This blog posts answers to questions given to us by ministers and others serving in Christian ministries advancing the gospel of Jesus Christ. It also discusses other financial topics that those in gospel ministries face. We trust the information provided can be helpful to you.
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403(b) Retirement Distributed as Housing Allowance
A pastor recently left his ministry to start a business. While in the ministry, he had a 403(b)* plan which he contributed to for over 12 years. When he retires, are the distributions from this 403(b) eligible for housing allowance, or will the IRS see this as not housing allowance eligible since he is no longer a minister?
The 403(b) plan will be eligible for housing allowance, as long as the church designates it as such. A previous blog post provided some additional information on this issue. Excerpts and a link to the post merit revisiting:
"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107 (Rev. Rul. 63-156, 1963-2 C.B. 79, and Rev. Rul. 75-22, 1975-1, C.B. 49)" (IRS Minister Audit Technique Guide published in April 2009).
Since it may be a long time between the pastor’s discontinuance of his employment at the church and the time when he receives distributions, he must reestablish contact with its leadership and request a formal housing designation in writing. We generally recommend that the church designate 100% of all future distributions from the 403(b) plan as housing allowance. The minister must then exclude only that portion of the distributions from income for which he has met the three-part test for housing allowance. (See other postings on this blog for a refresher of these rules.)
If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?
Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence.
The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.
A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?
IRS Pub 526 covers the
topic of Charitable Contributions and, more specifically, travel expenses
associated with charitable trips. The
publication states that travel expenses will be deductible “if there is no significant element
of personal pleasure, recreation, or vacation in the travel.” The publication
also states, “The deduction for travel expenses won't be denied simply because
you enjoy providing services to the charitable organization. Even if you enjoy
the trip, you can take a charitable contribution deduction for your travel
expenses if you are on duty in a genuine and substantial sense throughout the
trip. However, if you have only nominal duties, or if for significant parts of
the trip you don't have any duties, you can't deduct you…
403(b) contributions and the subsequent match be based on the pastor's total
income from the church (including housing allowance) or just from the salary minus
to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code
specifies that a minister’s housing allowance (or the annual rental value of a parsonage)
is not included in the minister’s
gross income for income tax reporting purposes. Therefore, it would appear that
the definition of includible compensation for purposes of computing the limit
on annual additions to a 403(b) plan would not
include the portion of a minister’s housing allowance that is excludable from