Experts say the parsonage allowance was originally included as a way to minimize taxes on clergy members, whose compensation was often meager. It still is widely used for that purpose, church officials said, although the IRS doesn’t track usage of the benefit.
“For most of them the housing allowance is modest because their compensation is modest,” says Daniel Gary, an attorney with the United Methodist Church in Nashville.
Similarly, D. August Boto, general counsel of the Executive Committee of the Southern Baptist Convention, says for leaders of the organization’s 46,000 churches “the housing allowance is critically important for making ends meet””it is not a luxury.”
The AAC will be hosting a clergy taxes webinar that will include updates on issues like this. We haven’t announced yet but the first one will be in late October. You can get emails about our free webinars at http://www.americananglican.org/email (I hope this doesn’t incur elvish wrath.)
One point of concern relates to clergy who may live in church-owned housing–say, a gracious two-story 19th century rectory, in a high-rent neighborhood–but may (these days) serve a relatively small congregation and receive a relatively modest cash stipend. Without the exclusion–and remember that the cleric is already responsible for paying Self-Employment Tax on the fair rental value, plus utilities–the total tax obligation might very well make continued settled ministry impossible.
Bruce Robison
The ability to tax and destroy will be a powerful weapon in secularism’s war on religion.
This is a gnarly topic indeed and one that illustrates how thick the weeds become very quickly when one wades into wholesale revision and simplification of the Tax Code. Comment No. 2 is a point well taken and just one of the many issues that surround just the parsonage exemption. If all the religious tax breaks were simply made to vanish, the impact on how churches govern themselves would be cataclysmic. However, there is a good case that these breaks (like hundreds of others in the Code) should not exist.
Bruce+ (#2),
If the congregation rented said dwelling for a nominal rent to the priest in question, would the Self-Employment Tax provision still hold? Just because owners [i]can[/i] ask market value doesn’t mean that they are obliged to.
Jeremy Bonner (#5)
The Self-employment tax provision provides that the fair rental value of the rectory plus supplied utilities be counted as self-employment income and the self-employment tax paid. Under the present provisions, I believe that renting the rectory to the priest at a nominal amount would allow the priest to deduct that nominal amount from the fair rental value, but the remainder of the fair rental value would still need to be claimed as “income” for self-employment tax.
The law requires that the actual fair rental value be claimed and there are acceptable ways of determining that value, but it is not in the least dependent upon what the actual rent charged might be.
Canon King (#6),
Thank you. What defines a rectory? Also, if a member of the congregation were to offer the priest an apartment that they owned at a nominal rent would the same rules apply?
Why not simply assign the rector or vicar to church-owned “family housing,” much as the military does…..if the parish owns a rectory…..and charge him no rent? That’s what [b]we[/b] do.
A couple of points I would make: I have no problem taking away the housing allowance on second or third homes by clergy. That’s not ethical because that ceases to be fair compensation and becomes a tax shelter or its own sake.
I even have a few ethical qualms about getting a housing allowance to pay for a home mortgage. To me, that opens up a conflict of interest. I mean, does a church give a car allowance? I say this as a priest. Rent or for a parsonage I have no problems with. Likewise, if a legitimate non-profit has interns or sends people to do secular humanitarian work that need housing as part of the assignment, a housing stipend can be used there as well, so its not just a religious thing.
One other note about the Self Employment Tax: that also covers monies made on doing things off the books like weddings and funerals, etc. Some priests can make a fortune doing that. But, likewise, I have some ethical qualms about making money off sacramental functions. I don’t charge people for the Eucharist. (Well, maybe in the form of a salary I guess, but not charging them at the door.) I always donate any money I make of things like that to charity because I just don’t feel right about it.
By the same token, however, I realize some clergy and organists make part of their earnest living playing or doing weddings. I will take money if offered for a wedding because I don’t want to make it difficult for my brothers in Christ who depend on that money to pay bills (much like a waitress relies on tips) just because “Father Archer doesn’t take money for funerals, why do you?”
Jeremy, as I understand the tax code, if housing is provided to ordained clergy as a component of their total compensation, then the fair rental value of that housing is subject to Self-Employment tax, but is excluded from IRS tax. By extension, if housing is not provided, and the ordained cleric provides for his or her own housing, then the amount spent on housing, up to the fair rental value of the housing, plus utilities, is subject to Self-Employment tax but is also, then, excluded from IRS tax. If a private party rents a house or apartment to a cleric, then the amount the cleric pays for rent and utilities, up to the fair rental value, may be excluded from his or her taxable income, but is still subject to Self-Employment tax. Note that when churches don’t provide housing, but pay an increased cash stipend in lieu of housing, then the amount to be designated by the cleric as excludable from IRS tax needs to be memorialized in advance by vestry resolution. I understand that it works essentially the same way for the military. Housing (or housing costs)–whether provided on base or by allowance off base–will be excluded from IRS tax but subject to payroll tax.
Per #9, auto allowances are allowed for clergy as for any other employment situation, on a verified reimbursement basis, subject to rules defining work-related travel. Unreimbursed allowances are, from the IRS’s point of view, simply additional income, and are reported on the front page of your 1040 and entirely subject to IRS and Self-Employment tax. Additional compensation, gifts, honoraria related to ministerial activities–baptisms, weddings, funerals, adult education lectures in a neighboring parish, etc.–are reported by clergy to the IRS as Schedule C income and are subject to IRS and Self-Employment taxes. If someone at a wedding gives you a check with your name on it, then it needs to be reported that way, as income, though of course if you want to make a donation to the church or a charity you can itemize it on Schedule A. If you don’t want to report that as income, you should have the parties write the check directly to the church or charity. When gifts are made in cash it is of course an honor system. You could put it in an envelope, write the name of the donor, and give it to your treasurer, to be recorded as a donation directly from the donor. Or you could put it in your pocket, keeping a journal entry and then including it on your Schedule C.
If the IRS were to drop the exclusion, then I expect parishes would need to increase compensation levels by roughly the amount of the additional tax now to be paid–or would need to ask the clergy and clergy-family to absorb a fairly substantial additional cost. Either choice would have significant impact on ministry especially in smaller, poorer congregations.
Bruce Robison
As to the wedding fees, the way I have always heard it done (at several parishes) was that the Bride (or family) gave an envelope as a gift to the Priest’s wife. Thus, it was not “payment” to the priest (taxable) but a gift to the wife (non taxable up to I believe $12,000 per gift giver, per year).
Recchip #11: There are of course all kinds of ways in our system for people to attempt to game the system. Small cash transactions are almost impossible for the IRS to track. A few years ago I worked with a carpet cleaner who offered to come by and do the job on a Saturday morning, “off the books” of his employer, with a hefty discount if I would pay in cash. Or maybe he might have suggested I give his wife a $300 “gift.”
The IRS can get pretty aggressive these days, and if a member of the clergy who officiates at a number of weddings doesn’t report any income, I imagine that might raise a question or two in the mind of an auditor. But I don’t think that the IRS cares whose name is written on the envelope or to whom the envelope was handed. If the money was intended to compensate the clergyperson for officiating at a religious service, that’s income and needs to go on Schedule C. If somebody wants to give you a gift, they can do it on your birthday . . . .
Romans 13:6, I guess, etc.
Bruce Robison