Pastor's housing allowance

[MAMalody]

and grow my own pot. It's legal here. But I'm not going to do it.

That wasn't my question, but, okay.

[veritas]

I can get a medical card

and grow my own pot. It's legal here. But I'm not going to do it.

[MAMalody]

I guess an interesting question would be, if you could exclude from taxation a portion of your income, legally, would you do it? If the answer is no, because everybody else can't do it...then it would be thoughtless (maybe). If the answer is yes, then what is the big deal. I agree that some churches do pay their pastors a social security offset, however, my experience is that most don't (I also specialize in only doing clergy returns). I do not have one pastor that receives $50,000 in housing allowance. In fact, I only have a handful that receive $50,000 it total compensation...and that for the entire household. We can bat this ball back and forth for quite a while, just thought I would put in my two cents worth.

[veritas]

I have a dual tax status while some pastors have a

dual tax free status

since I am considered an employee of my S Corproration. However I don't get the fringe benefits that an average employee gets. I also get to pay both sides of the fica taxes. However I don't get to exempt one third of my income as I understand the average allowance claimed.

By the way some pastors are paid additional compensation to cover their fica taxes as I'm sure you are aware.

As to your closing argument while it has some merit in theory. The exclusion for homeownership for instance, this is available to all taxpayers not just a select few. I read where Rick Warren announced the law signed which was rushed through congress to a room full of pastors who immediately broke out in applause.



"Warren and his staff promoted passage of the bill. He announced May 17 at a "Purpose-driven Church" seminar at Saddleback the president was to sign the bill May 20. The audience of 3,800 pastors from 87 denominations broke into loud applause." from an article by Tom Strode


In my opinion some pastors have lost touch with realty.

Could be shameful was to strong maybe thoughtless is a better word.

[jjstephens]

Hmmm. Interesting post. Shameful? Methinks that's a bit strong.

I sure didn't mean for this to turn into a philosophical conversation. I was originally just trying to provide some feedback on the why's and wherefor's of opting out and provide a bit of guidance on how to figure the amount subject to SECA tax. However, I recognize that it can be a hot button issue. Here's one person's perspective.

Coming from a pastor it might suprise you, but I agree that the original rationale for housing allowance has long since vanished. Once upon a time when most clergy were paid a pittance and provided tremendous service to the community-at large (not necessarily restricted to their local congregation) it may have been justified. For better or worse that is simply no longer the case. The housing exclusion almost disappeared in 2002. After considering the Warren case the 9th Circuit seemed poised to declare it unconstitutional but Congress bowed to pressure and rushed through a compromise that kept it alive. Frankly, I think it should disappear. There would be wailing and gnashing of teeth but I simply don't see how it can continue to be supported from a public policy perspective.

As for the opting out issue, I respectfully disagree. It is an option only for those who have a constitutionally protected objection. It has been sustained by the courts on that basis. In all honesty, if the option were not there I would probably not lose sleep over it but it is there and I do hold that conviction. I realize that others hold equally valid convictions about other matters (e.g., opposition to the war, ecological issues, etc) and are not similarly given the opportunity to opt out of tax payment (there are a few I'd like to take an adjustment on!). On the other hand, they do not voluntarily forfeit all the benefit that their tax 'purchases'. Some would argue that they want to opt out on only a proportional basis. The courts have consistently said that is not permissible. Taxpayers can't arbitrarily pick and choose on their tax return which policies they will support. However, they can (and should) take advantage of every legal option available to them in the form of deductions, exclusions, etc.

There is another side to this whole thing. Clergy have a unique 'dual tax status'. That is, they are almost always considered an employee for income tax purposes but are always considered self-employed for social security tax purposes. Now this is where it gets interesting. The vast majority of clergy do not opt out meaning they have to pay the higher self-employment social security tax. And guess what. For the typical full time clergy that higher social security tax is just about equal to the savings they realized from their housing allowance. It's just about a wash. What Congress giveth, Congress taketh away! For most clergy there is little or no net tax savings. If the average person in the pew is worried about their pastor making a killing on their tax return, they're worrying for nothing. After more than 25 years in the ministry I can honestly say I have not run into more than 2 or 3 people who thought clergy were unfairly advantaged tax-wise. The icing on the cake is that our clergy clients get the 'benefit' of paying us a few extra bucks to add a Sch SE to their tax return and to figure the legally excludable amount of their housing.

