Retirement Housing Allowance to Minister

Question:

A church wishes to help out its retired pastor by providing him funds, not from a qualified retirement plan, but from church donations. Should the church file Form 1099-R which is designed for pension distributions? Further, how can these funds be distributed to him without being taxable as self-employment (SE) income (perhaps as a cash housing allowance)?

Answer:

First, the retirement arrangement does not appear to be of the type reportable on Form 1099-R. However, the situation described above seems to closely relate to a detailed blog entry on September 9^th 2011:

 Retired Minister Housing Allowance SE Tax Free?

This appears, perhaps, to be one of the rare situations when a church is willing to fund a retired minister’s cash housing allowance when he is no longer providing services to the church ("retired", as discussed in the 9-9-11 blog post). Some nice tax benefits accrue to this pastor.

If the provisions communicated in the above referenced blog posting are followed by the minister, then he appears to qualify for a housing allowance that is both SE- and regular-tax free. The cash retirement distribution which is designated 100% as housing is reportable as taxable income neither on Form W-2 nor 1099-MISC.

If I may offer some advice, I recommend that the retired minister be provided a communication from the church on an annual basis of his cash housing allowance. While none of the allowance is subject to SE tax, he will need to consider whether he has adequate documentation that he spent the entire amount for actual housing expenses. To the extent he did not use the money for actual housing expenses, the excess is treated as miscellaneous taxable income (reportable on Form 1040, Line 21).