Housing Allowance FAQs
What is it?
- A tax benefit for pastors.
- A portion of income the is excluded from gross income, thus is not subject to federal income tax.
- Gives them the ability to take a portion of money out of their 403b without the 20% mandatory withheld (its possible they may still owe state or SECA taxes).
- Also referred to as parsonage allowance or rental allowance.
Why do they get it?
The idea is that pastors use their house as part of their regular duties.
A person who is an ordained, licensed, or commissioned minister.
Who can take it?
Housing Allowance cannot exceed the lesser of 100% of compensation or actual housing expenses.
Is there a limit to the amount of Housing Allowance?
They can and can even do it on the Housing Allowance form. But they will be taxed on the extra amount.
What if they want to take more than their Housing Allowance limit?
The Housing Allowance Distribution Envoy form (signed by account holder, employer, and spouse if applicable) and a HA letter (can be recorded).
What is required to take a Housing Allowance distribution?
The letter must be dated by December 31st of the previous year, but the letter can be handed in later than that.
Is there a due date on the letter?
It must be approved by the board at the church by December 31st of the previous year.
Who approves it?
Yes, the pastor must be 59 ½ or older to take it from their 403b and avoid the taxes.
Is there an age limit?
$25 for a one-time and $10 a time for a periodic
What is the fee?
Technically they can take it, BUT:
- They still need to be 59 ½ or older,
- The plan needs to allow in-service distributions,
We need proof that they are not receiving their housing allowance in other ways (church is paying them the housing allowance).
What if they are still employed?
No, this is why it is important for pastors to keep their money in a 403(b) and not rollover into an IRA or 401(k).
However, if they get a new job, they can roll back into a 403(b), and then have housing allowance eligibility.
Can they take Housing Allowance distribution if they rolled over to an IRA or 401(k)?
The total amount taken from the 403b for the year will show up in the “Gross Amount” section, but the amount in the “Taxable Amount” section will be the gross amount minus the housing allowance. So the housing allowance will not show in the taxable amount. The form you will get is a 1099.
How will this look on their tax form?
No. The employer does not report it as income. However, the pastor will include any excess housing allowance on their Form 1040.
Is this money reported as income?
Say in December of the previous year the pastor goes to his board and says that his housing allowance needs for next year will be $12,000. But at the end of the year he adds up his expenses and they were only $11,000. The extra $1,000 would need to be reported as income.
What is Excess Housing Allowance?
Yes, but it if their housing allowance amount changes, the account holder is responsible for letting us know and will need to fill out a new form with a new Housing Allowance letter.
The account holder should also send us a new Housing Allowance letter each year, even if it hasn’t changed.
Can they set up a recurring/periodic payment?
They can call or email us to let us know to stop it.
Can they stop a recurring/periodic payment?
Yes, have them log on to the web portal and go to the Help/Resource Center > Distribution > Housing Allowance > Scroll down to the bottom.
Are there sample Housing Allowance letters
Section 107 of the Internal Revenue Code
Where can I look for more tax law info?
Yes, they can take out their housing allowance without the majority of taxes, and the IRS will see the distribution as an RMD.
If their RMD is larger than their housing allowance they would need to take out more and it would be taxed like normal.