Qualified Home Expenses Versus Excess Parsonage Allowances
The treatment of excess parsonage allowances is a common source of confusion: if a parsonage allowance exceeds the amount spent on qualified home expenses, a minister must report the excess as taxable income.
In addition, the amount of parsonage allowances paid should be kept consistent by a religious organization, especially in situations where the pastor is in control of setting the allowance.
This ruling could represent a windfall for pastors who find that they might have excess parsonage allowances. As long as they use the money to purchase or rent a second or even third home, they can receive tax-free treatment.
Retired ministers need not include a parsonage allowance or the rental value of a provided parsonage in the computation of net self-employment earnings, even if they have not opted out of the Social Security system; moreover, they do not need to include any retirement benefits received from a church plan subsequent to retirement (IRC section 1402[a]).
The Clergy Housing Allowance Clarification Act applies only to housing allowances and parsonage allowances for federal income tax purposes.
Deductions for a home office rarely are allowed since churches and temples usually provide an office, and parsonage allowances already are excluded from income.
In addition Congress in 1996 excluded the parsonage allowance from self-employment taxes after the cleric retires, making denominational plans especially attractive.
Retirement benefits and parsonage allowances
paid to ministers after retirement are no longer subject to self-employment tax, retroactive to 1994.
83-3 precluded deductions for home mortgage interest and real estate taxes allocable to parsonage allowances excluded from gross income.
107 allows ministers to exclude from gross income, for income tax purposes, a reasonable amount for the rental value of a home, including utilities, furnished to them as part of their compensation or the rental allowance (commonly called a parsonage allowance), to the extent this allowance is used by them to rent or otherwise provide a home.
Today, the concept of parsonage includes parsonage allowances
, rental allowances, and housing allowances.