Ethical delima - take clergy housing allowance when they didn't actually live there?

[phoenyx]

I often help my family members prepare their tax returns. One of my family members is a minister, so she is able to take a lot of deductions against her church-given housing allowance. As far as the housing allowance goes, only an amount exceeding her actual housing expenses is taxed.

At the end of 2006, she moved out of the home she owns, and into her boyfriend's home. Her daughter and son-in-law have continued living there. She has left her address be the home she owns, on her driver's license, her paychecks, all of her bills, and is planning on using that address on her tax return.

I am unsure whether I should be comfortable preparing her 2007 return that takes a lot of deductions against her church-given housing allowance, when it's all for an address she didn't really live at.

What would everyone else do, if you had a client trying to deduct housing expenses such as their mortgage and utilities against a clergy housing allowance -- when you knew they didn't in fact live there?

[Snaggletooth]

No Problem

Phoenyx, there are several elements in your story that don't seem to fit, but none of which would prevent tax-exempt treatment of a housing allowance.

The furnishing of a parsonage or furnishing of a housing allowance in lieu of a parsonage has the same effect. A housing "allowance" is a cash payment which entitles the minister to use the money to pay for his/her own house.

The real problem as I see it would be with the church. Not sure which church or what their beliefs may be, but not many churches in mainstream religions would want their minister to live with their boyfriend. And the housing allowance for an abode that is not costing her anything would be more of a problem for the church than for the IRS. I am not making moral judgements myself, but can't picture this scenario.

IRS isn't really concerned, since it forces these deductions to be prorated downward by the percentage of exempt income. And for self-employment tax, the housing allowance is fully taxable, and deductions fully allowed.

I don't believe you have an ethical or moral dilemma in properly filling out the return.

[outwest]

I think you do have a problem...

housing allowance is limited to the lower of:
1. Amount designated by the church
2. Fair rental value of home.
3. Actual expenses.

I think #3 is zero, so all housing allowance is taxed.

Let alone the other issues that snaggletooth mentioned. And what a place to apply a more likely than not position.

[Gretel]

I also think the ethical problem starts with the minister not with you and if you don't feel comfortable doing the return, DON'T.

[MAMalody]

I often help my family members prepare their tax returns. One of my family members is a minister, so she is able to take a lot of deductions against her church-given housing allowance. As far as the housing allowance goes, only an amount exceeding her actual housing expenses is taxed.

At the end of 2006, she moved out of the home she owns, and into her boyfriend's home. Her daughter and son-in-law have continued living there. She has left her address be the home she owns, on her driver's license, her paychecks, all of her bills, and is planning on using that address on her tax return.

I am unsure whether I should be comfortable preparing her 2007 return that takes a lot of deductions against her church-given housing allowance, when it's all for an address she didn't really live at.

What would everyone else do, if you had a client trying to deduct housing expenses such as their mortgage and utilities against a clergy housing allowance -- when you knew they didn't in fact live there?

There is not problem here. The housing allowance, even to a casual reading, is to provide housing for the minister. In you case it does not, therefore no actual expenses. As was pointed out by another poster that makes zero the lower of the three comparative items and no exclusion.

Mike

[Lion]

Is she asking...

Is she asking you to continue the favorable housing allowance treatment? Then, hand her back her papers. If you're just trying to figure out what to do, then look at the reality. If she has no current housing costs, or low costs in her new living situation, then use her actual costs as far as the housing allowance procedure. But, she'll still have mortgage interest and property tax to deduct on Schedule A, or if her relatives are renting from her then on Schedule E. She may have other expenses against self-employment income. Do the return correctly, and give her a one sentence explanation of why it's a bit different this year. Or file an extension for her and hand her papers back if she doesn't want you to do it correctly.

[joanmcq]

If she wants you to lie, I'd question HER ethical values and hand back the papers.

[phoenyx]

I read everyone's responses throughout the day. Thanks everyone for them.

The overwhelming consensus confirmed to me that she can't offset expenses for the house she owns that she doesn't stay at daily against her giving housing allowance.

