Podcast Episode #421
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The ministers’ housing allowance is an oft misunderstood benefit. Today, we discuss the future of the housing allowance and if/when it might go away.
Some highlights from today’s episode include:
- Churches have moved away from providing parsonages for pastors.
- Ultimately, I believe the ministers’ housing allowance will be ruled on by the Supreme Court.
- If you’re getting a minsters’ housing allowance right now, I encourage you to live like you’re not—because it will eventually go away.
- The housing allowance is the most amazing tax benefit ministers get.
The seven factors we cover are:
- Understanding the background of the housing allowance
- The status in the court system
- Incumbent upon the minister to be prepared
- Review of the package versus pay
- Most churches cannot or will not make up lost income
- Begin preparing now as if it goes away
- It’s ultimately about trusting God, not the tax code
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Feedback
If you have a question you would like answered on the show, fill out the form on the podcast page here at ThomRainer.com. If we use your question, you’ll receive a free copy of Becoming a Welcoming Church.
Thank you for the pod cast this morning. Very much appreciated. I have two questions. One is I am a pastor that still lives in a parsonage. Will this decision affect those who live in a parsonage?
Secondly, if you could answer this it would be greatly appreciated. If a pastor’s salary is $30,000/yr and the Fair Market Value of the parsonage is $9,600/yr. Here’s the question, should the monthly salary be based on the $30k or the $30k minus the $9,600? This has been a long debate within the group of pastor’s I know who live in a church parsonage.
Thank you,
Jeff
Jeff –
Yes, it could affect those who live in a parsonage if you are currently taking a housing allowance for any housing expenses personally (like utilities, furnishings, repairs, and improvements).
I am not completely clear on your second question. Are you referring to to fair rental value of the parsonage rather than the fair market value? If so, that value is not related to your salary at all. They are “apples and oranges.” You pay SECA taxes on the fair rental value of the parsonage.
If your salary is $30,000 and you pay, for example $3,000 in housing costs personally (see above), the church could give you a housing allowance of $3,000 and a salary of $27,000.
But don’t confuse fair rental value of the parsonage with your salary.
Considering the fact that our tax laws already allow taxpayers to shelter income from taxation where that income is used to provide an in-home office, or other type of business, I’m led to wonder why pastors would fear loss of the housing allowance. Unless, that is, they could never justify the deduction, based on how little their homes are actually used for those purposes.
When you add to that the reportedly widespread practice of “double dipping” … taking a deduction for the interest paid on a mortgage when said mortgage is already paid with tax-free moneys … I think it’s right that the allowance be ended.
Bob Cleveland says “justify the deduction” to people who make around $30,000 per year. Ok. Let me ask you this, would a Democrat ever promote removing benefits for people who make $30,000 per year or less given their “label” as being “for the little people”. Yet, here we are.
The housing allowance was more than “equalization.” It was recognition of the respect society had for ministers of the gospel. Well, that respect is gone now. Churches need to pay their ministers more to make up the difference. If they can’t, more will need to go bi-vo just to survive.
Whenever this deduction gets removed by the courts, American Christianity will be changed dramatically. Initially, many people will leave the ministry. They just won’t be able to survive financially. Whether it will strengthen the church ultimately remains to be seen.
Bob Cleveland, the logic behind the conclusion that “it’s right that the allowance be ended,” if universally applied, would lead to a grave number of injustices.
By way of background, I am not a minister, but I did spend more than three decades in the armed forces. For my entire career I received a tax-free housing allowance.
The tax-free housing allowance was not conditioned on using a part of my home for business purposes. And the military is not alone–thousands of educators receive tax-free housing benefits. If business use of a part of the home were the criteria, then all of these housing allowances would be under attack. To single pastors out for criticism while exempting these other groups who receive housing allowances seems to me unfair.
Likewise with “double-dipping.” There is nothing inherently wrong with claiming a mortgage interest deduction while receiving a tax-free housing allowance. Every single military member who itemizes their taxes does so. Would this justify taking away taking the tax-free housing allowances all of our soldiers and sailors receive because some, be it a large or small percentage of them, itemize their mortgage interest deduction? Why punish those who do not itemize because an unknown percentage actually do itemize?
Last, the reportedly widespread practice of “double dipping” will decrease with the implementation of the Trump tax reform which doubled the standard deduction. The net effect will be that fewer taxpayers will exceed the standard deduction with their tax-deductible expenses. For those who worry about clergy (or military, educational, or any other recipient) abuse of their tax-free housing allowance, the “widespread practice” will be significantly curtailed in 2018.
I was wondering if you could elaborate on the parsonage side of things. Is there such a thing as a parsonage allowance? Or is the parsonage amount determined from the lowest of the three factors just included in your pay but money is never physically seen? What expenses should a pastor keep record of concerning the parsonage and housing? I really enjoyed today’s podcast as always. You all are a true blessing!
