Could a retired pastor subtract the federally taxable remainder of a Section 403(b) distribution from Illinois income after using part as a housing allowance?

Plain-English summary

The retired pastor could subtract from Illinois income the part of the Section 403(b) distribution that remained in federal adjusted gross income after the clergy housing allowance. Section 107 allowed a qualifying retired minister to exclude the properly designated and used housing-allowance portion federally. Because that amount never entered federal adjusted gross income, Illinois did not need a second subtraction for it.

The excess distribution—amounts not used for qualifying housing expenses in the distribution year—was federally taxable. If it originated from the Section 403(b) plan, Section 203(a)(2)(F) allowed that included retirement amount to be deducted in computing Illinois base income.

The GIL also warned that the housing-allowance designation was specific to a church or denominational Section 403(b) plan and was lost if the funds were rolled into another type of retirement account.

What this means for you

Reconcile the Form 1099-R, the amount actually excluded federally for housing, and the remaining amount included in federal adjusted gross income. Illinois's subtraction applies to the qualifying retirement amount that is in the federal starting point.

Confirm the money's plan origin and rollover history; the GIL did not extend the housing designation to an IRA, Roth IRA, or non-403(b) annuity.

Common questions

Q: Was the housing-allowance portion itself an Illinois subtraction?
A: It was already excluded federally, so it was not in federal adjusted gross income to subtract again.

Q: What happened to the unused portion of the distribution?
A: It was federally taxable, but if it came from the Section 403(b) plan, it qualified for the Illinois retirement subtraction.

Q: Could the housing designation survive a rollover to another account type?
A: No, according to the GIL.

Citations and references

• 35 ILCS 5/203(a)(2)(F) — Illinois subtraction for specified retirement distributions
• I.R.C. § 107 — minister housing allowance
• I.R.C. § 403(b) — tax-sheltered annuity plan
• I.R.C. §§ 402(a), 402(c), 403(a), 406(a), 407(a), 408 — retirement provisions listed by Section 203(a)(2)(F)

Subject

Subtraction - Pensions

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2014/it-14-0010.pdf

Original ruling text

IT 14-0010-GIL 09/15/2014 Subtraction - Pensions
Pastor is entitled to a subtraction for the portion of payments received under an IRC Section
403(b) plan that is not excluded from his federal adjusted gross income as a housing
allowance.

September 18, 2014

Re:

Request for Letter Ruling, TAXPAYER

Dear Xxxxx:
This is in response to your letter dated January 29, 2014 in which you request a legal tax ruling
whether Illinois would recognize certain retirement income. The Department’s regulations require that
the Department issue only two types of letter rulings, Private Letter Rulings (“PLRs”) and General
Information Letters (“GILs”). PLRs are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation. A PLR is
binding against the Department, but only as to the taxpayer issued the ruling and only to the extent
the facts recited in the PLR are correct and complete. GILs do not constitute statements of
Department policy that apply, interpret or prescribe the tax laws and are not binding against the
Department. See 2 Ill. Adm. Code 100.1200(b) and (c). The nature of your letter and the information
provided require that we respond with a General Information Letter.
Your letter states as follows:
RE:

20XX IL-1040
Letter ID: XXXXXXXXXXXXXXXX
Account #: XXXXXXXXX
TAXPAYER
ADDRESS
CITY, IL ZIP CODE

This is the 4th piece of correspondence attempting to resolve a question of retirement
subtraction on the Illinois 1040 return. EMPLOYEE, of the Problems Resolution Division, fails
to recognize retirement income.
The problem comes from the use of IRS Section 107 Housing Allowance for Clergy. A 1099-R
from COMPANY, Pension/Retirement from COMPANY 1 (church affiliation) was received for
$$$, of which $$$ was determined available for Section 107(2) Housing Allowance. The $$$
was included on Line 16a Pensions & Annuities of the federal 1040. The required IRS
presentation requires a schedule and inclusion on Line 21 of the Federal Return:
1099 amount
Housing allowance used
Excess over housing allowance

$XX,XXX
(XX,XXX)
$XX,XXX

Pension/Retirement
IRS Subtraction
Required to be placed on Line 21
of the federal 1040 (still
pension/retirement)

IT 14-0010 GIL
Page 2
The $$$ was pension/retirement and, even though the housing allowance was carved away for
federal purposes, the balance of $$$ is still pension/retirement which is included as a
subtraction on Line 5 of the Illinois return.
As interesting is that clergy housing allowance has been with us for over 30 years and only
since Illinois electronic filing, has it become an issue with the Illinois Department of Revenue.
Whether it is software or interpretation, it is now an issue.
Please review the enclosed documentation to support the original subtraction on Line 5 of the
2013 IL-1040. If direct conversation is necessary, we have included the IL-2848 again.
RESPONSE
The answer to your question can be found in Section 203(a)(2)(F) of the Illinois Income Tax Act
(“IITA”; 35 ILCS 5/101 et seq.). Section 203(a)(2)(F) states as follows:
Section 203. Base income defined
(a) Individuals.
(1) In general. In the case of an individual, base income means an amount equal to the
taxpayer’s adjusted gross income for the taxable years as modified by paragraph
(2).
(2) Modifications. The adjusted gross income referred to in paragraph (1) shall be
modified … by deducting from the total so obtained the sum of the following
amounts:
(F)

An amount equal to all amounts included in such total pursuant to the
provisions of Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and
408 of the Internal Revenue Code, or included in such total as
distributions under the provisions of any retirement or disability plan for
employees of any governmental agency or unit, or retirement payments to
retired partners, which payments are excluded in computing net earnings
from self employment by Section 1402 of the Internal Revenue Code and
regulations adopted pursuant thereto;

Under federal law, retired ministers are eligible for housing allowance exclusion. “If you are a retired
minister, you exclude from your gross income the rental value of a home (plus utilities) furnished to
you by your church as a part of your pay for past services, or the part of your pension that was
designated as a rental [housing] allowance,” subject to the rules set in IRC Section 107 (IRS Pub.
517).
Churches and denominational pension plans that have established retirement income accounts
(Section 403(b) plans, sometimes called tax-sheltered annuities) for their employees can designate
some or all of a retired minister’s account distributions as a housing allowance. Section 403(b) plans
are the only type of retirement account that allow for this housing allowance designation. The housing
allowance designation is lost if a minister rolls the funds from his/her 403(b) plan into another type of

IT 14-0010 GIL
Page 3
retirement account (e.g. IRA, Roth IRA, non-403 (b) annuity) because any amount rolled over to an
eligible retirement plan from a 403(b) plan, either as a direct rollover or a rollover made within the 60day period, is treated as a distribution followed by a rollover contribution.
Distributions designated as housing allowance may not be prorated. They may only be used for
housing expenses incurred in the same year as the distribution, subject to the requirements of IRC
Section 107. Amounts not used for housing expenses in the distribution year are subject to the
regular federal income tax rates.
In this manner, amounts exceeding that used by the retired minister would be added to the minister’s
adjusted gross income. As such, if the amounts distributed to TAXPAYER originate from a Section
403(b) plan, then the amount exceeding that used for housing would qualify for the subtraction
modification found in IITA Section 203(a)(2)(F).
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you have
any further questions, you may contact me at (217) 524-7580.
Sincerely,

Matthew Crain
Associate Counsel (Income Tax)