When filling out applications for loans or student aid, a lot of clergy parents are surprised by line 1 of their tax return. Lenders frequently ask “Why are line 1 taxable wages so low?” The answer is usually the same: Clergy have low taxable wages reported on the 1040 return because of the housing allowance.
If you have had your taxes previously prepared with Clergy Financial Resources, you should be aware that the housing allowance is a way that clergy can exclude a portion of their wages from income tax. However, there are some limitations on this tax benefit. Clergy can only exclude the lesser of three categories from income taxes:
- How much they designate as housing
- How much they spend on housing expenses for their principal residence
- The fair rental value of their principal residence, including rent, utilities and furnishings
Because of this limitation, not all of a minister’s housing allowance may be excludable from income tax. The excess is added back into taxable wages. This is why line 1 is usually low, and why it does not match income on schedule SE (which includes all clergy wages and housing allowance when calculating your self-employment taxes).
If you have more questions, Clergy Financial Resources has more answers. We offer pro advisor support to provide on-demand answers to your important tax and payroll questions. Visit our website at https://www.clergyfinancial.com/resources/proadvisor/ today to schedule.
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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.
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Clergy Financial Resources
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