What is Housing Allowance?
A tax benefit for ordained, licensed, or commissioned ministers.
A portion of income that is excluded from gross income, and 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 does one get Housing Allowance?
The idea is that pastors use their house as part of their regular duties.
Who can take Housing Allowance?
A person who is an ordained, licensed, or commissioned minister.
Is there a limit to the amount of Housing Allowance?
Housing Allowance cannot exceed the lesser of 100% of compensation or actual housing expenses.
What if they want to take more than their Housing Allowance limit?
They can and can even do it on the Housing Allowance form. But they will be taxed on the extra amount.
What is required to take a Housing Allowance distribution?
Download the Distribution Authorization Form - Special Housing Allowance Tax Treatment. Complete all sections of the form and return it to your former employer. Each year, you need to provide Envoy with a Housing Allowance Authorization letter from your organization, on letterhead, signed by an authorized individual, and indicating the amount of Housing Allowance approved for the year.
Is there a due date on the letter?
The letter must be dated by December 31st of the previous year, but the letter can be handed in later than that.
Who approves it?
It must be approved by the board at the church by December 31st of the previous year.
Is there an age limit?
Yes, the pastor must be 59 ½ or older to take it from their 403b and avoid the taxes.
What is the fee?
$25 for a one-time and $10 a time for a periodic
What if they are still employed?
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).
Can they take Housing Allowance distribution if they rolled over to an IRA or 401(k)?
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.
How will this look on their tax form?
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.
Is this money reported as income?
No. The employer does not report it as income. However, the pastor will include any excess housing allowance on their Form 1040.
What is Excess Housing Allowance?
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.
Can they set up a recurring/periodic payment?
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 stop a recurring/periodic payment?
They can call or email us to let us know to stop it.
Are there sample Housing Allowance letters
Yes, have them log on to the web portal and go to the Help/Resource Center > Distribution > Housing Allowance > Scroll down to the bottom.
Where can I look for more tax law info?
Section 107 of the Internal Revenue Code
Can it count towards RMD?
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.