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What would happen if the “housing allowance” exclusion was eliminated?

October 30, 2012

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

http://www.clergytaxnet.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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