Do you get paid an allowance for housing? Are you sure that it’s set up correctly? Double checking your housing allowance is an easy way to avoid annoying tax headaches later.
In order to take a housing allowance, there needs to be proper documentation:
- A specific dollar amount or percentage of salary must be designated, in writing.
- The written designation must be adopted or approved in writing, preferably by a resolution of the governing body and/or in an employment contract.
- The designation should be recorded in the church budget and payroll records.
It’s not sufficient to just have the church pay an amount that you agreed upon, and you can’t retroactively document housing allowances that have already been paid.
If you don’t properly designate and document a housing allowance, you probably won’t notice any effects immediately. The problems occur later when IRS audits your return.
Section 107 of the Internal Revenue Code states that the exclusion of your housing allowance from income is limited to the lesser of:
- The amount that you had designated as a housing allowance.
- The amount actually used to provide a home (rent, furnishings, utilities, tax, etc).
- The fair rental value of the home, including furniture and utilities.
If you did not set up your housing allowance correctly, IRS assumes that your housing allowance is equal to zero dollars and your entirely housing allowance is now taxable income. Even worse, this new income on your return comes with additional tax, penalties and interest.
Our “Housing Allowance Worksheet” located at https://www.clergytaxnet.com/wp-content/uploads/2017/11/18.Housingform.pdf is a useful resource that you can use to record approval of your allowance.
If you need to hire someone to review your allowance for accuracy, Clergy Financial Resources has years of experience in documenting and deducting parsonage or housing allowances.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
For more information or if you need additional assistance, please use the contact information below.
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