When is ministerial retirement income exempt from tax?

[Spino]

I have heard discussion suggesting that in some cases retirement income for ministers is exempt from tax. Specifically a minister in MN receives a supplemental retirement income of $2000 per month based on contributions through his ministerial sponsor. $1500 is designated as retirement housing allowance. TT deducted the designated housing allowance and charged SECA and reported taxable earned income (self-employment) only on the remaining $500/month. No income tax or SECA was charged on the designated housing allowance.

Please help me understand the basis of what ministerial income in retirement is subject to SECA, what is subject to income tax, and what is not.

[There is some discussion online as to whether the minister is really retired. This minister is. While he continues to do ministry, it is as a volunteer with no required duties, and the supplemental income is completely unrelated to any current activity on his part in retirement. He does however have incidental expenses related to his ministry in retirement, such as ministry travel, office supplies and services, and printing for materials he distributes.]

[Opus 17 · Accepted solution]

A designated housing allowance is exempt from income tax.  The rest of the retirement income is always subject to income tax.  During the pastor's working life, both the housing allowance and salary are subject to SECA (even though the housing allowance is excluded from income tax), but in retirement, neither is subject to SECA.  You appear to be entering the retirement income as if it was compensation earned from working, and getting charged SECA when you should not be.

The retirement should be reported on a 1099-R, did you get any tax forms from the plan that is paying the pension?  How is the retirement income being paid and do you get any tax paperwork from the denomination?  If the denomination is issuing a W-2 or 1099-NEC, the denomination is indicating that the payment is compensation that is subject to SECA, and you need to contact the denomination to straighten it out.  

Here is how to report the retirement income if you are receiving a 1099-R.

https://ttlc.intuit.com/turbotax-support/en-us/help-article/retirement-benefits/enter-parsonage-hous...

The Pastor is not permitted to deduct clergy-related incidental expenses because the pastor is not reporting compensation (wages) for services performed.  If the pastor reports compensation, they can deduct expenses related to the work they were compensated for, but must follow the Deason rule.  (They can also only deduct expenses directly related to the work they were compensated for, they can't deduct general incidental expenses of being a clergy member that are not connected to particular paid duties.)