Many churches give their ministers a housing allowance instead of providing a parsonage for them. There are real advantages to this, mainly the fact that it allows the minister an opportunity to purchase his own home and prepare more adequately for retirement. For those who are still in parsonages, there are advantages to that as well, some that are not monetary in nature.
Valerie RumboughHowever, a common misconception with a parsonage is that the minister does not have to recognize its rental value for self-employment tax purposes. This can be a shock at tax time, when this is added in. The other issues is when the minister retires, and has no house to go to. Churches and ministers in this situation can make plans now that will lessen or alleviate this problem.
Some ideas for churches:
? Make sure your minister is aware of the tax implications of living in the parsonage and help by providing information on the fair rental value of the property, as well as considering a salary increase to help pay for the tax.
? Consider selling the parsonage, investing the proceeds, and using the income to provide a housing allowance.
If the parsonage is located on the church’s property, it may not be practical to sell it. In this case, the church should work to adjust their budget each year to gradually increase the housing allowance for your pastor. Once the pastor moves out of the parsonage, use the building for education or office space.
? Consider making or increasing retirement contributions to your pastor’s retirement plan.
Some ideas for pastors:
?Be sure to set aside enough funds during the year through estimated tax payments to cover the tax due.
? Begin planning now for retirement by saving as much as you can each month.
When you retire, you may be able to reduce your taxable income by designating funds you withdraw from your 403(b) retirement as housing allowance. Be sure to contact GuideStone or other providers first to determine the taxability of the withdrawn funds.
? Look into purchasing a home to rent out. If possible, set the rental payments at an amount that will cover your mortgage, taxes, insurance and maintenance. When you retire, either sell it and take your proceeds to pay down on a house for yourself, or move in.
When the pastor and the church work together to plan for now and the future, they end up ministering to each other, and all are blessed.
– Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at 800-723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.