Housing Allowance credit on 403(B) dist's?

[Guest danmar]

I've heard from various sources but have never been able to confirm in writing that certain church-sponsored 403(B) plans allow a minister to deduct his/her housing allowance from the taxable amount distributed from the plan after the minister has retired. Anyone have more substantial info on this deduction? Would this apply to any 403(B) plan/contract, or does it require specific plan or contract provisions? Does it apply to both salary reduction contributions or just to ER contributions? Thanks!

[Guest Robert Collins]

Please see IRS Publications 15-A, 17 & 517.

[Guest Robert Collins]

Excerpt from Publication 15-A

4. Religious Exemptions

Special rules apply to the treatment of ministers for social security purposes. An exemption from social security is available for ministers and certain other religious workers and members of certain recognized religious sects. For more information on getting an exemption, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Ministers.-- 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 and sacraments according to the prescribed tenets and practices of that religious organization.

A minister who performs services for you subject to your will and control is your employee. The common-law rules discussed in section 1 should be applied to determine whether a minister is your employee or is self-employed. The earnings of a minister are not subject to social security and Medicare tax withholding. They are subject to self-employment tax. You do not withhold these taxes from wages earned by a minister. However, you may agree with the minister to voluntarily withhold tax to cover the minister's liability for self-employment tax and income tax.

Form W-2.-- If your employee is an ordained minister, report all taxable compensation as wages on Form W-2. Include in this amount expense allowances or reimbursements paid under a nonaccountable plan, discussed in section 5 of Circular E. Do not include a parsonage allowance (excludable housing allowance) in this amount. You may report a parsonage allowance (housing allowance), including any allowances for utilities and the rental value of housing provided, in a separate statement or as "Other " in box 14 on Form W-2. Do not show on Forms W-2 or 941 any amount as social security or Medicare wages, or any withholding for social security or Medicare. If you withheld tax from the minister under a voluntary agreement, this amount should be shown as income tax withholding. For more information on ministers, see Pub. 517.

Excerpt from Publication No. 17 :

Clergy

Housing allowance. A housing allowance paid to you as part of your salary is not income to the extent you use it, in the year received, to provide a home or to pay utilities for a home with which you are provided. The amount of the housing allowance that you can exclude from your income cannot be more than the reasonable compensation for your services as a minister. The church or organization that employs you must officially designate the payment as a housing allowance before the payment is made. A definite amount must be designated; the amount of the housing allowance cannot be determined at a later date.

If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. The local congregation must officially designate the part of your salary that is to be a housing allowance. However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the agency. If no part has been officially designated, you must include your total salary in your income.

Expenses of providing a home include rent, house payments, furniture payments, costs for a garage, and utilities. They do not include the cost of food or servants.

Homeowner. If you own your home or are buying it, you can exclude your housing allowance from your income if you spend it for the down payment on the home, for mortgage payments, or for interest, taxes, utilities, repairs, etc. However, you cannot exclude more than the fair rental value of the home plus the cost of utilities, even if a larger amount is designated as a housing allowance. The fair rental value of a home includes the fair rental value of the furnishings in it.

Pension. A pension or retirement pay for a member of the clergy is usually treated the same as any other pension or annuity. It must be reported on lines 16a and 16b of Form 1040 or on lines 11a and 11b of Form 1040A.

Excerpt from Publication 517

Exclusion of rental allowance and fair rental value of a parsonage. If you receive in your pay an amount officially designated as a rental allowance, you can exclude the allowance from your gross income if:

l The amount is used to provide or rent a home, and

l The amount is not more than reasonable pay for your services.

The term "rental allowance" includes an amount to pay utility costs.