Back to the housing exclusion. There are dozens of deductions that benefit a lot of select groups. The mortgage interest deduction for example. Why mortgage interest and not other kinds? Why are state and local income taxes deductible and not other taxes? The answer is that our elected officials made conscious decisions to include or exclude based on public policy. Once upon a time they made the decision to exclude clergy housing. It was no more or less arbitrary than other exemptions. I have already granted you that (IMO) the public policy rationale has long since disappeared and that the only reason it still exists is political expediency. Frankly, I fault the Congress for that, not the clergy. As long as there is a valid exclusion/deduction just about every eligible taxpayer I know of is going to avail him/herself of it. I'm not sure many would consider taking advantage of a valid exclusion 'fudging'. Like most of you I look for every valid means I can find to save my clients money on their tax return. Like most of you I personally take advantage of every valid means to minimize my own tax bill. Anyway, that's my two cents worth.

[veritas]

Interesting

I might get booted for this one.

But if the church membership understood the special advantages clergy received with regards to their taxes I'm thinking it would cause many to stumble.

I can't help thinking when a preacher talks to the laity telling them that we should not fudge on our taxes. Yet here we have people exempting themselves out of a social security taxes and then a housing allowance to boot. Or better yet talk to us about giving. Giving would be so much easier if one did not have to pay fica taxes and could exempt thousands from income tax.


Then they retire and exempt their retirement from income tax and collect social security from their "secular earnings".

Sorry but that is so wrong it is shameful.

[jjstephens]

Right reasons

What I meant by 'right reasons' was a firmly held conviction that receiving public (that is, goverment provided) benefits related to my ministry service is inappropriate. The theory behind the option is that the ability to compensate (even to the extent of providing a retirement or disability benefit) carries with it the possibility of exerting influence on the person receiving that benefit. I believe it is inappropriate for the govt to even have the ability (whether they utilize it or not) to exert influence on me in an effort to influence what I preach and teach. The exemption is offered to those who do not wish to be placed in that postion. IMHO, the govt is not presently engaging in such activities (some of my colleagues are not so sure). However, the possibility exists. I chose to opt out because I do believe it is inappropriate and do not wish to be placed in that position should circumstances change in the future. As a consequence of that choice I am making alternative arrangements for my retirement. To be honest, in a sense I have the best of both worlds. I have worked long enough in secular employment (in excess of 40 quarters) so that I am vested in the SS system. I will be eligible to draw SS benefits on the basis of what was (and is continuing to be) paid in on my secular earnings. I simply do not accrue any additional benefits on the basis of my clergy earnings because I do not pay into SS on those earnings. A surprising number of clergy who have opted out are in a similar position, especially those for whom the ministry is a second career.

I fully agree that many pastors opt out for the wrong reason (to 'save' money or because they think they can do better elsewhere) and give little thought to the consequences. That is wrong on several levels. However, the opportunity for exemption exists because of a real and valid concern on the part of some about govt interference in religious matters.

My clergy clients often ask me if they should opt out. My reply is always the same. "If--but only if--you have a firmly held religious conviction that it is inappropriate for you to receive public insurance benefits related to your ministry service then carefully consider the consequences pro and con of opting out. But if you do not firmly hold such a conviction and if you are not willing to make appropriate alternative arrangements then do not even consider it."

[Chief]

for all the right reasons

I too would be interested in hearing these. Related to this I was a public school teacher for 2 years in Colorado. The public employees had opted out for the "right reasons." I was happy to leave the state and get back into the social security umbrella.
Many pastors of these small churches the majority dont want public assistance programs; rather they depend on the good graces of their flocks to provide their needs. Later without the churches they depend on the Lord to provide. Generally they wind up in poverty and I feel sorry for them. Social security is at least one program that they can depend on. Even church supported pensions depend upon how much you put in. You only get what you have invested in them. The Salvation Army and the Catholic Church are the only church related organizations that continue to support their clergy and other workers for life. I can see why they optout of social security but these other churches and religio0us orgnizations I do not understand their opting out. Would they go on public assistance? Not according to their thinking. They would die first. How hungry does a man have to get to compromise his ideals?

