By Travis Marks, CFP®, CFA®
Director, Generations University
A minister’s housing allowance (sometimes called a parsonage allowance or a rental allowance) is excludable from gross income for income tax purposes*. It is an amount officially designated (in advance of payment) as a housing allowance and in reasonable compensation for services rendered as a minister.
Pension benefits usually are taxable as retirement income. However, it often comes as a pleasant surprise to clergy (ordained, licensed, or commissioned) that their Pension Boards pension benefits are eligible to be designated as housing allowance. Under current regulations and the Pension Boards’ actions, 100% of a retired minister’s pension may be spent on housing, including furnishings, utilities, and other allowable expenses. Withdrawals from the Retirement Savings Account (money that is not annuitized from the Pension Boards plan) also qualify for the housing allowance.
However, this applies only to the Lifetime Retirement Income Plan for the United Church of Christ (formerly called the Annuity Plan) benefits that were earned in a ministerial capacity. Any money transferred from the Plan to an I.R.A. does not qualify for the housing allowance designation. Also, the amount you exclude as housing allowance cannot exceed the fair market or rental value of your property, including utilities and furnishings, if that is less than your actual out-of-pocket costs.
A housing allowance is also not available to a minister’s surviving spouse for benefits arising from the minister’s employment, even if the surviving spouse is also ordained. A housing allowance attributable to pension income should not be treated as self-employment income, and, accordingly, should not be subject to Social Security taxes. This is a difference between the housing allowance of an active minister and the portion of pension income treated as a housing allowance by a retired minister.
*Not self-employment tax purposes
Once you receive annuity benefits, you will receive tax information and instructions to complete your tax return. Annuities paid by the Pension Boards are generally taxable as income in the year you receive them, partly because the money used to provide them was not previously taxed. However, if you have made after-tax contributions, part of your annuity will be tax exempt. The I.R.S. requires the Pension Boards to withhold taxes from your monthly pension unless you tell us not to. When you retire, the Pension Boards will supply all the proper tax forms for money that’s annuitized or moved to a Retirement Savings Account. If you do not submit a tax form, we must withhold federal tax based on a marital status of Single. You should check for possible changes in I.R.S. rules by visiting the I.R.S. website at www.irs.gov and consult with your personal tax advisor to discuss the tax ramifications of your retirement decisions.
Each state has its own tax policy on retirement benefits, so it is important for you to be aware of your local and state tax regulations. You should review any related issues with your personal tax advisor.
For more information, access clergy-specific tax resources here. Tax resources are updated in January of each year.
Travis Marks, CFP®, CFA®, is the Director of Generations University for the Pension Boards, responsible for the education initiatives for Pension Boards members, employers, and internal staff. Prior to joining the Pension Boards, Travis worked as Senior Manager of the National Financial Education Practice (FEP) for PricewaterhouseCoopers. He has more than 16 years of financial planning, education, and management experience, and has a passion for helping people improve their finances.