February 07, 2013

Earned Income Credit and Housing Allowance

Question:

For purposes of the Earned Income Credit (EIC), is housing allowance considered to be part of earned income?

Answer:

According to the IRS, "The rental value of a home or a housing allowance provided to a minister as part of the minister's pay generally is not subject to income tax but is included in net earnings from self-employment. For that reason, it is included in earned income for EITC, unless you have an approved Form 4361."

This statement is part of IRS Publication 596 which goes on to say,
"Form 4361.
Even if you have an approved Form 4361, amounts you received for performing ministerial duties as an employee count as earned income. This includes wages, salaries, tips, and other taxable employee compensation. A nontaxable housing allowance or the nontaxable rental value of a home is not earned income [our emphasis]. Also, amounts you received for performing ministerial duties, but not as an employee, do not count as earned income. Examples include fees for performing marriages and honoraria for delivering speeches."

4 comments:

  1. So do you recommend including the housing allowance or excluding the housing allowance when calculating EIC?

    ReplyDelete
  2. Josh,
    It is not a matter of recommendation. If a pastor includes, as required, his housing allowance or parsonage fair rental value in his Schedule SE self-employment income, then it will be also a factor in determining his Earned Income Credit. The same is not true of a minister who has opted out of social security via filing and approval of Form 4361.

    ReplyDelete
  3. Corey,
    I am a minister without form 4361. I receive both a salary and a housing allowance. In regards to the EIC, does the full amount of my housing allowance (before deductions for housing expenses) count towards the EIC? Or is it the total income after deductions for housing expenses that counts (coupled with my salary of course)?
    Thanks for the clarification.

    ReplyDelete
  4. The Earned Income Credit (EIC) calculation uses amounts from a minister’s Schedule SE (calculation of self-employment taxable income). Because housing allowance is included in the Schedule SE calculation, it does necessarily affect determination of one’s EIC.

    ReplyDelete