Can a church report a portion or all of a minister’s rental value of the parsonage and utilities as taxable income?

A church can declare a portion of a minister’s rental value of the parsonage as taxable income on the minister’s IRS Form W-2.

Must the church issue a W-2 form if the pastor’s entire salary is designated as a clergy housing allowance?
This question does not have a definitive answer. There is an IRS Revenue Ruling (IRS Revenue Ruling 2000-6) which suggests that a church may not be required to issue a W-2 to a part-time pastor whose entire income is designated as a housing allowance. MMBB Financial Services recommends that you contact the IRS or your tax advisor to determine whether a W-2 is needed in your situation. The IRS operates a centralized call site to answer questions about reporting information on W-2 forms at 866.455.7438.

If a member’s ordination recognition has been revoked or suspended, does the housing allowance for ministers still apply?

Yes. It is assumed that the contributions were made while the member’s ordination was in good standing.

What payments made in retirement are not eligible for the housing allowance for ministers designation?

  1. Distributions to members from rollovers from retirement accounts that were not the result of church-related income.
  2. Distributions that are directly rolled over to another retirement account.
  3. Distributions that represent contributions made on behalf of clergy while they were not eligible to have a portion of their compensation designated as housing allowance because of the nature of their employment. This would usually occur for clergy classified as Wandering Ministers.
  4. Deemed distributions resulting from defaulted loans.

Are commissioned missionaries eligible for the housing allowance in retirement?

Only commissioned missionaries who are licensed, commissioned or ordained as a minister are eligible for the housing designation on annuity payments and distributions in retirement.

Are persons licensed as lay preachers eligible for the housing allowance?

The IRS code and regulations stipulate that the person must be ordained, licensed or commissioned as a minister to be eligible for the housing allowance designation. As a result, a person with the license as a lay preacher would not be eligible for the housing allowance.

Does a church with a lay preacher living in its parsonage have to report the rental value of the parsonage and utilities as taxable income?

No. Employees required to live in employer-designated housing do not have to have their housing reported as taxable income for federal income tax purposes. For example, a church that requires a janitor to live in an apartment at the church does not report the janitor’s apartment rental value and utilities as taxable income. The rental value of the apartment and utilities would be included as income for determining FICA taxes.

Is a person who is licensed or commissioned as minister by a local church continue eligible for the housing allowance when switching to another church?

The licensed or commissioned as minister status applies to the ministry at the church which granted the license or commission. When a person moves from that church to another church, the new church must grant the license or commission as minister status for the individual to be eligible for the housing allowance designation by the new church.

How does eligibility for pastor housing allowance apply to individuals who are licensed or commissioned as a minister by a region?

The license or commission as a minister status applies while the person is engaged in ministry within the region that has granted the ministerial status for the individual. If persons move from that region to another region, then they will have to have the new region or the local church grant them ministerial status to be eligible for the housing allowance designation.

How does the housing allowance work with nursing home expenses?
If the clergy person is a permanent resident of the nursing home, the housing allowance applies to the nursing home because the nursing home is the member’s primary residence. Charges for food and medical care are not considered housing expenses. Ask the administrator of the residence to provide the portion of their monthly payments that represents housing costs (rental, utilities, etc.).

When the clergy housing allowance is applied against nursing home costs, it cannot also apply for the home where the member’s spouse resides.

Clergy temporarily in a nursing home would continue to use their primary home for the housing allowance. In this case, the nursing home expenses could not be used toward the housing allowance.

The IRS has ruled that a lump-sum entrance fee paid by a retired minister to gain admission to a retirement community can only be treated as a housing expense in the year it was actually paid. It cannot be prorated over several years and claimed as a housing expense in those years.

When an annuitant and his spouse are living at a retirement complex that includes apartments, an assisted living facility and a nursing home facility, the cost of the annuitant’s nursing home and the spouse’s apartment can be covered under the housing allowance for ministers designation of his annuity if the contract the annuitant has with the retirement facility states that when the annuitant or spouse is moved from their apartment to the assisted living facility or nursing home facility of the retirement complex, there is no change in their monthly cost to the retirement complex.

If the contract the annuitant has with the retirement facility indicates that their monthly cost is increased to cover the added cost of the nursing home facility, then only the portion covering the nursing home facility will be eligible for housing allowance. None of the spouse’s apartment housing cost will be eligible to be excluded from taxable income.

Is a pension from a non-church institution eligible for the housing allowance?

No. Clergy receiving a pension from a non-church institution cannot have the institution designate their pension as housing allowance even if contributions to that pension account came as result of the clergy’s employment by a church.

What housing expenses can be applied toward the annuity and distributions for clergy annuitants who die in the middle of the year?

If a clergy annuitant dies in the middle of the year, the housing allowance designation applies only for the months during which s/he was alive. The annuity payments to the surviving spouse for the remaining months will not be designated as housing allowance. The expenses and rental value criteria would only apply for the months during which the clergy annuitant was alive.

Does a surviving spouse of a clergy member receive the pastor housing allowance designation?

No. The housing allowance designation is not available on the deceased member’s annuity payable to the surviving spouse of the minister. If the surviving spouse is clergy and is receiving annuity payments and distributions based on his/her own membership, those payments will have the housing allowance designation.

A clergy annuitant has two residences and lives in each residence an equal amount of time. Can the pastor housing allowance be applied to both residences?

No. The housing allowance would apply to the home which is considered the annuitant’s legal residence (i.e., where s/he is registered to vote).

If a clergy person’s ordination recognition has been revoked or suspended, does the pastor housing allowance still apply when payments are made in retirement?

Yes. It is assumed that the contributions were made while the member’s ordination was in good standing.

A member is receiving an annuity from MMBB as well as another denominational pension board. Can the member use income from both annuities against the housing allowance designation?

It is possible to use annuities from two separate denominational pension boards for the housing allowance. MMBB suggests you contact legal or tax counsel for an opinion on your specific situation.

When a deemed distribution occurs as a result of a loan default, will the amount of the deemed distribution listed in the 1099-R be eligible to be excluded from taxable income if used for housing for clergy?

No.

If a clergy member decides to pay back to their retirement account the amount of deemed distribution as a result of a loan default, will the payment be eligible to be excluded from taxable income for housing purposes at the time distributions occur?

No.

The ABCUSA Board of National Ministries’ Chaplaincy and Pastoral Counselors Committee endorses clergy to serve as Military Chaplains, Institutional Chaplains and Pastoral Counselors. Their endorsement affirms the fitness of these persons to function as American Baptist clergy in specialized settings. They may be eligible for the housing allowance designation if the employer is agreeable, but the endorsement does not necessarily mean they will be eligible for the housing allowance exclusion. What the endorsement does is give them more validity than if they took on a job without any kind of endorsement, assignment or designation by a church.