As the tax is season is upon us, one issue on everyone’s mind is how much of a refund can I get? How do I take advantage of all my available deductions? A particularly complex area that is of special importance in our community, where a large percentage of the population is working for religious institutions is the Parsonage Allowance.
Many people are aware that a portion of their income earned from a religious institution may not be taxable, but there is a lot of uncertainty regarding the details. For example, how much of my income can be considered Parsonage and therefore not taxable? Can the amount of parsonage fluctuate during the year? Can a female teacher who is not ordained be considered a member of clergy?
Let’s first define Parsonage:
Under the Internal Revenue ministers are accorded some unique tax benefits and savings for income, social security and Medicare taxes.
According to the IRS Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a place of religious worship (such as a Yeshiva or Shul). They are given the authority to conduct religious worship and administer duties according to the prescribed tenets and practices of that denomination.
These Ministers or rabbis or other religious officials are allowed to be paid “tax free” a portion of their earnings. However, these earnings must be used to pay directly for rent or mortgage of their home up to the fair rental value. It doesn’t stop there: The employee taxpayer can also be paid and deduct from regular income other home related expenses, such as utilities, and home repair. Parsonage can therefore generate huge tax savings for the individual taxpayer.
However, taxpayers need to be aware that these earnings are not a “get out of taxes free” card. Indeed, they are still taxed for self-employment tax purposes (i.e. FICA and Medicare) , (unless of course they choose to opt out of the whole program and file form 4361)
Taxpayers should also note that the parsonage earnings may also affect some of their eligibility for certain tax credits such as the Earned income credit for instance
Whether you are the Employer or the employee, there are many complex issues to consider, such as the requirement that the parsonage is duly reported and designated by the employer organization before the employee starts earning the parsonage allowance each year.
Moreover this parsonage allowance is only allowed for:
a) “Duties of Minister”, which includes conduct of religious worship, giving shiurim and the control and maintenance of the religious organization, not for other more general duties.
b) Money earned by Ministers, which should include someone who has Semicha or some certificate or diploma from a yeshiva or seminary (which may include a female teacher as well).
Some Parsonage related questions to consider are:
1) Whether the individual has to earn the money directly from a religious organization or can work as a Rabbi or Mashgiach for any organization such as nursing home with the caveat that the work comprises religious duties.
2) What happens if the employee doesn’t end up using the estimated parsonage allowance (which by the way should be estimated and declared by the paying organization before the start of the year) towards paying for their actual housing?
5) What kind of expenses can I add to my basic rental expenses s to calculate the parsonage?
6) Can a self-employed individual still earn parsonage?
7) Can a husband and wife both claim parsonage?
For answers to these tax questions, which might end up saving you huge amounts and any other tax questions, simple or complex, please feel free to contact us: