How to Properly Document a Housing Allowance

How to Properly Document a Housing Allowance

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:

      1. The amount that you had designated as a housing allowance.
      2. The amount actually used to provide a home (rent, furnishings, utilities, tax, etc).
      3. 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.

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