Question

13. Reverend Smith is a full-time ordained minister whose church allows him to use a parsonage with an annual fair rental value (FRV) of $24,000. The church pays him an annual salary of $67,000, of which $7,500 is designated for utility costs. His actual utility costs were $7,000. He is not exempt from self-employment (SE) tax. On his tax return, Reverend Smith must report what amount of income for income tax purposes and what amount for SE tax purposes? a) $59,500 for income tax purposes and $31,500 for SE tax purposes b) $60,000 for income tax purposes and $31,000 for SE tax purposes c) $60,000 for income tax purposes and $91,000 for SE tax purposes d) $91,000 for income tax purposes and $31,000 for SE tax purposes

Answer 1

Ans: The correct answer is (b) $60000 for Income Tax purposes and $31000 fro SE Tax purposes.

Explanation and calculation:

1. Income of Reverend Smith for Federal Tax Purpose:

Annual Salary ($67000 - $7000) See note 1 & 2	$60000
Income for Federal tax purpose	$60000

While reporting Income for the purpose of Federal Taxes, a Pastor can claim exclusion of housing allowance from the income he or she received from the church when calculating gross income. Housing allowance is an exclusion and not a deduction so it is never included in gross income and if gross income already includes the amount of housing allowance then that portion of allowance is excludible.

Note 1-The amount of exclusion is the lessor of:

• The amount actually spent on eligible housing expenses i.e $7000
• The fair market rental value plus furnishings and utilities I.e $24000
• The amount officially designated in advance and paid by the church as a housing allowance i.e $7500

As the annual salary of the minister is inclusive of allowance, we have to deduct it from the salary

Note 2- Regarding the provisions of federal taxes, if a minister or pastor lives in a church provided parsonage, he or she is not subject to pay income tax on the use of that parsonage for federal tax purposes. But the fair rental value of the parsonage is added for his or her self employment tax purposes. Also, the eligible housing allowance is an exclusion for federal tax but not from self employement tax. The provision of exclusion is also applicable if the allowance is paid to ministers that own a home or rent their homes.

Note 3- A nonexempt qualifying minister claiming housing allowance must report the lesser of the following amounts on a Self Employment schedule on their personal income tax return:

• The amount actually spent on eligible housing expenses i.e $7000
• The fair market rental value plus furnishings and utilities I.e $24000
• The amount officially designated in advance and paid by the church as a housing allowance i.e $7500

Note 4- Reverend Smith is a Full time Ordained Minister, it is assumed that his activities are controlled by the church and he is an employee of the church.Thus, his salary is considered as wages for Federal income tax purposes only. He is not receiving any fee for performing any other services like marriage, baptism etc and therefore, it is assumed that the minister has applied for exemption so his wages will not be included in income for self employment tax purposes

2. Income for the purpose of Self Employment Tax:

Annual Salary (see note 4)	$0
Fair Rental Value of the parsonage (see note 2 above)	$24000
Amount claimed as exclusion as allowance (see note 3 above)	$7000
Income for SE purpose	$31000