by the congregation might have part of their compensation designated as a tax-free parsonage or housing allowance to cover the cost of furniture purchase and repair, as well as different expenses connected with maintenance that are not repaid by the congregation employer. If a home equity loan is utilized to pay for expenses connected with the parsonage, it tends to be incorporated as part of the clergyman's parsonage allowance.

Nonetheless, assume the home equity loan is utilized to cover post-optional tuition expenses or different costs not eligible as a parsonage expense. In that case, the loan can't be incorporated as a parsonage allowance.

Notwithstanding home equity loans used to pay off non-housing expenses, the cost of food, clothing, domestic assistance, and cleaning services are not part of a pastor's parsonage allowance. A pastor who has a parsonage allowance and organizes deductions may likewise deduct mortgage interest and property taxes from income taxes. The parsonage allowance is a tax exemption from income, while mortgage interest and property taxes are tax deductions from income.

Self-Employed Minister

In spite of the fact that parsonage allowance is deducted for federal income tax purposes, it isn't deducted for self-employment tax purposes. Parsonage allowance as well as the fair market rental value of a parsonage gave to a minister must be incorporated as self-employment earnings subject to the self-employment tax.

Retired pastors might be eligible for the parsonage allowance.

Eligible Clergy

Note that in spite of the fact that somebody in a congregation might be alluded to as a priest, the IRS may not see that individual as a pastor for tax purposes. While appointed pastors are bound to be eligible for a parsonage allowance exemption, charged and licensed clergymen are less inclined to be treated as priests by the IRS.

Likewise, secular employers can't give an employee working in a non-clerical job a tax-free housing allowance, even assuming the employee is a priest in the congregation.

Moreover, the IRS doesn't differentiate an active church serve from a retired one. Consequently, retired clergymen might request that distributions from their 403(b) Plan be designated in whole or in part as a parsonage allowance.

Illustration of a Parsonage Allowance

For instance, assume an appointed pastor receives an annual income of $50,000 from a congregation, giving a parsonage. In the event that the fair rental value of the on location parsonage is $15,000 annually, the clergyman's gross income would be $50,000 for federal income tax purposes, however it would be $65,000 for self-employment tax purposes.

A parsonage can be a rental, or it tends to be a home with a mortgage, and the congregation gives a parsonage allowance. In the case over, the $15,000 can be utilized towards the rent and utilities, or on the other hand in the event that the house has a mortgage, towards the loan payment.

Parsonage Allowance FAQs

What is a 403(b)(9) Plan?

Like other retirement plans, a 403(b)(9) plan is a defined contribution retirement plan utilized by fervent temples or church organizations. This plan isn't subject to ERISA requirements. The congregation, as the employer, may add to the plans, and this type of plan offers distribution methods for retired clergymen, too.

Could You at any point Take a Housing Allowance Distribution in the event that You've Rolled Over Into an IRA or 401(k)?

No, you can't take a housing allowance distribution in the event that you roll over your 403(b)(9) into a 401(k) or an IRA. It is suggested that retired church members don't move their 403(b) funds to take tax-free distributions. On the off chance that you roll over your funds out of your 403(b), you can not claim a housing allowance.

Is a Parsonage Allowance an Exclusion or a Deduction?

A parsonage allowance is an exclusion that can be taken from gross income for income however not self-employment tax purposes, as per the IRS website. It can't be taken as a deduction on your taxes in light of the fact that the allowance isn't viewed as earned income.

What's more, members of the church who receive a parsonage allowance must incorporate "the amount of the fair rental value of a parsonage or housing allowance for social security coverage purposes," as indicated by the Internal Revenue Service.

Features

• A parsonage is a dwelling (home or apartment) gave to a clergyman by the overseeing board of a place of love.
• A clergyman's parsonage allowance is exempt from gross income.
• The amount deducted may cover reasonable housing costs.
• In the event that the place of love has its own parsonage, part of the costs of maintenance might be deductible.
• Parsonage allowance must be utilized in the year it is allocated to the church member.