Greetings,I set up this board because of my frustration in dealing with taxes and financial planning. It seems that many tax and financial professionals are simply unable to deal with housing equity/housing allowance issues. In fact, had I not done all the research, my accountant would have added an additional $5000 to my income because he didn't understand that fair rental value of the parsonage is not included as income (with a small exception). So, what do we need to teach each other?Peace,Nate
So, what do we need to teach each other?Peace,Nate I'm a curious layman, so teach me what you can or what you choose to.Charles
Hello Nate - and Hello again, Charles.I'm not a clergyman, but a CPA who serves as chair of my church's finance committee, and am a former trustee. And I've done tax returns for several clergymen over the years. (I'm Catholic, but I don't think that's germane at the moment. There are some denominational twists to this, but I'll get to that later.)I'll say a brief word in defense of your accountant. The tax issues for the clergy are bizarre, compared to just about any other profession. Actually, there may be more special rules for farmers, but most of the odd things there serve to make their lives easier.Particularly vexing, and downright odd, is the often dual-status that a clergyman may have as an employee for federal and state income tax withholding and other purposes, which may or may not be to his benefit; but as self-employed for social security purposes. Yet in other churches a clergyman may be self-employed for all purposes.For example, in the Catholic Church, priests have the dual status described above, according to the guidelines from the US Conference of Catholic Bishops(USCCB). I think the USCCB rolled over for the IRS on this issue. I say that because I think an excellent case can be made that in the Catholic, Episcopal, Orthodox, Methodist, and other churches with a hierarchical structure, the pastor of parish is no one's employee, according to the IRS' own rules on assessing employment taxes with private employers. Why?In the Catholic Church, for example, the priest is assigned to a parish by the bishop. The parish doesn't hire him. The parish can't fire him. The parish cannot, realistically, determine his job description or discipline him. Only the bishop can do that. But the bishop doesn't pay him. The parish does. The IRS' usual tests in determining employment taxes whould make it hard to call a priest an employee of anybody. But somehow, they decided that a priest is the employee of a parish. And the USCCB went along with it. (So did the United Methodist Church, if I recall correctly.)As far as resources, the IRS has a halfway decent publication calledPublication 517 - Social Security and Other Information for Members of the Clergy & Religious Workers. I haven't read it in a few years. Their other publications for tax-exempt organizations are pretty good. The risk, if you want to call it that, is that IRS publications pretty much give the IRS's party line on everything. And there are some grey areas here (as much as the clergy try to clarify and minimize grey areas in terms of general morality.)http://www.irs.gov/formspubs/article/0,,id=99252,00.htmlAnd maybe the best publication I've seen put out by a church was one I got from a client (a Methodist minister, now deceased) that was published by the United Methodist Church. It not only covered housing allowances very well, but gave me some good guidance in handling his pension income, which was designated as housing allowance. Unfortunately, I don't know if I can get hold of an up-to-date version online or elsewhere.As far as housing allowance, churches that handle this well make it very clear what is and what isn't general compensation and what is housing allowance.In my present parish, the pastor has an employment contract with the parish. It's a standard form mandated by the archdiocese (Milwaukee). Like I said, the parish didn't really hire him. But the contract serves as a guide to pastor and trustees, as far as what is and isn't subject to withholding, etc.Years ago, Catholic priests were somewhat loose about this issue, as housing allowance was sort of a theoretical concept. But they are supposed to pay self-employment tax on the "fair rental value" of their residence. Most of them live in rectories. Very few own their own homes, and the few that do are mostly retired. Our diocese has tightened things up quite a bit, including the requirement that priests pay rent for their living quarters, as outlined ine the contract I alluded to above.I'm running on a little long. Sorry. I just got back from a finance committee meeting. We passed our budget for the coming year tonight. Being a CPA this time of year, this was my fun night out for the week. I don't get much fun during tax season. To put it another way, I gave it up for Lent.Bill
Bill,Particularly vexing, and downright odd, is the often dual-status that a clergyman may have as an employee for federal and state income tax withholding and other purposes, which may or may not be to his benefit; but as self-employed for social security purposes. Yet in other churches a clergyman may be self-employed for all purposes.Protestant clergy here - just finished my tax return for this year, I think. :-) I'll go over them one more time in the light of day before I decide for sure.My first year out of seminary I went into the local H&R Block and asked them if they could do my taxes, and expalined that I was a minister and needed someone who could deal with a housing allowance. I got a blank stare and a suggestion that I should come back when the manager was there. As many churches as their are in the South I was a bit surprised.In any case, in our denomination everyone is paid through the provincial office and we have the option of having them withold taxes from each check or making quarterly payments of estimated taxes on our own. I guess the distinction between self-employed and being an employee is lost on me when it comes to state and federal taxes. The bill is the same in either case. I choose to make estimated tax payments. Of course, we have to pay SS taxes at the self-employed rate.We also have some unusual dynamics in regards to who pays our salary, how calls are extended (the local congregation does not extend a call to a minister, though the minister's salary is determined by the local congregation even though the money is funnelled through the provincial offices), and what must be done to remove a pastor. Despite the hierarchical structure, it doesn't really seem like "self-employed" to