Terry D EA Posted February 21, 2009 Report Share Posted February 21, 2009 I have a minister who has opted out of SS. This particular minister tells the church what the amount of his housing allowance is. As I read some of the IRS regs on this, the governing body of the church sets the housing allowance amount. Is this correct when the minister has opted out of SS? How does the housing allowance work when the minister has opted out of SS. I understand the housing allowance is to reduce the SE tax and has no affect on taxable income. Can you point me to some additional reading material. Thank you in advance for your expertise and help with this. Terry D. Quote Link to comment Share on other sites More sharing options...
RitaB Posted February 21, 2009 Report Share Posted February 21, 2009 I have a minister who has opted out of SS. This particular minister tells the church what the amount of his housing allowance is. As I read some of the IRS regs on this, the governing body of the church sets the housing allowance amount. Is this correct when the minister has opted out of SS? How does the housing allowance work when the minister has opted out of SS. I understand the housing allowance is to reduce the SE tax and has no affect on taxable income. Can you point me to some additional reading material. Thank you in advance for your expertise and help with this. Terry D. You are correct, the HA is set by the church PRIOR to the minister being paid. Of couse, the minister should have input, but it is NOT correct to tell the church the HA AFTER the compensation is received. The (proper) HA is not subject to INCOME tax. So, if guidelines had been followed correctly, this HA would have been both income AND SE tax free, since he filed 4361 (to opt out of SECA -"self-employed contributions act") sometime or other. There are some additional rules regarding the amount of HA that can be excluded. Try Pub 517, (page 8 in the 2006 booklet I'm looking at). Also, clergy worksheet #1 on page 23. Quote Link to comment Share on other sites More sharing options...
MAMalody Posted February 21, 2009 Report Share Posted February 21, 2009 In short, nothing changes on the operation (rules) of the housing allowance, regardless of whether the pastor has an approved Form 4361 or not. The prior referenced Publication 517 is a good source as well as the MSSP the IRS has out on clergy taxes. Both are available at www.irs.gov. All the approved Form 4361 does is determine the nonapplicability of the SE tax to clergy income, regardless of designation. In your case, if you mean the pastor is giving guidance for the ensuing year, that is okay. If you mean they are trying to do a retroactive designation, that is not acceptable and if it was done for the 2008 tax year, he does NOT have a housing allowance. That would throw the income into being subject to income tax but still probably exempt from SE tax. Now, if this is the case, be sure to read the actual desigation for 2007 to make sure it is not word in a fashion to make it applicable to 2008 also. I hope this helps. Quote Link to comment Share on other sites More sharing options...
JohnH Posted February 21, 2009 Report Share Posted February 21, 2009 Mike: Possibly this has been addressed on another thread, but I don't recall. I have read in some places that the resolution designating the H&U allowance for a given year should say something to the effect that it applies to the "current year and all future years unless subsequently changed". The effect of this wording would be to provide some cover if there's a failure to handle it correctly in a subsequent year (maybe due to a change in treasurers, finance or budget committees, etc) and at least validate the original amount even if a larger amount were paid without a proper resolution. Do you have an opinion on that? Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted February 21, 2009 Author Report Share Posted February 21, 2009 In short, nothing changes on the operation (rules) of the housing allowance, regardless of whether the pastor has an approved Form 4361 or not. The prior referenced Publication 517 is a good source as well as the MSSP the IRS has out on clergy taxes. Both are available at www.irs.gov. All the approved Form 4361 does is determine the nonapplicability of the SE tax to clergy income, regardless of designation. In your case, if you mean the pastor is giving guidance for the ensuing year, that is okay. If you mean they are trying to do a retroactive designation, that is not acceptable and if it was done for the 2008 tax year, he does NOT have a housing allowance. That would throw the income into being subject to income tax but still probably exempt from SE tax. Now, if this is the case, be sure to read the actual desigation for 2007 to make sure it is not word in a fashion to make it applicable to 2008 also. I hope this helps. Mike, Thank you for your response. Through some investigation, the pastor has been telling the treasurer at the end of each year what the amount of his housing allowance is, which by your statement, this is indeed retroactive and unacceptable. With that the current council has not voted or even viewed the pastor's pay package nor the youth pastor's package and I am of the understanding this has been the practice for a number of years. I will take the time to read Pub 517 and already have the MSSP. If you don't mind, I would like to speak with you privately about some of this. I have your e-mail as you have helped me in the past and I will begin the contact in that manner if you approve. Thanks, Terry D. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 21, 2009 Report Share Posted February 21, 2009 I understand the housing allowance is to reduce the SE tax and has no affect on taxable income. Terry D. Terry, you did get that you had this part backward, right? The Housing Allowance reduces Income tax, not SE tax. And if he's opted out of the SE with form 4361, it's not subject to either tax. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted February 22, 2009 Author Report Share Posted February 22, 2009 KC, Yes, I did see that I posted that point backwards. There are some issues with the determination of the housing allowance in this church among some other issues involving the finances. I may be asked to help here and want to be sure of what I am getting into. Thanks for being helpful. Terry D. Quote Link to comment Share on other sites More sharing options...
JohnH Posted February 22, 2009 Report Share Posted February 22, 2009 Terry: I'm willing to be corrected if I'm off base here, but I think that generally speaking, the less the church gets involved in the specifics of the H&U allowance the better. They should have the pastor submit an estimate and then the budgeted amount should be set well above that figure, in order to be sure any reasonable contingencies are covered. It does no harm if the pastor doesn't spend it all and has to pull some of it back into income, but if the pastor's actual allowable expenses exceed the amount set for any reason, then he/she loses the favorable tax treatment of the amount not designated as H&U allowance. Once the congregation has met their responsibility to determine the amount in advance and made the proper designation, the rest is between the pastor and the tax preparer (and of course the pastor's boss). Quote Link to comment Share on other sites More sharing options...
MAMalody Posted February 22, 2009 Report Share Posted February 22, 2009 Mike: Possibly this has been addressed on another thread, but I don't recall. I have read in some places that the resolution designating the H&U allowance for a given year should say something to the effect that it applies to the "current year and all future years unless subsequently changed". The effect of this wording would be to provide some cover if there's a failure to handle it correctly in a subsequent year (maybe due to a change in treasurers, finance or budget committees, etc) and at least validate the original amount even if a larger amount were paid without a proper resolution. Do you have an opinion on that? That was what I was referring to. The statement you mentioned above was used infrequently until a few years ago. While I have not seen in a court case, I believe that it is a valid statement and meets the designation criteria. Terry, if I can help in any way, feel free to contact me. Be advised, that if you do so directly, you will lose the benefit of peer review that this board affords. Quote Link to comment Share on other sites More sharing options...
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