What about?

ELCA Pension and Other Benefits Program

Questions ordained ministers ask about taxes

NOTE: The ELCA Board of Pensions does not provide tax advice. We provide members with certain written tax information of general application in order to help you understand the way in which we administer our plans. For tax questions or advice specific to you, you should consult with your own tax or legal adviser. Tax laws are complex and are subject to change. The Internal Revenue Service has many free tax services available and lists them in the IRS Guide to Free Tax Services (Publication 910), which can be downloaded from the IRS web site at www.irs.gov. Forms, instructions and publications are also available at www.irs.gov and IRS offices. You may ask tax questions or get help with a tax problem at your local IRS Taxpayer Assistance Center.

Clergy housing allowance act

The Clergy Housing Allowance Clarification Act signed into law May 20, 2002 reinstates the fair rental value limitation for ordained pastors who claim housing allowance. The amount that can be excluded from federal gross income as housing allowance is always the smallest of the 1 amount officially designated in advance as housing allowance by your employer or church organization 2 amount spent for your primary residence (e.g., down payment, mortgage principal and interest, utilities, taxes, insurance, furnishings, maintenance) 3 fair rental value of your home, including furnishings and cost of utilities (owned or rented)

Frequently asked questions

Here are general answers to some frequently asked questions. For specific answers to your questions, please consult with your tax adviser.
Q. What are some of the special tax issues that apply to those serving under call and performing ministerial services as defined by the IRS?

A. The following special tax and reporting rules apply to pastors: eligible for clergy housing allowance federal income tax exclusion employees for federal income tax purposes self-employed status for Social Security purposes exempt from federal income tax withholding (Pastors may use the quarterly estimated tax procedure to pay their taxes or elect voluntary withholding.)
Q. How do I become eligible for the clergy housing allowance exclusion?

A. Your employer must officially designate a certain portion of your income in writing (e.g., a council resolution, meeting minutes or budget line item) as eligible for housing allowance, prior to payment being made to you. The amount of the housing allowance designation should be mutually agreed upon by you and your employer. See the sidebar for more information.
Q. Is the amount of my income designated as housing allowance subject to Social Security tax?

A. Yes, all earnings for the services performed in the exercise of your ministry are subject to self-employment and Medicare tax under the Self Employment Contributions Act (SECA) rules, unless you have requested and received an exemption. These earnings are subject to Social Security tax whether you are an employee of a church or other organization or self-employed under the common law rules.
(continued on Page 2)

Q. Can I use the housing allowance exclusion when I withdraw housing equity money held in any financial institution?

A. No. According to the IRS, you can claim the clergy housing allowance exclusion only when receiving distributions from contributions made while you were a member of the clergy if your account is held in a church-administered retirement plan (like the ELCA Retirement Plan). Church-affiliated or other fraternal organizations do not qualify for this exclusion.
Q. If I make member pretax contributions, do I pay Social Security tax on these amounts?

Withdrawals may be subject to taxes

Withdrawals from your account may be subject to 20% federal tax withholding and state tax (in certain states where required). You may elect to waive federal tax withholding if the distribution will be used as housing allowance and excluded from gross income. Also, withdrawals made while you are employed (including hardship withdrawals) before age 5912, may be subject to an additional 10% early distribution tax.

A. No. Member pretax contributions are excluded from gross income for Social Security and federal income tax purposes.
Q. What is taxable for federal income tax purposes?

A. Taxable income includes: base salary, less pretax contributions earnings from other sources (i.e., for writing or speaking or gifts for pastoral acts like weddings and funerals) any Social Security tax allowance paid to you furnishings and utilities allowance paid directly to you (if housing is provided), unless excludable as housing allowance
Q. What earned income is not taxable?

Pretax contributions
All member and employer contributions are pretax; they are not subject to federal income tax at the time they are contributed to the plan. Earnings on these contributions are also tax deferred. For pastors, contributions are also not subject to Social Security taxes or creditable toward Social Security benefits.

A. You will not be taxed on the following income: employer contributions made to the ELCA Retirement Plan housing equity contributions made to the ELCA Retirement Plan business expense reimbursements or allowances made under an accountable plan your pretax contributions to the ELCA Retirement Plan
Q. Am I an employee or self-employed?

A. Generally, the ELCA recognizes ordained ministers serving in congregations as employees for federal income tax purposes. In most cases, such ordained ministers should receive an IRS Form W-2. The IRS recognizes all ministers as self-employed for Social Security tax purposes. Therefore, you are required to pay your own Social Security taxes through quarterly estimates or withholding through the Form W-2 process (these taxes are filed as federal taxes paid)

After-tax contributions
If you have made after-tax contributions (e.g., under a predecessor plan or overseas employment after 1997), only the investment earnings on these contributions are subject to tax upon distribution.

Q. If my congregation pays me an amount of money equivalent to half of my SECA taxes, is that amount included as part of my gross taxable income?

A. Yes. If your congregation pays you an additional amount to cover what would have been their employer FICA tax if you werent considered self-employed, the IRS says it must be included in clergy self-employment earnings and as income for federal income tax purposes.