Thanks, Jerry. See my response to Jeffrey above to see what you can take as a housing allowance. You should keep good records of those housing items you pay personally while you live in the parsonage.
Something has to make up for the fact that we have to pay Self-Employment Tax. Maybe they could eliminate that if they take away the housing allowance.
David –
I will be surprised if the self-employment issue for ministers is addressed concurrently with the housing allowance.
The trade-off for me, and I may fully misunderstand the way taxes are done, would be that as the housing allowance is removed, so should the treatment of pastors in duality–as both an employee of the church, but also taxed as a self-employed person.
Agree!
I don’t disagree, but I will be surprised if both issues are addressed concurrently.
Good point
The housing allowance has often gone together with does self employment status. Is there any indication that the self-employment status will go away with the of a loss of The ministers housing allowance?
I sure hope so.
Kevin –
I doubt it.
Don’t ministers report business miles for their car on form 2106 and rather than schedule C.
Buddy –
Because the minister has dual tax status (both employed and self-employed), the matter can get complicated. As an employee of the church, he would file form 2016 for auto expenses related to his church work. But, for any ministry expenses outside the church (revivals, conference speaking, etc.), he would be considered self-employed, and those expenses would go on Schedule C.
Yes
I understand that the minister housing allowance tax free status is in conjunction with similarly done tax free status of military and other jobs that provide free or reduced housing.
Yes. They are very much alike.
If/when housing allowance goes away, the effect for me (as well as some of my colleagues) will compound: (1) my taxable income will increase by almost 50%, and when this happens (2) my family will no longer be eligible for Marketplace/ACA insurance. Between the two this will likely mean a $10,000+ annual change for me. This wont be easy to handle.
With a national debt of over 17 trillion it makes sense to make some changes to tax code (and perhaps the ACA as well). If only these, and other, changes and increased tax revenue would be matched by decreased governmental spending!
Well said, Aaron.
I think that some outside the church see the abuse of the housing allowance, where pastors of very large churches get a benefit that was meant for pastors who really do not make very much. I am a pastor, so I have seen the abuse from time to time. Most pastors are barely making it and need this. The housing allowance is taxable for FICA. I did not here this on the podcast.
Yes, the housing allowance is taxable for SECA (Self Employed Contributions Act), commonly call social security taxes.
There is an easy solution to the “unfairness” that people think exists with the housing allowance for Pastors. ANY key leader of ANY nonprofit should be allowed a housing allowance if they’re essentially on call 24/7. Other than Pastors, this wouldn’t apply to very many.
If the housing allowance is eliminated, then they certainly shouldn’t continue the dual status treatment with regard to SE tax that Pastors are currently subject to.
Which level of Turbotax actually does clergy?
Have not used TurboTax for a couple of years now, but the Deluxe level was able to work for Clergy. Lately I have been using TaxAct instead, as its forms for Housing Allowance and Ministry Expenses were actually better than TurboTax. TaxAct includes the Publication 517 worksheets while with TurboTax I had to do the worksheets by hand and then enter the figures.
I used Turbo Tax for years, probably Deluxe. But I had to do manual overrides and additions. Unused Housing Allowance (HA) was one. I believe I put that on ln. 7 of the 1040. Likewise, the Schedule SE (self-employment/S.S.) needed addition; Salary (with Housing Allowance added), FRV (parsonage fair rental value) and Schedule C (weddings, funerals, honoraria). I think there was one other override.
In the Episcopal Church, the Vestry (Elders) sets the HA in advance of the tax year. This is set very high since the pastor can only claim the lesser of HA or what is actually spent. Say the HA is $8000 but I spend $5000 (save all receipts). The $3000 must be added to income. That is because the $8000 was not part of W-2 salary (box 1,3,5). While not required, I had the treasury put the $8000 in box 14 with a note “Housing Allowance, section 107”.
Since retiring two years ago, I have used a local tax service that knows clergy taxes. It is well worth the extra $200.
Very interesting conversation on Parsonage Allowance. I serve the Lord in a denomination that allows certain amount of compensation set aside to pay for household stuffs allowed by IRS to be used with the Allowance. But One must use the money fully, or you pay income tax on any balance at the end of the year.
Like someone said earlier on this comment, we pay self-employment tax on any amount set aside by the Church, and that puts a lot burden on pastors.
Every April I have to come up with a big amount of greens to pay Uncle Sam. Yes, pastors of small churches where their churches do not pay taxes (FICA and Medicare) are suffering, and struggling to come up with so called self-employment taxes. Any change from the Congress may, or still not help clergy. The churches we serve should, or could help by paying pastor’s social security and medicate taxes. But until then, our reward will be when we see the Lord face to face in the kingdom. If we not privilege to serve big or mega-churches–where help sometimes are available in picking up taxes for pastors, let us trust in the Lord to provide for his own–how and when He wants it.
Faith is the Victory in the world and in glory when we get there!
