My previous year federal tax return is being audited because an error within Turbotax. Again, in 2024, the problem continues. With my housing allowance properly entered, there is no adjusted to my taxable income. If I remove the allowance, there is no change in the tax due. If I delete my housing allowance from the W-2 amount paid, then I see the correct tax amount resulting in a refund. I expect to be audited again for 2024 for the problem. I explained that I had a clergy housing allowance, provided a copy of the standard letter that I receive every year outlining the allowance from my employer, and that the only way I could get Turbotax to provide the housing allowance was to deduct the allowance from the gross income on the W-2. It has been nearly nine months and the IRS is still working on it. What will it take to fix Turbotax so it properly handles the allowance??
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If your housing allowance is included in your W-2 box 1 taxable wages, then the problem is with your church, not the IRS or Turbotax.
A housing allowance must be declared in advance and in writing by the responsible church body (Deacons, board of elders, etc.). It is not included in your box 1 wages. Clergy are considered common law employees for most purposes and should receive a W-2, even though they are treated as self-employed for limited purposes. You should receive a W-2 with your taxable compensation (not including non-taxable housing allowance) in box 1, box 2 is generally empty (unless the church agrees with withhold and remit federal taxes), and boxes 3-6 must be empty. If you are paying social security and medicare tax in boxes 4-6, this is also a mistake by your church.
The housing allowance is not reported on the W-2 at all, or it can be reported in box 14, which is a memo field. You report the housing allowance and your qualified expenses in the Turbotax interview. The housing allowance is always subject to self-employment tax, but it is excluded from income tax as long as your qualified expenses equal or are more than your housing allowance.
There is no procedure to deduct a housing allowance from your box 1 wages if it was improperly included by your church. Your church needs to issue corrected W-2s.
Any procedure someone told you in Turbotax, or anything you guessed at, is probably wrong. The only thing that might work is filing with a substitute W-2 (form 4852) but this will almost certainly lead to an investigation. And if you entered your W-2 AND you entered a housing allowance when asked, you paid too much self-employment tax, because the housing allowance question is not a subtraction, it is an addition.
I suggest that you and the church need to meet with a qualified accountant who understands clergy and church tax filing. If your HA is included in box 1, your church needs to file corrected W-2s, and you need to take another look at your 2023 return because it is almost certainly wrong. Wait to file your 2024 return until you get the corrected W-2, even if that means getting an extension.
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