What about?

Q. What if my household expenses are less than my designated housing allowance?

A. The amount of the difference is taxable income for income tax purposes.
Q. If I live in church-provided housing, do I pay taxes on the value of what is provided?

A. FOR InCOME TAXES: If housing is provided to you by your congregation for your services as a minister, you do not need to count the value of the housing as taxable income even though it is part of your remuneration. In addition, if any of your income is designated as a furnishings or utilities allowance, you may be able to exclude more from your taxable income according to the standard housing allowance limitations. FOR SOCIAL SECURITY TAXES: You need to include the fair rental value of the churchprovided housing (including the cost of utilities paid by the employer) as income for Social Security purposes. Be sure you also include as income any amount of your pay that was designated as furnishings and/or utilities allowance when calculating Social Security taxes.

Everyday tax solutions

You can obtain federal tax solutions every day by contacting the IRS National Taxpayer Advocates Helpline at (877) 777-4778. You will hear pre-recorded information about office hours and locations, or if you have a tax problem and want to make an appointment to talk with someone in person, leave a message and an IRS representative will return your call.
How to access forms and publications

Q. My congregation provides a parsonage and makes a housing equity contribution to the ELCA Retirement Plan. What are the tax implications?

A. Housing equity contributions to the ELCA Retirement Plan are not taxed at the time they are contributed. These contributions are eligible to be withdrawn at any time and are designated as eligible for housing allowance exclusion when withdrawn. However, when you make a withdrawal, you must justify to the IRS how much may be excluded as housing allowance, based on 107 tax code limits. If you cannot justify the entire withdrawal as eligible for housing allowance, you will be subject to income tax on the difference and if under age 5912, also subject to an IRS early withdrawal penalty.
Q. If I purchase a home, can I claim the entire down payment plus the monthly housing expenses as housing allowance?

A. Generally, no. The IRS allows you to exclude the money you spend to purchase a home only if it is your principal residence and if you provide proof of how the money was spent when you file your income taxes. The IRS sets limits on the amount of annual housing allowance you can claim. It is always the smallest of the amount officially designated in advance as housing allowance by your employer or church organization amount actually spent for your primary residence (e.g., down payment, mortgage principal and interest, utilities, taxes, insurance, furnishings, maintenance) fair rental value of your home, including furnishings and cost of utilities (owned or rented)

You can access the IRS web site 24 hours a day, seven days a week at www.irs.gov to: download forms, instructions and publications see answers to frequently asked tax questions search publications online by topic or keyword send comments or request help via e-mail You can also order forms and other publications by calling (800) 829-3676 or by visiting your local Taxpayer Assistance Center.

Questions ordained ministers ask about taxes

Q. How much can I contribute to my retirement account through member pretax contributions?

A. The annual maximum limit allowed in 2010 is $16,500. In certain circumstances you may be eligible to make additional contributions. Find the current annual IRS maximum contribution limits at www.elcabop.org. The limits are set annually by the IRS and may be increased annually. Contact our Service Center to have your maximum amount calculated.
Q. When I convert my retirement savings into income after retirement, is this income taxable?

For more information

If you have questions about this information please contact the Board of Pensions Service Center at (800) 352-2876, e-mail us at mail@elcabop.org or visit our web site at www.elcabop.org.

A. Yes. Contributions to the Retirement Plan are tax deferred until you begin receiving distributions. You would not pay federal income tax on any amount you are able to justify as excludable for housing allowance.
Q. When I die, can my surviving spouse apply the housing allowance exclusion to distributions?

A. No. The housing allowance exclusion is only available to pastors.

Q. Ive heard about a flexible spending account. What is it?

References available at
www.irs.gov/faqs Social Security and Other Information for Members of the Clergy and Religious Workers (Publication 517) Earnings for Clergy (Tax Topic 417)

A. A flexible spending account (FSA) enables employees to set aside payroll dollars on a pretax basis to pay for out-of-pocket expenses, including: certain health care expenses that are not paid for or reimbursed under ELCA-primary health benefits eligible dependent day care expenses
Q. Who determines the rules that govern FSA plans?

A. Because of the tax benefits involved with flexible spending accounts, the IRS has established specific rules that govern FSA plans.
Q. How will an FSA affect my income taxes and Social Security benefits?

A. The FSA enables you to reduce your taxable income, which in turn lowers your Social Security tax and federal and state income taxes for the year. NOTE: Some states may not recognize FSA plans for income tax purposes.
Q. Can I enroll in the ELCA Flexible Benefits Plan?

A. If you are sponsored in the ELCA benefits program and you have ELCA-primary health coverage, you can enroll in the ELCA Flexible Benefits Plan which includes FSAs during the annual enrollment period indicating separate contribution amounts for the health care FSA and the dependent day care FSA. Your FSA election(s) will remain in effect for that entire plan year unless you experience a qualifying election change event.

Printed with soybean inks on recycled paper containing 15% post-consumer fiber.

20-329 (8/2010)