Minister / Clergy Taxation

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Contents

General Definitions and Information

References

  • Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers]

Minister Defined

Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination.
If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes.

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Minister Parsonage and Housing Allowances

References

Parsonage

Church owned housing provided to a minister to live in while performing ministerial duties for the church. The annual fair rental value is not included in the minister's compensation for federal income tax purposes.

Housing/Parsonage Allowance

That portion of a minister's compensation received from a church which is designated as a housing or parsonage allowance and is used to pay housing related expenses (see examples below).

Designating a parsonage or housing allowance

Should be:
  1. Approved by the church board or congregation.
  2. Recorded in the church board minutes or in writing.
  3. Done before the year starts. It can only be put into effect prospectively. A retroactive designation is not allowed.

Examples of parsonage and housing related expenditures

Repairs, cleaning supplies, furnishings, utilities (electricity, gas, water, trash pickup, local telphone charges), homeowners/renters insurance, mortage payments, rent payments, carpet, drapes, furniture, yard maintenance, landscaping, appliances, lightbulbs, home security, paint, wallpaper, decks, real estate taxes, down payment on a home, pest control, homeowners association dues, etc.

Clergy Housing Allowance Act

President Bush has assured the continued benefit of this special benefit by signing into law May 20, 2002, the Clergy Housing Allowance Act. Tax preparers need to be aware of the special tax laws for ministers.

Social Security Issues

References

Housing and Social Security Taxes

Although the housing/parsonage allowance is not subject to federal income tax, it is subject to social security taxes. Contrary to this is when a minister retires and social security taxes do NOT apply to the "rental value of any parsonage or any parsonage allowance after the minister retires." See also: Sec. 1402(a)(8). Minister net earnings from self-employment

Vow of poverty

If you are a member of a religious order who has taken a vow of poverty, you are exempt from paying social security tax on your earnings for qualified services you perform as an agent of your church or its agencies. For income tax purposes, the earnings are tax free to you. Your earnings are considered the income of the religious order.

Services performed outside the order

Even if you are a member of a religious order who has taken a vow of poverty and are required to turn over to the order amounts you earn, your earnings are subject to federal income tax withholding and employment (FICA) tax if you:
  1. Work for an organization outside your religious community, and
  2. Perform work that is not required by, or done on behalf of, the order.
In this case, you are considered an employee of that outside organization. You may, however, be able to take a charitable deduction for the amount you turn over to the order. See also: Publication 526, Charitable Contributions.

Exemption from Social Security

You can request an exemption from SE tax if you are one of the following.
  • A minister.
  • A member of a religious order who has not taken a vow of poverty.
  • A Christian Science practitioner.
  • A member of a recognized religious sect.
To request the exemption:
  • If you are a minister, members of a religious orders, or a Christian Science Practitioners, you should file Form 4361.
  • If you are a member of recognized religious sect, you should file form 4029.

Minister Business Expense Issues

References

  • Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers]

Ministerial Trade or Business Expenses as an Employee

Ministers must itemize deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. They may also have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses).
These expenses are claimed as miscellaneous itemized deductions and are subject to the 2%-of-adjusted-gross-income (AGI) limit. See Publication 529 for more information on this limit.
Additionally, these expenses may have to be reduced by the amount that is allocable to tax-free income (discussed next) before being limited by the 2% AGI limit.

Expenses Allocable to Tax-Free Income

If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. You cannot deduct the portion of your expenses that is allocated to your tax-free rental or parsonage allowance.
Exception. This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home.

Links to Minister tax related cites (IRC, Court Cases, etc.)

Warren v. Commissioner, 114 T.C. 23 (2000)

Clergy Housing Allowance Clarification Act of 2002

Letter Ruling 9115051 (Home Equity Loans used for housing allowances

Also reference: Rasmussen v. Commissioner, T.C. Memo. 1994-311 (Home Equity Loans used for housing allowances)

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