me, but neither does it seem like I am ministering to my employers either.I've always thought that the employee/self-employed tension was best exemplified by comparing the difference between the way SS taxes and retirement was handled. SS is handled as if we are self employeed, our church funded retirement is handled as if we are employees. The retirement fund contributions come from the church and the account is handled by the denomination. We do not contribute nor do we have any say so in how the money is invested. (WE also have the option of opening a 503(b) account which we would contribute to and control, but that is not true of the longstanding retirement plan the church has.)You mentioned the Methodist publication about housing and clergy taxes. OUr denomination usually makes those available to the clergy who need one. It is well done.As far as housing allowance, churches that handle this well make it very clear what is and what isn't general compensation and what is housing allowance.The IRS allows clergy to set their housing allowance each year, within the IRS parameters of "fair rental value." This is more significant if the minister owns the house. If my pay is $25,000 with an additional $5,000 housing allowance, I can have the church designate my housing allowance as $10,000 and reduce my salary to $20,000. Such designations have to be included in the minutes of the financial or governing board and must be made in advance. That is, you can't change your housing allowance in Nov. 2006 and make it retroactive to Jan. 2006.Years ago, Catholic priests were somewhat loose about this issue, as housing allowance was sort of a theoretical concept. But they are supposed to pay self-employment tax on the "fair rental value" of their residence. Most of them live in rectories.Protestant ministers who live in church owned parsonages also have to do this.Our diocese has tightened things up quite a bit, including the requirement that priests pay rent for their living quartersThat may be true in some Protestant churches, but I have never heard of this. All the ministers who I know that live in church owned parsonages pay nothing to the church for this. They do, of course, report this as income for the purpose of paying SS taxes, but not state or federal taxes.Are priests required to pay "fair rental value" back to the church for living in the rectory? It seems a bit like swapping money each month. (But I guess that is what we do when the local congregation sends money to the provincial office which is then paid to their minister as salary.)It has gotten much too late. I need to gather up these tax forms and call it a day.peaceRobert
I hope I wasn't sounding too much like I don't appreciate the problems CPAs must have with clergy taxes. In the end he did what he knew. That is why I think this board could be helpful. For example, we are allowed to have some money designated "housing equity allowance" which is neither fair rental value or housing allowance. Instead, the money is part of my pension plan and if I withdraw the money and use it for housing then it is not taxed. However, the church sends 20% of that amount to the IRS and the money is returned only when I can prove that the other 80% was used for housing. This is what I think is the case, but even my own board of pensions is somewhat at a loss to explain the complexities of this rule to me. They say "talk to your CPA." But what do I do when my CPA doesn't know?Peace,Nate (ELCA)
Nate,I am not a tax advisor, so take this with a grain of salt. The housing allowance provision is not as complicated as it might seem.I know nothing about how the ELCA handles housing allowances, but what you have written seems a bit odd to me. The IRS does not require the money to come from your pension plan, nor do they require 20% of your housing allowance to be sent to them (presumably to offset taxes should it not be actually spend on housing?) The IRS allows an ordained minister to designate a portion of his regular salary as his/her housing allowance, which is not taxed and is not listed as taxable income on your W-2 form. I don't know why you would need to take it from your pension. If the housing allowance is too large, the amount not spend on housing must be added in as taxable income. I add mine on line 21 of my 1040 and mark it "Excess housing allowance." I also attach a supplementary sheet with details.There is some information here http://www.irs.gov/taxtopics/tc417.htmlAlso, as wradical mentioned, pick up the IRS publication 517, it has some additional information that might be helpful and I think it has several example tax forms filled in. It is also available online. If you have a Christian bookstore in your area you might want to check and see if they have a clergy tax handbook. The local Family Bookstore always carries this here.As I said, I am not a tax advisor, and haven't even spent the night in a Holiday Inn Express lately.peaceRobert
Robert,What I am refering to is not housing allowance - something used to pay current expenses - but housing equity allowance. This allows me to invest money for a long period of time allowing me to build up cash in place of equity. When I am ready to purchase a home I can use this money - which has been accumulating in my pension fund - without paying taxes or penalties. The ELCA sends 20% to the IRS so that if it turns out I bought a new car or something the gov gets its money.Peace,Nate
Nate,What I am refering to is not housing allowance - something used to pay current expenses - but housing equity allowance.Now I see - Since I do not live in a parsonage I do not get an equity allowance. A friend of mine who is also a minister locally went from a congragation that provided housing to one which didn't. He tried to draw out the equity allowance he had accumulated over the years so he could use the money to purchase the house, but the financial office would not let him do that. They said it was, in essence, part of his retirement. Maybe that is the way that works.Can't you get some clarification on this from the ELCA Board of Pensions?peaceRobert
He tried to draw out the equity allowance he had accumulated over the years so he could use the money to purchase the house, but the financial office would not let him do that. They said it was, in essence, part of his retirement.That is not right! It did go into his pension plan because if the money does not get used for housing it can be used for his pension, yet the whole purpose of the money is for housing! I'll check on it. What denomination?Peace,Nate
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