What is a Parsonage Allowance?
A parsonage allowance is a sum of money awarded by the governing board of a house of worship to its minister to offset housing expenses. For tax purposes, this allowance is exempted from the recipient’s gross income. Additionally referred to as a rental allowance or housing allowance, it is designed to help ministers with their housing costs.
It’s important to note that the term ‘minister’ isn’t exclusive to any one religion. The IRS definition includes Christian, Jewish, Muslim clergy, and more.
Key Takeaways
- A parsonage is a dwelling, such as a home or apartment, provided to a minister by the house of worship’s governing board.
- The parsonage allowance a minister receives is exempt from their gross income for tax purposes.
- The allowance must be used in the year it is allocated to the clergy member.
- It covers reasonable housing costs like mortgage payments, rent, and utilities.
- If the house of worship owns the parsonage, maintenance costs may be deductible.
Understanding the Parsonage Allowance
Section 107 of the Internal Revenue Code (IRC) allows ministers to exclude some or all of a housing allowance from their gross income for income tax purposes. The minister’s parsonage allowance can exclude the lesser of the following amounts from gross income:
- The amount officially designated as a housing allowance.
- The actual amount used to provide or rent a home.
- The fair market rental value of the home.
Any excess amount must be reported as income on the minister’s tax return. The payments designated as a parsonage allowance must be used in the year they are received.
Covered Expenses
Parsonage allowances apply only to a minister’s primary residence. Qualifying housing expenses include:
- Mortgage payments (principal and interest)
- Rent payments
- Property insurance
- Property taxes
- Utility and service delivery payments
- Homeowners’ association dues
- Remodeling expenses
Ministers living in a parsonage provided by the church may have part of their compensation designated as a tax-free parsonage allowance to cover expenses such as furniture, repairs, and maintenance. If a home equity loan is used for housing expenses, it can be included in the parsonage allowance, provided it’s not for non-housing expenses like tuition.
Self-Employed Minister
While parsonage allowance is excluded from federal income tax, it isn’t excluded from self-employment tax. These allowances, along with the fair market rental value of provided housing, must be included in self-employment earnings subject to self-employment tax.
Eligible Clergy
Not everyone referred to as a minister in a church qualifies for a parsonage allowance; ordained ministers have a higher likelihood of qualification. The IRS doesn’t distinguish between active and retired ministers, so retired ministers may request their 403(b) Plan distributions be designated as a parsonage allowance.
Real-Life Example of a Parsonage Allowance
Assume an ordained minister receives an annual income of $50,000 from a church and also a parsonage valued at $15,000 annually. For federal income tax purposes, the minister’s gross income would be $50,000, but for self-employment tax purposes, it would be $65,000. The $15,000 allowance can be used towards rent, utilities, or mortgage payments.
Parsonage Allowance FAQs
What is a 403(b)(9) Plan?
A 403(b)(9) plan is a defined contribution retirement plan utilized by evangelical churches. Unlike other retirement plans, it is not subject to ERISA requirements, allowing church employers to contribute to these plans.
Can You Take a Housing Allowance Distribution if You’ve Rolled Over Into an IRA or 401(k)?
No, retirees cannot take a housing allowance distribution if they roll over their 403(b)(9) into another retirement account like a 401(k) or IRA. It’s advised that retired clergy retain their 403(b) status to benefit from tax-free distributions.
Is a Parsonage Allowance an Exclusion or a Deduction?
A parsonage allowance is considered an exclusion from gross income for income tax purposes, not a deduction. However, ministers must include the fair rental value of a parsonage or housing allowance for social security coverage calculations.
Related Terms: rental allowance, housing allowance, gross income, self-employment tax, 403(b) plan.
References
- Internal Revenue Service. “Topic No. 417: Earnings for Clergy”.
- Internal Revenue Service. “2019 Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers,” Page 3.
- United States Government. “Internal Revenue Code, Title 26, Section 107”, Page 452.
- Internal Revenue Service. “Ministers’ Compensation & Housing Allowance”.
- Internal Revenue Service. “2019 Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers,” Page 9.
- Clergy Financial Resources. “The Parsonage Allowance”.
- Eagle Retirement Plans, Inc. “Church Plans”.
- Envoy Financial. “How Does the Minister’s Housing Allowance Impact Your Retirement?” June 13, 2021.
- Internal Revenue Service. “FAQs. Ministers’ Compensation and Housing”.
- Internal Revenue Service. “Ministers’ Compensation and Housing”.
- Internal Revenue Service. “Topic No. 417 Earnings for Clergy”.