[veritas]

"For all the right reasons I 'opted out' many years ago."

If I may ask what are all the right reasons?

[jjstephens]

Clergy housing and social security tax issue

Has anybody ever used that. My understanding fo that is the choice is not to be covered by Social Security and it is foever??!!!!!!!!!!

This is not a small church and she met with the financial "expert" when they cam up with all of this.

In addition to operating a consulting biz for pastors and ministries, I am an ordained pastor. For all the right reasons I 'opted out' many years ago.

The prerequisite for opting out (ie., the only 'right' reason) is the the clergy person must have a firmly held conviction that it is inappropriate to receive public insurance benefits (ie. SS) related to ministry services. They have to certify that conviction when they file Form 4361 and the IRS follows up with a letter reminding the applicant of that requirement. The applicant must then recertify his/her conviction before the IRS approves the 4361. The exclusion is only for ministry related earnings--all secular earnings are still subject to either FICA or SECA tax and the person is still eligible for SS benefits based on amounts paid in.

The deadline for filing Form 4361 is the deadline for filing the second tax return on which the clergy person reports at least 400 dollars of ministry related income. The election is generally irrevocable--except that over the last 25 years the Congress has allowed a brief window of opportunity on three different occasions for clergy to opt back in (most recently in 2001 and 2002).

Someone else stated that it is not wise financially. Technically, the financial benefit (or lack thereof) is not supposed to be a consideration--though in all honesty it probably is for some who opt out. Further, I'm not convinced a person can't do better for him/herself anyway. The key (and something I strongly stress with my clients who choose to opt out) is that they need to be extremely diligent about pumping the money they save by not paying SECA tax into a 403b and also pick up some disability coverage.

Here's a quick formula for determining the amount of clergy income subject to SECA tax (for those clergy who did NOT opt out):
+ Church W2 (box 1)
+ Clergy housing/parsonage allowance
+ Fair rental value of church provided parsonage
+ Net self-employment income on Sch C (secular and ministry related)
- Unreimbursed ministry expenses reportable on Form 2106 (even if F2106 is not filed)
= Amount subject to SECA tax

[MAMalody]

I have one time, but it is not something that I personally think is wise in a financial way. Also, it is not supposed to be done for financial reasons, just if there is a religious objection. There are time limits as to when you can opt out, and you are right - once you are out, you're out. What happens to these people if they become disabled? They cannot collect on social security disability.

LT

Actually, they can if they have the required credits of non-clerical income.

It is also interesting to note that there have been two opportinities so far to opt back into the system.

Mike

[thomtax]

I have one time, but it is not something that I personally think is wise in a financial way. Also, it is not supposed to be done for financial reasons, just if there is a religious objection. There are time limits as to when you can opt out, and you are right - once you are out, you're out. What happens to these people if they become disabled? They cannot collect on social security disability.

LT

[JON]

4361

Has anybody ever used that. My understanding fo that is the choice is not to be covered by Social Security and it is foever??!!!!!!!!!!

This is not a small church and she met with the financial "expert" when they cam up with all of this.

[Chief]

Clergy Housing Allowance

Although this does not pertain in your case. For a minister who is retired and received a housing allowance from a church owned group does not even pay FICA or SE tax on the allowance. This perk is an attractive one and to the best of my knowledge does not duplicate itself any where else.

[MAMalody]

While I agree with the prior postings, it is possible to have clerical income that is not subject to social security and Medicare. If the pastor has an approved Form 4361, then the salary and housing from the church are not subject to SE tax.

I might also mention that you are able to subtract from his clerical SE income any unreimbursed professional expenses, disregarding the IRC 265 adjustment.

Mike