I told her that in contrast to last year's taxes, since she lived there until the end of 2006, that I couldn't prepare a return using those expenses. I wound up filing an extension for her. She may be going elsewhere, but then it's out of my hands.

Thanks again, everyone, for confirming that I wasn't incorrect in my initial thoughts, that this year she isn't entitled to use the expenses she wants to.


Specifically ---

Snaggletooth, the church would definately have a problem with it. I think that's one of the many reasons why she's leff her official address alone.

outwest, Gretel, MAMalody, joanmcg, and Lion, thanks for your replies. They helped me know I was right to raise a red flag on this, and wasn't going overboard.

[Snaggletooth]

Not Zero

[QUOTE=outwest;59206]housing allowance is limited to the lower of:
1. Amount designated by the church
2. Fair rental value of home.
3. Actual expenses.

I think #3 is zero, so all housing allowance is taxed.
QUOTE]

Phoenyx, I appreciate all the other responses, and your apprehension. Outwest is one of the more knowledgeable people, but I disagree. If you mentioned her children are still living in the house, I suspect that her actual expenses are NOT zero. I suspect she is still maintaining the house while living with beau. Also, I have the impression that this live-in situation has not been going on very long - possibly not even half of the calendar year.

I do believe application of the tax law and moral/ethical precepts are not always the same.

[JohnH]

I have a somewhat similar situation but without the ethical twist. The minister and his family own a home and have relocated to a church in another state. The home is on the market but hasn't sold yet. They are temporarily living in a church-provided residence at the new location, with the intention of buying a residence at the new location when the prior residence sells.

I'm telling them he can exclude the utilities, etc for the church-provided residence from income under the H&U allowance rules, but he cannot exclude from income any costs associated with the residence that is for sale. I'm also telling him that he must add the FMV of the church-provided residence to income in computing Self-Employment Tax.

He isn't realy happy about this information, but trusts me to get it right. Can anyone tell me if I'm missing something here?

[Jesse]

MAMalody is a very good source for clergy information so perhaps he will chime in. In my opinion you are correct in your conclusion.

This doesn't pertain to your actual question but I'll ask it in your thread in case someone has an answer- a minister lives in an apartment that is actually part of the church, no housing allowance is provided and 100% of expenses are paid by the church.

The minister asked if it is required by the church to live in the church provided home can the FMV rental be excluded from SE?

My reply, perhaps if she was an employee, but because she is not an employee, I say no, the fair rental value of the parsonage would be income for self employment tax calculation. Agree? Disagree?

[MRTAX4EA]

Is Minister An Employee?

I (& IRS) would consider the minister a dual status employee. She gets a W-2 Form, but pays Social Security tax on Schedule SE.

If staying in the apartment is a condition of employment, I would lean toward it being tax-free. Like an apartment manager living in the building. (I could be corrected on ths.)

[MAMalody]

JohnH - For what it is worth, I think you are right on the mark.

Jesse - We are looking at the difference between IRC 107 and 119 here. Fun, huh? First, I can't tell by your posing if the minister is qualified as dual-status, they all are not. If they are the only minister or the senior minister then they probaby are, and, as such, they are a common law employee for income tax and fringe benefits and self-employed for SS and Medicare. If they qualify for 107 status, that automatically disqualifies them from 119 consideration. If they qualify for 119, that takes them out of 107 consideration. Lay the criteria next to each other and see what they qualify for, that will answer you question. Based upon the facts presented it looks to me like they would be dual status and not qualify for 119. If you are unable to make a distinction between qualifications, you can choose the one you wish to use and it should be defendable in audit.

I have had one case similar to this (in my case it was a church owned camp manager who was an ordained minister), and was unable to definitively say one or the other, so chose the one that was the best tax advantage to the client.

[MRTAX4EA]

Dual Status Minister

The minister must be dual status if housing, filing Schedule SE, 403(b) not subject to SE, ect are to apply.

[Jesse]

Thanks for pointing me in the right direction! I'll do some research.