Clergy Housing Allowance in Retirement
As you may know, the IRS provides for unique tax treatment to distributions from the denominational plan or other qualified church plan, when contributions have been due to Exercise of Ministry (and only up to applicable limitations described further below). The attachment is a SAMPLE OF the usual letter the UUA sends to retired clergy who took a distribution from the denominational plan in the prior calendar year. It, along with the example below, may answer many of your questions regarding the allowable tax treatment.
The clergy-housing-related tax advantage on distributions in retirement can be lost by rolling your Exercise of Ministry funds into a plan which is not a qualified denominational or church retirement plan. Before embracing any suggestion to roll funds out of the UU Plan, consider the tax consequence and weigh whether recommendations you receive will actually serve your best interests. On March 15, 2019, the Seventh Circuit Court of Appeals issued a decision upholding the constitutionality of the clergy housing allowance, preserving this valuable tax benefit.
You or your chosen tax preparer or advisor must become familiar with the IRS regulations: We encourage you to get and review the details on the IRS’ website, Publication 517, and/or in the (annually updated) Church and Clergy Tax Guide by Richard R. Hammar, J.D., LL.M., CPA.
A retired UU clergy person whose contributions to the denominational Plan were due to “exercise of ministry,” has the ability to request suppression of U.S. Federal taxes on distributions from this plan or another qualified church retirement plan. In order to qualify for the income exclusion when filing your tax form, the IRS requires that the contributions to the Plan were earned in the “exercise of ministry,” and that the amount the clergy person claims does not exceed the allowable amount.
Please review the following examples which are meant to illustrate that active and retired clergy persons must be careful not to claim a greater income exclusion than they are legally permitted to claim (for source documentation go to IRS.gov and review Section 107 and any/all related Clergy tax information/provisions).
When employed by a congregation, as in the example below, a clergy person would be able to claim as an income exclusion (on their tax form 1040) the lesser of the three (3) amounts numbered below the header “Parsonage allowance”. (Read on for what happens when retired – further below)
Active/Employed Clergy Housing Allowance example
excerpted from the Church & Clergy Tax Guide (2015) Parsonage allowance:
1. Amount Designated in advance and paid by church ($1,400 x 12) = $16,800.00
2. Actual Expenses (Mortgage $1,125 x 12, Utilities/other $1,450, RE taxes $1,750 = $16,700.00
3. Fair Rental Value of Home (including furnishings and utilities) (1,380 x 12) = $16,560.00
· When filing their income taxes, the clergy person can only legally claim as tax free the least of the three amounts listed above ($16,560.00 in this example).
· Note that in this example there is an excess amount (of $240.00) designated by the congregation and paid to the clergy person over the lesser of actual expenses or fair rental value. That excess amount is taxable income to the minister.
When retired, a clergy person no longer works for a congregation, and therefore designating the housing allowance in advance by the church/employer is no longer possible. The UUA Board is the entity which designates in advance that up to 100% of distributions to clergy participants from the Plan may qualify for the tax treatment. Thus, during retirement, each year you may withdraw funds from the denominational plan and request tax suppression on the withdrawal(s). And, when you file your taxes, you may claim as the exclusion from income on your tax form only the lesser of items 2 and 3 listed above (Actual Expenses or the Fair Rental Value of the Home furnished, including utilities and appurtenances such as a garage). Your review of the IRS’ source documents reminds you that the exclusion is limited to a minister’s primary residence.
NOTE: Employees of the UUA Office of Church Staff Finances are not engaged in rendering financial advice, legal advice, tax advice, or other financial planning services. If such advice is desired or required, the services of a qualified professional should be sought.