In light of the recent reversal of the minister’s housing allowance court ruling, it’s a good time to address several common misunderstandings about how this tax benefit works.
Myth #1: The allowance applies to all my income.
Fact: A housing allowance can only be declared for income earned in service as a minister.
Section 107 of the Internal Revenue Code allows ministers of the gospel to exclude some or all of their ministerial income designated by their church or church-related employer as a housing allowance from income for federal income tax purposes.
Ministers may not receive a housing allowance for income earned from non-ministerial duties. That income is subject to standard taxation.
Myth #2: The allowance stops once I retire.
Fact: Retired ministers may declare a housing allowance on distributions from their AGFinancial 403(b) account, rendering that portion of their distributions tax-free.
This is a unique benefit of this retirement plan. Here is how it works: AGFinancial automatically designates 100% of a minister’s 403(b) distributions as housing. The minister must then determine and report their actual housing allowance amount on their Form 1040. The amount claimed must be the lesser of either your actual housing expenses for the year or the actual fair rental value as furnished.
For a list of expenses that qualify, click here.
Keep in mind, as explained above, a housing allowance can only be declared for income earned in the service as a minister. This applies to rollovers or transfers into your 403(b), as well as money contributed directly to it. In other words, you cannot transfer money from other retirement accounts into your AGFinancial 403(b) account and use retired clergy housing allowance on those transferred funds.
Myth #3: My spouse can declare a housing allowance on my income.
Fact: As a credentialed minister, you can only declare a housing allowance for your own ministerial income.
This rule also applies during retirement. Spouses may only declare a housing allowance for their own ministerial income as a credentialed minister.
In addition, a spouse cannot declare a housing allowance on an inherited 403(b) account even if it belonged to a spouse who was credentialed.
Because of these regulations, it’s very important for each credentialed spouse with ministry income to open their own 403(b) account and contribute to it.
Also, consider the option of a Roth 403(b). This type of account has the benefit of allowing your spouse to receive distributions that are not taxable after your death.
If you have additional questions regarding the minister’s housing allowance, feel free to give our office a call at 866.621.1787 or email retirement@agfinancial.org.
