Tax-free housing allowances for ministers: documentation is critical to ensure exclusion.

• Author: Godfrey, Howard

Sec. 107 provides for tax-free "parsonage" (housing) allowances for ministers of the gospel. This article describes how substantial tax savings may be realized if the requirements are met.

The Tax-Free Allowance

Under Sec. 107, gross income of a minister does not include:

1. The rental value of a home furnished to him as part of his compensation; or 2. The rental allowance paid to him as part of his compensation, to the extent used to rent or provide a home.

   Thus, the use of a house can be provided, or a cash housing allowance for the minister to rent or purchase a home. An allowance continues to be tax free when paid to the minister after retirement,[1] but the exclusion is not available for payments to the minister's surviving spouse.

   Qualifying for a Parsonage Allowance

   Under Regs. Sec. 1.107-1(a), the parsonage allowance is tax free if provided as remuneration for services that are ordinarily the duties of a minister of the gospel. Although neither Sec. 107 nor the regulations provide a definition of "minister," Regs. Sec. 1.107-1(a) indicates that Regs. Sec. 1.1402(c)-5, which defines a minister for self-employment (SE) tax purposes, applies for Sec. 107 purposes. Under Regs. Sec. 1.1402(c)-5(a)(2), a minister is one who is "duly ordained, commissioned, or licensed" as a minister of a church. The Tax Court stated in Wingo[2] that a minister may be either ordained, commissioned or licensed, but need not be all three.

   The parsonage allowance is available for ministers in all religious faiths. Regs. Sec. 1.107-1(a) provides that the duties of a minister include the following:

1. The performance of sacerdotal functions (e.g., weddings, baptisms, Lord's Supper, Bar Mitzvahs, funerals, etc.). 2. The conduct of religious worship. 3. The administration and maintenance of religious organizations and their internal agencies.[3] 4. The performance of teaching and administrative duties at theological seminaries.[4]

   The parsonage allowance is excluded for income tax purposes, but is subject to SE tax unless the minister elects to be excluded from Social Security coverage. In Wingo, Rev. James Wingo, a probationary member of the United Methodist Church, an ordained deacon and a licensed local pastor of a church of that denomination, filed an election on Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, to be exempt from SE tax; the election was rejected as filed late. Wingo then attempted to avoid paying SE tax by showing that he was not a minister. The Tax Court considered the first three factors listed above and the following two additional factors in determining if Wingo was a minister:

1. The person is ordained, commissioned or licensed, and 2. The congregation considers him a religious leader or minister.[5]

   The court determined that Rev. Wingo was a minister and, thus, liable for SE tax.

   Under Silverman,[6] an individual can qualify as a minister if he participates in some of the sacerdotal functions - it is not necessary for the individual to participate in all of them. Thus, if the church has more than one minister, their job descriptions should refer to them as "ministers of the gospel," and state that they are expected to perform any sacerdotal function needed.

   Limits on the Allowance

   There is no dollar limit or percentage of income limitation on the parsonage allowance. However, as seen in Table 1, above, the tax-free allowance is the least of (1) the actual amount spent on housing, (2) the amount...