MMBB’s Advantage and Examples

When a minister lives in his or her own home, a portion of the minister’s compensation may be designated by his or her church, in advance, as housing allowance for clergy. The designated amount should include the cost of maintaining a home, including mortgage payments, taxes, repairs, insurance, furnishings, utilities, etc. For federal income tax purposes, the excludable amount is limited to the lesser of:

1. The amount designated by the church;
2. The amount actually spent on housing for the year by the minister, or;
3. The fair rental value of a house, furnished, plus utilities such as gas, electricity, oil, telephone and water.

A minister cannot exclude more than the church designates. Therefore, under the housing allowance, clergy must cover items (2) or (3) above. Of course, any amount of the designated housing allowance that exceeds the lesser of (2) or (3) must be reported as taxable income by the minister. If audited by the IRS, it is the responsibility of the minister to document actual housing expenses. A minister must pay Social Security/Medicare taxes on this allowance.

When a minister lives in his or her own home, a portion of the minister’s compensation may be designated by his or her church, in advance, as housing allowance for clergy. The designated amount should include the cost of maintaining a home, including mortgage payments, taxes, repairs, insurance, furnishings, utilities, etc. For federal income tax purposes, the excludable amount is limited to the lesser of: (1) the amount designated by the church, (2) the amount actually spent on housing for the year by the minister, or (3) the fair rental value of a house, furnished, plus utilities such as gas, electricity, oil, telephone and water.

A minister cannot exclude more than the church designates. Therefore, under the housing allowance, clergy must cover items (2) or (3) above. Of course, any amount of the designated housing allowance that exceeds the lesser of (2) or (3) must be reported as taxable income by the minister. If audited by the IRS, it is the responsibility of the minister to document actual housing expenses. A minister must pay Social Security/Medicare taxes on this allowance.

Examples

Example 1: Sample resolution for parsonage allowance designation for ministers who live in a church-owned parsonage:

The following resolution was duly adopted by the board of directors of First Baptist Church at a regularly scheduled meeting held on December 15, 2010, a quorum being present:

Whereas, section 107 of the Internal Revenue Code permits a minister of the gospel to exclude from gross income the rental value of a parsonage furnished to him as part of his compensation and a church-designated parsonage allowance paid to him as part of his compensation, to the extent the allowance represents compensation for ministerial services; is used to pay parsonage-related expenses such as utilities, repairs, and furnishings; and does not exceed the fair rental value of the parsonage (furnished, plus utilities); and

Whereas, Pastor John Smith is compensated by First Baptist Church exclusively for services as a minister of the gospel; and

Whereas First Baptist Church provides Pastor John Smith with rent-free use of a church-owned parsonage as compensation for services that he renders to the church in the exercise of his ministry; and

Whereas, as additional compensation to Pastor Smith for services that he renders to the church in the exercise of his ministry, First Baptist Church also desires to pay Pastor Smith an amount to cover expenses he incurs in maintaining the parsonage; therefor it is hereby

Resolved, that the annual compensation paid to Pastor Smith for calendar year 2011 shall be $50,000, of which $5,000 is hereby designated to be a parsonage allowance pursuant to section 107 of the Internal Revenue Code; and it is further

Resolved, that the designation of $5,000 as a parsonage allowance shall apply to calendar year 2011 and all future years unless otherwise provided by this board; and it is further

Resolved, that as additional compensation to Pastor Smith for calendar year 2011 and for all future years unless otherwise provided by this board, Pastor Smith shall be permitted to live in the church-owned parsonage located at 123 Main Street, and that no rent or other fee shall be payable by Pastor Smith for such occupancy and use.

Example 2: Sample resolution for housing allowance for clergy designation for ministers who own their home:

The following resolution was duly adopted by the board of directors of Second Baptist Church at a regularly scheduled meeting held on December 15, 2010, a quorum being present:

Whereas, ministers who own their home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as a housing allowance, to the extent that he allowance represents compensation for ministerial services, is used to pay housing expenses, and does not exceed the fair rental value for the home (furnished, plus utilities); and

Whereas, Pastor Jane Smith is compensated by Second Baptist Church exclusively for services as a minister of the gospel; and

Whereas, Second Baptist Church does not provide Pastor Jane Smith with a parsonage; therefore it is hereby

Resolved, that the total compensation paid to Pastor Jane Smith for calendar year 2011 shall be $50,000, of which $15,000 is hereby designated to be a housing allowance; and it is further

Resolved, that the designation of $15,000 as a housing allowance shall apply to calendar year 2011 and all future years unless otherwise provided.

Because MMBB is a church plan, we are able to designate as eligible for housing allowance for clergy 100% of a retired ordained member’s annuity payments, required minimum distributions and partial or complete distributions. The limit on the amount of an annuity and distribution payments that can be excluded from taxable income for housing allowance is the lower of:

1. The amount actually spent during the year to provide a home, including mortgage payments, property taxes, furnishings, repairs and utilities, or;
2. The fair rental value of the furnished home, plus the cost of utilities.

Although MMBB designates 100% of distributions as eligible for housing allowance for clergy exclusion, the church is responsible for determining the actual amount of the distribution to exclude based on the guidelines above.