Prorated Final Paycheck - treatment of Housing Allowance

Our pastor has put in his notice and his last day will be in about a month (mid-May).

He is not currently going to another congregation.

He has asked if I can treat all of his remaining pay as Housing Allowance since the total would still remain under the full amount approved by our Council in January.

Is this allowed? Or, should I prorate the annual amount and only pay that? Thanks.

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Taking the Lesser of Three when Claiming Housing Exclusion
by: Vickey

It may be allowable, but it would not be advisable.

When he claims his housing exclusion on his taxes, he can only claim the lesser of these 3:

1) The amount actually spent on eligible housing expenses
2) The fair market rental value plus furnishings and utilities
3) The amount officially designated in advance and paid by the organization as a housing allowance

That first one is going to limit his allowable amount and the rest of the payments paid to him as a housing allowance will have to be claimed as taxable income.

For example, if you paid him all of the amount the church designated and approved for a housing allowance (let's use $20,000).

BUT his actual eligible housing expenses for the time period he was an employee of the church (Jan to mid-May from your post) was only $8,000.

He will only be able to use $8k for a housing exclusion and the rest ($12k) will have to be reported as "taxable income" and the appropriate taxes paid.

So it would not make any sense to pay him more than his actual expenses as it might even make his tax return more difficult to process =(

He would have to "include any amount of the allowance that you can't exclude as wages on line 1 of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. Enter "Excess allowance" and the amount on the dotted line next to line 1." ... according to the IRS website.
Taking the Lesser of Three when Claiming Housing Exclusion
by: Vickey

It may be allowable, but it would not be advisable.

When he claims his housing exclusion on his taxes, he can only claim the lesser of these 3:

1) The amount actually spent on eligible housing expenses
2) The fair market rental value plus furnishings and utilities
3) The amount officially designated in advance and paid by the organization as a housing allowance

That first one is going to limit his allowable amount and the rest of the payments paid to him as a housing allowance will have to be claimed as taxable income.

For example, if you paid him all of the amount the church designated and approved for a housing allowance (let's use $20,000).

BUT his actual eligible housing expenses for the time period he was an employee of the church (Jan to mid-May from your post) was only $8,000.

He will only be able to use $8k for a housing exclusion and the rest ($12k) will have to be reported as "Other Income" and the appropriate taxes paid.

So it would not make any sense to pay him more than his actual expenses as it might even make his tax return more difficult to process =(

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