Dominic
Good word, Dominic
So, is it legal for me to turn in receipts for housing expenses, instead of housing allowance? maybe I misunderstood the comment.
If and when the housing allowance (as described by IRS -not parsonage allowance) is decided to be taken away one needs to attempt to influence towards a phase out period of time in order to make adjustments without any hardship put on those already receiving such
For more detailed information read Forbes article at:
https://www.forbes.com/sites/peterjreilly/2018/02/16/appeals-filed-on-ruling-that-exemption-of-clergy-housing-allowances-is-unconstitutional/#6469bfb67487
or IRS Topic 417 and IRS Topic 517
Thom,
I think the greatest factor that would affect the continuation of the housing allowance is that it applies not just to Christian ministers, but also to rabbis, imams, and other religious leaders.
Hi there, thank you for addressing the issue of housing allowance for ministers. The only thing that I would add that was not mentioned in this podcast is that although a housing allowance can be a benefit to a minister, the minister also has to pay self-employment tax (the full 15.3%) because they do not get FICA taken out of their paychecks. The minister is still responsible for the 15.3% on their housing allowance instead of the usual 7.65% employee portion for income taxes. Without knowing this, it could sound like a housing allowance is a huge benefit to the minister if it is taken away by the government. Granted, some churches do provide a FICA reimbursement for the minister to help offset the 7.65%, but many do not. I believe that if the housing allowance option is taken away from the minister, then the government will more than likely allow clergy to have FICA taken from their paycheck. Then the minister will only have to pay the normal employee taxes of 7.65%. Right now the minister has “dual status” to the government. Self-employed for FICA purposes but an employee for federal income tax purposes. So if housing allowance goes away, clergy will more than likely become a normal employee, which would be awesome less complicated for taxes each year.
I agree that the SE taxes really should have been discussed on the podcast. I appreciated the content. However, if a person (who is not a pastor) isn’t already familiar with minister taxes, based on this podcast they might think that pastors should just “suck it up” and deal with the potential loss of housing allowance. After all, it is only fair that we pay taxes on all of our income. Without knowing that we pay SE taxes they wouldn’t see that this is legitimately a BIG deal. Thom, I would request that the next time you present this material that you mention SE taxes because it should help church leaders better understand why this topic matters so much to pastors. Most people would assume that a pastor is treated like an employee for tax purposes. I still don’t understand why we aren’t.
It’s interesting to read on what is happening in the US. As a Canadian bi-vocational pastor considering a change to full-time ministry, I’ve been looking into our clergy tax benefits and I know our government is slowly reviewing them as well. Considering some of the mega churches and the salaries likely involved with “celebrity pastors” in the US, and how what many deem to be excessive income for such pastors is taking disproportionate advantage of the current tax laws, perhaps the more logical approach would be to cap the level of income on which this benefit can be claimed?
I know there are far more pastors who make less money and for whom losing this benefit would be a hardship. If the tax laws recognized such people by imposing an income limit of say $50K (this is an arbitrary suggestion), then the mega church leaders with matching mega incomes wouldn’t qualify.
With the recent changes to the tax code, it doesn’t look like the removal of my housing allowance would make a big change in my taxes owed. But health insurance will be a whole different ballgame! Do you know for certain whether a decision to strike the allowance down would be effective immediately for that year’s taxes or would it more likely go into effect for the next year? Because if it were to take effect almost retroactively like that, many of us would suddenly find that thousands of dollars in health insurance subsidies that reduced our monthly premiums had vanished come tax time.
Dr. Rhainer, thank you so much for this podcast! As a young pastor myself this does trouble me greatly, though I know there is enough worry for today. What are your reasoning’s for thinking the SCOTUS will decide against the housing allowance? Couldn’t a case be made that instead of taking away the tax break that the tax break should be opened up for all non-profits under certain limitations?
This discussion ignores a larger issue: Congress has a long record of approving provisions that benefit certain groups of taxpayers in ways that seem unfair or illogical. The treatment of “carried interest,” for example has been highly criticized as being unfair and unnecessary. It is not interpreted as being an “endorsement” of the financial arrangements it rewards. While I am not a particularly big fan of the ministerial housing allowance, I find it curious that a tax benefit for clergy receives scrutiny that other seemingly unfair provisions do not. If I were to say, “that group over there gets tax benefits that I don’t,” this perceived unfairness does not typically carry any weight with the courts. Unless the beneficiaries happen to be clergy. How odd.
Dr. Rainier,
Thank you so much for your very informative podcast. Our denomination allows a permanent housing allowance even into retirement. It allows us to withdraw a set amount from our 403b tax free. I guess it is meant to take the place of a pension. If the minister’s housing allowance goes away, will it also effect retired pastors?
Tim
Tim –
Unfortunately, yes. If this development unfolds, it will have the same impact on retirement housing allowances.
Is there any difference if a parsonage house is used for ministerial duties, i.e.: hosting, educating, worshipping?