Operations 104Finances, Part 2

Don McLeodGuest Lecturer

Don McLeod is the Eastern Regional Director for Retirement Relationship Management at GuideStone Financial Resources.  He joined GuideStone in 1994 and serves as a Principal for the organization.  He holds the Series 6, 26, and 63 securities licenses, is a Certified Financial Planner™ licensee, and is a member of the Financial Planning Association.  Don is a graduate of Baylor University and Southwestern Baptist Theological Seminary.  Before his work at GuideStone, he served as a minister on the staff of several large Southern Baptist churches.  Don regularly speaks across the country on retirement planning, retirement distribution options, and ministerial tax issues.

Class 2—Ministers Housing

No other area of staff salaries is as complicated as the Ministerial Housing Allowance.  Though recently challenged in court, it seems this exemption will be with us for the foreseeable future.  What do the IRS regulations require about who can receive this allowance?  Are guidelines for acceptable use and a regular church board acceptance of the allowances?  Problem cases have arisen over the years; Rick Warren had a major news-breaking case a number of years ago and another pastor wanted the allowance for a vacation home.  Pastors also want this allowance to be carried forward for their retirement income.  What is acceptable in this confluence of law, rules and policy?

Minister’s Housing Allowance Don McLeod, CFP®Regional DirectorRelationship Management

XPastor’s Webinar

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Welcome!

The information in today’s webinar is intended for educational/informational purposes and should not be construed to be legal or tax advice. Please consult with a competent legal or tax adviser if any of the topics addressed today warrant policy or action by you or your organization.

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What is a minister’s housing allowance?

• Found in section 107 of the IRS tax code• Allows “ministers of the gospel” to exclude some

or all of their ministerial income designated as a housing allowance from income for federal income tax

• This is an exclusion from income, not a deduction

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As we begin…

Requirements of a Minister for Tax Purposes

◦ Ordained, licensed or commissioned

◦ Administers ordinances

◦ Conducts worship

◦ Management responsibilities

◦ Religious leader

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As we begin…

Ministers for Tax Purposes

◦ Exempt from mandatory federal income tax withholding

◦ Must pay SECA taxes for Social Security coverage

◦ Eligible for church-designated housing allowance

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As we begin…

Ministers for Tax Purposes — dual tax status:

◦ “Employee” for income tax purposes

◦ “Self-employed” for Social Security purposes

*Housing allowance should not be the reason to ordain, license or commission someone

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History lessons

• For centuries pastors have lived in parsonages• Parsonage allowance first appeared in Revenue

Act of 1921• In 1954 Congress enacted Section 107 that

expanded parsonage allowance to include a payment to rent or provide a home

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History lessons

• In 1971 the IRS added the limitation of the fair market value to the limitation to housing allowance

• The Warren case in 2002 dealt with the fair market value limit that was not in the tax code

• In 2002 the Clergy Housing Allowance Clarification Act added the fair market value limit to the code

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How to designate a housing allowance:

• Minister’s responsibility

◦ Present an estimate of housing expenses

• Church’s responsibility

◦ Designate amount prior topaying minister

◦ Review annually

◦ Record it as set until changed by official decision

◦ Remember housing allowance limits

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Who is responsible?

• The church is responsible to assure that the request is reasonable.

• The minister is responsible, in an audit situation, to substantiate all housing expenses with proper documentation.

• The minister is responsible to report any unused housing allowance on his 1040 as other income-unused housing allowance.

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The “least of” rules:

Eligible ministers must follow the “least of” rules for claiming housing allowance (IRS Pub 517):

• The amount pre-approved by the church or recognized committee of the church

• Actual housing expenses

• The fair rental value of your home (furnished, including utilities)

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Housing Allowanceactual eligible expenses

• Down payment

• Mortgage or rent

• Utilities (electricity, gas, water, local phone, internet, trash service)

• Property taxes

• Insurance

• Furnishings

• Repairs and improvements

• Maintenance

• Homeowner’s dues

Three common situations

• Church owned parsonage• Housing allowance if minister rents a

home or apartment• Housing allowance if minister owns

his home

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Housing Allowance if you live in a parsonage

• The church (or approved committee) should determine and approve the fair rental value of the home and report this amount to the pastor

• The church could pay the utilities and include this amount in what is reported

• If the pastor has housing expenses not paid directly by the church (i.e. utilities), he could request a portion of his salary to be designated as housing allowance

• This value is exempt from federal and state taxes but is subject to Social Security (SECA) taxes

Housing Allowance if you rent a home or apartment

The maximum amount eligible for exclusion is the lesser of:

• The designated amount approved by the church

• The actual eligible expenses

Housing Allowance if you own your home

The maximum amount eligible for exclusion is the least of:

• The designated amount approved in advance

• The actual eligible expenses

• The fair rental value of the home including furnishings plus utilities

Housing Allowance and federal tax

Even though the housing allowance is excludable for federal income tax there are two unique tax deductions still available for those who own their homes.

• Mortgage deduction

• Property tax deduction

However, only a third of all taxpayers have enough itemized deductions to move them above the standard deduction.

Housing Allowance and SECA tax

Social Security taxes (SECA) are due on the fair rental value of a parsonage and/or the housing allowance if the minister rents or owns his home.

Example:

• $60,000 salary/housing

• $20,000 designated as housing

• Pastor would save about $3,000 in federal taxes (assuming a 15% tax bracket)

• However, since the minister is in SECA for Social Security he pays 15.3% on entire amount—this results in about $4,500 more in Social Security tax than the average employee in FICA.

How does a church report a Housing Allowance?

• Pub 517 has an illustration that shows a W-2 with a minister’s housing allowance in box 14 (other information)

• However, this is optional and housing does not need to be included on the W-2

• Some churches give the minister a copy of his approved housing allowance form with his W-2 so he has this information in writing for tax purposes

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Housing Allowance in Retirement Revenue ruling 63-156In Revenue Ruling 63-156, 1963-2 C.B. 79, the IRS determined that a retired minister of the gospel is eligible to claim the housing allowance because it is paid as part of the minister’s compensation for past services as a minister of the gospel. In addition to this requirement, the housing allowance must be designated as such “pursuant to official action taken by the employing church or other qualified organization” [Treas. Reg. § 1.107-1(b)].

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Two recent court cases

Driscoll case in 2012-tax court approved the use of two homes for housing allowance. The Eleventh Circuit court reversed this ruling and the Supreme Court declined to review the case.

Freedom From Religion v. USA filed in 2012

1. Suit claims…

◦ Housing allowance gives churches an

unfair advantage over other nonprofits

◦ Violates separation of church and state law

2. November 22, 2013 Wisconsin federal judge Barbara Crabb ruled the housing allowance unconstitutional but stayed the decision pending appeal to the Seventh Circuit Court of Appeals in Chicago. Directly impacts Illinois, Indiana, and Wisconsin 3. GuideStone is working with the Church Alliance and others

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Your questions

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