What is a Parsonage Allowance? Definition and Practical Applications
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Summary:
A parsonage allowance, often referred to as a housing allowance, is a financial provision offered by a religious organization to support a minister in meeting housing expenses. This particular allowance holds the unique distinction of being excluded from the recipient’s gross income, offering significant tax benefits. However, it’s imperative that this allocation is utilized within the same fiscal year it is granted. Ministers have the option to exclude a designated housing allowance or the fair market rental value of their residence, ensuring accurate reporting of their income for tax purposes. While various eligible housing costs can be covered, it’s important to note that non-housing expenses are not part of this specific allowance.
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Understanding the parsonage allowance
Section 107 of the internal revenue code (irc)
The internal revenue service (irs) delineates Section 107 of the irc, enabling ministers affiliated with religious institutions to exempt a portion or the entirety of a housing allowance from their gross income for income tax purposes. This exclusion serves as compensation for the services rendered in a ministerial capacity and is subject to specific conditions, ensuring tax benefits for eligible individuals.
Covered expenses
Parsonage allowances pertain exclusively to a minister’s primary residence, encompassing expenses such as mortgage or rent payments, property insurance, taxes, utilities, and costs related to home renovations or remodeling. However, it’s important to note that non-housing costs such as expenditures on food, clothing, or domestic help are not encompassed within the allowances.
Self-employed minister
While the parsonage allowance is eligible for deduction concerning federal income tax, it’s noteworthy that it does not qualify as a deduction for self-employment tax. Self-employed ministers must declare this allowance or the fair market rental value as part of their self-employment earnings, thus subject to taxation.
Eligible clergy
The irs primarily considers ordained ministers as the most probable candidates for the parsonage allowance. However, commissioned and licensed ministers might encounter restrictions on eligibility. Retired ministers also stand eligible for this allowance, provided they meet the necessary criteria.
Example of a parsonage allowance
Illustratively, if an ordained minister earns an annual income of $50,000 and is allocated a parsonage with a fair rental value of $15,000, their gross income for federal tax purposes would be recorded as $50,000. However, for self-employment tax purposes, it would amount to $65,000.
Frequently asked questions
What is a 403(b)(9) plan?
The 403(b)(9) plan, prevalent among evangelical churches, stands as a retirement plan that facilitates distributions specifically for retired ministers. Notably, this plan operates without being subject to erisa (employee retirement income security act) requirements.
Can you take a housing allowance distribution if you’ve rolled over into an ira or 401(k)?
No, individuals rolling over a 403(b)(9) plan into an ira or 401(k) would forfeit their eligibility to claim a housing allowance distribution.
Is a parsonage allowance an exclusion or a deduction?
The parsonage allowance is categorized as an exclusion from gross income for income tax purposes. It is not considered a deduction, particularly for self-employment tax purposes.
key takeaways
- A parsonage allowance exempts housing costs for ministers from gross income for tax purposes.
- Expenses covered are limited to the primary residence and exclude non-housing costs.
- Eligibility for the allowance varies based on irs qualifications and the minister’s role.
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