Clergy Parsonage Allowance versus Retirement

New client is retired from United Methodist Church abroad. He gets a church pension from the foreign country. He preaches a couple of times a year at a local church here in NC and gets an honorarium of a few hundred dollars. He returns to his home country for two months a year. Sometimes his wife goes with him, sometimes not. The visit is mostly personal. He owns a small apartment in his home country. Whilst he is there he preaches every Sunday, without payment. Apparently he is quite well-known in his home area. Other than that he does no other clergy work.

Prior preparer (from whom I acquired a client list, so I have years worth of files) took parsonage allowance for the amount of the pension. He did not account for SE Tax. Prior preparer also filed Form 8275, disclosing the position and quoting RR 71-280. The detailed explanation was "Portion of taxpayer's pensions being treated as parsonage allowance."

I have only ever dealt with clergy that are substantially full-time or properly retired. It seems to me that the prior preparer's position is not sustainable, but I am more than happy to be educated on that point.

EDIT: It appears this is not from the foreign portion of the pension but from the US portion. There is a note in client's file from 2014 about the New England Conference adopting a resolution that 100% of retirement or disability payments are for housing allowance.

Retired clergy are permitted to claim housing against pension income. I don't recall if a designation is required or not without looking. No disclosures required. I think if you'll look at your 1099R worksheet, there's even a space for entering housing.

TY JR1. I found a resolution from the local conference, designating 100% of pension etc payments as housing allowance on the grounds that it is imply deferred compensation. That is all very well, but shouldn't it be subject to SE Tax? If so, my clients lose out as they are in the 12% bracket and would just be swapping 12% income tax rate for about 14.13% SE tax.

Depends on whether he's in or out of the SE/SS system. Clergy are permitted to opt out. Sounds like he has. But wait, why would pension ever be subject anyway?

He has never opted out of SS.

In any case, further research leads me to IRC 1402(a)(7) which exempts it from SE tax. I should have looked there first. Thank you for replying and sorry to have troubled you.

I believe the designation for the portion of income that is housing allowance is made each year for one year at a time? Or maybe that is only for the church, not the church's "national" pension board. Also, is the "New England Conference" that you reference is the conference from which he is receiving his pension? Does it need to be the same as the one paying him, or is his pension considered UMC for the whole USA? (I have only dealt with Pastors within the Presbyterian Church USA.)

I seem to recall, Joan, that when it's on the pension, they don't have to designate...but I've been wrong before.

Joan, it appears to be conference by conference and I found something from the NC conference that covered 2019 and 2020.