How much money does the IRC 107(clergy housing allowance/parsonage tax exclusion) actually save clergy? After running a few scenarios, the outcome may surprise you.
In each scenario, we calculated the amount of tax paid by the clergy in two ways. First, their taxes are calculated as if the housing allowance/parsonage exclusion was eliminated(secular employee). This means that they are treated as secular employees under the FICA system and their housing allowances and the FRV of their parsonages are taxed as secular employees. This article is looking at how these scenarios would affect cash flow for the taxpayer in reference to their federal income tax return, not the impact it would have on the amount of tax that the church/employer pays. Scenarios 1-3 feature a clergy living in a church owned parsonage, while scenarios 4-6 feature a clergy that receives a housing allowance. The second calculation(clergy dual status) represents the current tax law, meaning that clergy are dual-status employees and their housing allowances and the FRV of their parsonages are not included in federal income tax(but they are included in the SECA calculation). Under current tax laws, most clergy are considered dual-status employees and do not have the option of choosing secular employment.
Keep in mind these figures do not represent actual taxpayer figures, they are just scenarios put together for this article. Your individual employment status and tax circumstance may vary greatly from the examples given.
Scenario #1
MFJ
2 kids under 17
Standard Deduction
Income:
40,000 base + 12,000 FRV (Parsonage)
Secular Employee:
$52,000 AGI
$994 Tax Due
$2,938 SS/Medicare Taxes W/H from Pay
$3,932 Total Taxes Paid
Clergy Dual Status:
$36,327 AGI
$5,487 Tax Due
$0 SS/Medicare Taxes W/H from Pay
$5,487 Total Taxes Paid
Scenario #1 Outcome: In scenario #1, the family would actually pay $1,555 less tax for the year if clergy were treated like secular employees and the housing allowance exclusion was eliminated.
Scenario #2
MFJ
2 kids under 17
Standard Deduction
Income:
Clergy: 40,000 base + 12,000 FRV (Parsonage)
Spouse: 30,000
Secular Employee:
$82,000 AGI
$5,603 Tax Due
$4,633 SS/Medicare Taxes W/H from Pay
$10,236 Total Taxes Paid
Clergy Dual Status:
$66,327 AGI
$9,715 Tax Due
$1,695 SS/Medicare Taxes W/H from Pay
$11,410 Total Taxes Paid
Scenario #2 Outcome: In scenario #2, the family would actually pay $1,174 less tax for the year if clergy were treated like secular employees and the housing allowance exclusion was eliminated.
Scenario #3
Single
Standard Deduction
Income:
40,000 base + 12,000 FRV (Parsonage)
Secular Employee:
$52,000 AGI
$6,756 Tax Due
$2,938 SS/Medicare Taxes W/H from Pay
$9,694 Total Taxes Paid
Clergy Dual Status:
$36,327 AGI
$9,986 Tax Due
$0 SS/Medicare Taxes W/H from Pay
$9,986 Total Taxes Paid
Scenario #3 Outcome: In scenario #3, the taxpayer would actually pay $292 less tax for the year if clergy were treated like secular employees and the housing allowance exclusion was eliminated.
Scenario #4
Single
Income:
Clergy: 32,000 base + 18,000 Housing Allowance
Itemized Deduction
RE Taxes 2,500
Mortgage Interest 6,000
Charitable 3,500
Secular Employee:
$50,000 AGI
$4,724 Tax Due
$2,825 SS/Medicare Taxes W/H from Pay
$7,549 Total Taxes Paid
Clergy Dual Status:
$28,468 AGI
$7,632 Tax Due
$0 SS/Medicare Taxes W/H from Pay
$ 7,632 Total Taxes Paid
Scenario #4 Outcome: In scenario #4, the taxpayer would actually pay $83 less tax for the year if clergy were treated like secular employees and the housing allowance exclusion was eliminated.
Scenario #5
MFJ
2 kids under 17
Income:
Clergy: 25,000 base + 25,000 Housing Allowance
Spouse: 50,000
RE Taxes 2,500
Mortgage Interest 6,000
Charitable 5,000
Secular Employee:
$100,000 AGI
$8,181 Tax Due
$5,650 SS/Medicare Taxes W/H from Pay
$13,831 Total Taxes Paid
Clergy Dual Status:
$71,468 AGI
$9,767 Tax Due
$2,825 SS/Medicare Taxes W/H from Pay
$12,592 Total Taxes Paid
Scenario #5 Outcome: In scenario #5, the family would actually pay $1,239 more tax for the year if clergy were treated like secular employees and the housing allowance exclusion was eliminated.
Scenario #6
MFJ
Income:
Clergy: 25,000 base + 25,000 Housing Allowance
Spouse: 50,000
RE Taxes 2,500
Mortgage Interest 6,000
Charitable 10,000
Secular Employee:
$100,000 AGI
$10,781 Tax Due
$5,650 SS/Medicare Taxes W/H from Pay
$17,681 Total Taxes Paid
Clergy Dual Status:
$71,468 AGI
$12,127 Tax Due
$2,825 SS/Medicare Taxes W/H from Pay
$14,952 Total Taxes Paid
Scenario #6 Outcome: In scenario #6, the family would actually pay $2,729 more tax for the year if clergy were treated like secular employee and the housing allowance exclusion was eliminated.
Source:
Clergy Financial Resources
https://www.clergyfinancial.com
Clergy Financial Resources is a national accounting and finance organization serving churches and clergy since 1980. They have an unparalleled tax expertise on the complex issues associated with clergy tax law, clergy taxes, clergy compensation and church payroll. Clergy Financial Resources is a valuable resource for clergy, churches and denominations
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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