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Can you modify housing allowance mid-year?

The Housing Allowance can be amended (changed) as often as needed.  We always recommend overestimating when designating a housing allowance.  The goal would be to have enough of a buffer in the designation to end up with unused housing at the end of each year.  This eliminates the need to amend a housing allowance mid-year and, guarantees that a pastor will not be limited to the amount of his designation, but will be able to exclude all his housing expenses from income tax.  It never hurts to designate too high, but it can hurt to designate too low.

Theoretically there is no reason to lower a housing allowance since any unused housing would be considered taxable salary at the end of the year.  Lowering a housing allowance is not necessary even in the event of a decrease in pay.  The designated housing allowance cannot be more than 100% of salary.

There can be a legitimate need to increase a housing allowance.   The issue to keep in mind when amending a housing allowance is the fact that a housing allowance is never retroactive.

Since housing allowance is never retroactive when it comes to the expenses you pay. This means you can not “go back” and pick up expenses you have paid and consider them to be a part of your used housing allowance at the end of the year if you exceeded your designated housing allowance at the time you paid them.

While there is no list of qualifying housing allowance expenses provided by the IRS, it is understood that most reasonable household expenses can be included in the housing allowance. Some of these items include: down payment on a home, mortgage payments (including both interest and principal), home equity loan payments (assuming the loan proceeds are used for housing-related expenses), real estate taxes, homeowners’ association dues, property insurance, utilities, furnishings and appliances (including repairs), structural repairs, remodeling, yard maintenance and improvements, pest control, snow removal, maintenance items, and trash pickup. 

Note that the cost of food, clothing and other personal items may not be included in the housing allowance. Also, housing-related expenses can only be included in the housing allowance for the year in which they are incurred.

If you own your home and receive as part of your compensation as housing allowance, you may exclude from gross income the smallest of the following:

  1. The amount actually used to provided a home,
  2. The amount officially designated as housing allowance, or
  3. The fair rental value of the home, including furnishings, utilities, garage, etc.

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Clergy Financial Resources
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11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421.0101
Fax: (888) 876.5101

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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.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (763) 425-8778 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com

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