It’s that time again for Parsonage Allowance/Exclusion designations!

This time of year, churches are designating amounts which can be excluded by their clergy in the next year for a parsonage allowance. Some churches provide a house for the minister, in which case the minister is allowed to exclude from taxable income an amount equaling the rental value of a church-provided parsonage. Other churches set aside a portion of the minister’s compensation as a cash allowance for the minister to provide his/her own housing. Typically called a “parsonage allowance” or a “parsonage exclusion”, this designation is required by the IRS to be reviewed annually, approved by a church governing council or body, and put into writing. It is important to carefully consider the amount to exclude, since any unused portion must be added back to taxable income.

Save your receipts! The excludable amount may include expenses the minister incurs while living in the home, including the mortgage payment, utilities, furniture, lawn mower, and even cleaning supplies! This can mean big tax savings for a minister, but there is just one catch. The minister must add the excluded amount back to taxable income when figuring the taxable amount for Social Security and Medicare. Since the IRS recognizes clergy as self-employed for Social Security and Medicare, clergy must file Form SE.

Here’s some good news. The 2010 Tax Relief Act reduced the self-employment tax by 2% for self-employment income earned in calendar year 2011. The new tax rate for 2011 income 13.3%.