You can only do this if you are a district licensed or ordained Nazarene minister over the age of 59½. You may request that Fidelity Investments designate your withdrawal as housing allowance for retirement housing purposes. To do this, contact Fidelity toll-free at 1-866-NAZARENE (629-2736). Fidelity will send you a pre-completed form to review and sign. If you are married, you and your spouse will both need to sign the form. Please return the completed form to Pensions and Benefits USA, 17001 Prairie Star Pkwy., Lenexa, KS 66220. The Pensions and Benefits USA office will be responsible for approving the request for housing allowance.
Fidelity will issue an IRS Form 1099-R in January of the year following the distribution. They will report any housing allowance designated withdrawal as “taxable amount not determined” in Box 2 of the 1099-R.
Why would I want to take advantage of this housing allowance option?
The availability of a housing allowance exclusion for denominationally-sponsored pensions plans has been a very attractive benefit for many retired ministers. In many instances, retired ministers have been able to exclude all of their 403(b) distribution income by having the Plan designate their distribution request as a housing allowance. Keep in mind that the housing allowance designation is limited to denominationally-sponsored plans, like the Nazarene 403(b) Plan.
What factors should I consider in determining the portion of my housing designation?
The responsibility for determining the portion of the housing designation rests solely with the minister. In retirement, IRS guidelines allow a minister to designate the lesser of (1) the fair rental value of the home furnished plus utilities, or (2) the amount actually used to provide a home. Legitimate housing expenses include rent, mortgage payments, interest, home insurance, taxes, repairs, utilities, furnishings, and general maintenance costs for one's primary residence. You will want to document all of your expenses.
What does the IRS mean by “fair rental value”?
Until the Clergy Housing Allowance Clarification Act of 2002, it was unclear ministers needed to include a fair rental value when computing their housing allowance. This Act updated the Code to make sure ministers include a rental value of their property in determining how much they can exclude from income tax. However, the IRS remains silent on how a minister can go about determining the fair rental value. According to clergy tax specialist and CPA Dan Busby, “the fair rental value should be based on comparable rental values of other similar residences in the immediate neighborhood or community, comparable furnished. One of the best methods to use in establishing fair rental value of your housing is to request a local realtor to estimate the value in writing. Place the estimate in your tax file and annually adjust the value for inflation and other local real estate valuation factors.”
Where can I find additional help in determining my housing allowance?
Carefully review P&B Tax Memo #13 – The Minister’s Housing Allowance. You may also wish to obtain IRS Publication 517 which provides helpful information in this regard. You may also want to review Dan Busby's booklet, “Preparing Tax Returns for Clergy” which is sent to all active Nazarene ministers in January of each year.
NOTE: Distributions made from a 403(b) account (whether designated housing allowance or not) do not need to be included in determining your Social Security self-employment tax liability. This is due to the fact that distributions from a 403(b) account are not considered as "earned income," but as "deferred income."
Will the IRS continue to recognize my right to exclude withdrawals from my 403(b) Retirement Savings Plan as a housing allowance?
Are ministers eligible for a housing allowance under the tax law? Currently, the IRS indicates this is a question “under extensive study” and has not provided definitive answers for this issue. However, there are several precedents from previous rulings and regulations which provide some direction.
Section 107 of the Internal Revenue Code provides that, in the case of a minister of the gospel, gross income does not include the rental value of a home furnished to the minister as part of the minister's compensation, or rental allowance paid to the minister as part of the minister's compensation to the extent used by the minister to rent or provide a home.
In Rev. Rul. 75 22, 1975 1 C.B. 49, the Internal Revenue Service concluded that the portion of a retired minister's pension designated as a rental allowance by the national governing body of a religious denomination having complete control over the retirement fund was excludable under Section 107.
The 1982 General Board of the Church of the Nazarene voted that 100 percent of the pension paid to a retired minister be designated as housing allowance to the extent allowed under Section 107 of the Internal Revenue Code. This designation was intended to be permanent.