Understanding the Parsonage Allowance Part 3:

Claiming the Parsonage Allowance in Retirement

By Mitchell J. Smilowitz, CPA

Rabbis and cantors can claim Parsonage Allowance tax benefits in retirement – with one big caveat. Parsonage Allowance benefits are only available on distributions from a denominational retirement plan such as The Joint Retirement Board 403(b)(9) Retirement Plan (JRB). (The JRB has a “Private Letter Ruling” from the IRS authorizing the JRB to confer the Parsonage Allowance on distributions to retired clergy.)

Calculating the Parsonage Allowance in Retirement

The Parsonage Allowance in retirement is calculated the same way it is calculated during your working years.

The value of the Parsonage Allowance is the lowest of three amounts:

• The actual cost of maintaining the home owned or rented by the minister.
• The Fair Rental Value of the home, furnished, plus utilities.
• The amount clergy designate on their JRB Distribution Request Form.

For more information on calculating the cost of maintaining your home (note that there are different rules for owners and renters) and determining the Fair Rental Value of your dwelling, see Part 2 in this series. The JRB recommends keeping accurate records of the expenses incurred to maintain your home as well as records justifying the Fair Rental Value of your home.

Designating the Parsonage Allowance with the JRB

For each calendar year, The JRB Board of Trustees adopts a Resolution with respect to a Parsonage Allowance for retired clergy for the upcoming calendar year. Here is the 2024 resolution passed by the Board.

Any distribution by retired clergy from the JRB is eligible to be used as a Parsonage Allowance. Simply indicate the portion of your distribution that will be claimed as a Parsonage Allowance on your Distribution Request Form. The JRB accepts the amount requested on the form. Because the JRB relies on the reporting of our participants, clergy will be responsible for justifying the parsonage benefit claimed if questioned by the IRS. As stated above, keep good records.

There are two variations of the Distribution Request Form. The Periodic Distribution Request Form allows you to request payments on a monthly or quarterly basis. The Partial Distribution Request Form is used to take a non-recurring distribution. Contact the JRB at 888-JRB-FREE (572-3733) or via email for both Distribution Request Forms.

Use Section III of either Distribution Request Form to specify how much of your distribution you want to claim as a Parsonage Allowance. You can claim up to 100% of the distribution from your JRB account as a parsonage benefit – as long as you have eligible parsonage expenses.

If you withdraw more than your Parsonage Allowance, the excess is taxable as ordinary income. For example, if you withdraw $5,000 from your JRB account and you claim $4,000 as a Parsonage Allowance, you will owe federal and (possibly) state income taxes on $1,000. While there are exceptions, federal law generally requires the JRB to withhold 20% of the amount in excess of your Parsonage Allowance.

The JRB will contact those taking periodic distributions toward the end of each calendar year to ask if you want to change your distribution and the amount you are claiming as a Parsonage Allowance.

A Major Benefit of Parsonage in Retirement – No Self-Employment Tax (SECA)

During their working years, clergy pay SECA taxes on the amount claimed as a Parsonage Allowance. In retirement, distributions are not subject to self-employment – or SECA – tax. This includes any amount claimed as a Parsonage Allowance.

Conclusion

The Parsonage Allowance remains an important tax benefit for clergy in retirement – but only on income derived through distributions from a denominational retirement plan such as the JRB. The method for calculating the parsonage benefit remains the same as during your working years.

The Parsonage Allowance is declared in Section III of the JRB’s Distribution Request Forms. Taxes are owed on the amount of the distribution in excess of the Parsonage Allowance requested. SECA taxes are not owed on withdrawals from a retirement plan, including Parsonage Allowance distributions.

Please contact the JRB about how to calculate the Parsonage Allowance in retirement, how to request the Parsonage Allowance on the JRB’s Distribution Request Forms or other questions regarding the Parsonage Allowance. You can reach as at 888-JRB-FREE (572-3733) or via email.

July 2023