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Reciprocal state and clergy housing allowance in terms of state tax withholding

Forum|Forum|2 years ago
November 29, 2023
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Hi,

I live in PA and work as a clergyman in NJ. I receive salary and housing allowance on my W-2. I know that PA and NJ have reciprocal agreement and I am under the impression that PA doesn't recognize housing allowance when it comes to state tax withholding while NJ does.

My question is, if my impression with housing allowance is correct, is it possible to ask my employer to withhold NJ state tax to save on my state tax return? Or will I be forced to pay my state tax with PA no matter what so it's better to ask them to withhold PA state tax? Do I have a choice?

Thank you!

Best answer by TomD8

@hjw77 wrote:

Thank you for the reply. My source is from PA Department of Revenue: "All housing allowances provided by the congregation to clergy are taxable as compensation, as cash is always taxable."

https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx#:~:text=All%20housing%20allowances%20provided%20by,as%20cash%20is%20always%20taxable.

I will ask "@TomD8" to comment further on the reciprocal agreement.

In general, my understanding of the reciprocal agreement is that if you live in PA and work in NJ, you only file a PA tax return. (Technically, if you had other NJ income that was not compensation, that is taxed in NJ. That might be real estate income or a lottery win. But if your only NJ income is "compensation" then you don't file an NJ return at all.)

https://www.nj.gov/treasury/taxation/njit25.shtml

The fact that PA has a different definition of taxable compensation than the IRS or New Jersey works against you here. Your cash housing allowance is considered by PA (where you live) to be part of your taxable compensation, so that's how you file. You will pay PA state income tax on your housing allowance, even though it is excluded from your federal taxable income. You do not file a New Jersey tax return at all, unless you have other New Jersey sourced income. (Basically, you are always taxed first according to the laws of the state where you live, then you may or may not be taxed by the state where you work, depending on various laws and reciprocal agreements.)

I have never encountered this scenario before so I don't know if the PA state income tax module in turbotax will automatically add back your housing allowance, or if you will need to manually add it back. The state module will have one or more pages of "state specific additions and subtractions to income" and you should review those carefully.

@hjw77 --

See this: How is the income of a clergy member taxed? (custhelp.com)

Since your housing allowance is "compensation", it is fully taxable by PA (and not by NJ). Therefore you should ask your employer to withhold PA income tax only. The PA/NJ reciprocity agreement applies to all "compensation."

If you have not already done so, you should file NJ Form 165 with your employer. Here's a link to the form:

https://www.nj.gov/treasury/taxation/pdf/current/nj165.pdf

Employee

hjw77Author

Hi, there are so many posts. Which one should I be looking for? Thanks.

O

Opus 17

Employee

@hjw77 wrote:

Hi, there are so many posts. Which one should I be looking for? Thanks.

This is a bulletin board, not an instant chat. The speed of replies depends on which volunteers are available and how often they check the board. (I am one of only 2 volunteers I know of who might be called "specialists" in clergy tax topics, and we aren't online 24/7 even though it seems that way.)

You can search other topics for helpful info but direct replies to your post will appear under your post. Unless you changed the default notification settings, you will get an email notification of any replies.

O

Opus 17

Employee

Do you have a source for any state not recognizing a clergy housing allowance exclusion? Most states use your federal adjusted gross income as the starting point, and a properly executed housing allowance is not included in the federal AGI.

H

hjw77Author

Thank you for the reply. My source is from PA Department of Revenue: "All housing allowances provided by the congregation to clergy are taxable as compensation, as cash is always taxable."

https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx#:~:text=All%20housing%20allowances%20provided%20by,as%20cash%20is%20always%20taxable.

O

Opus 17

Employee

@hjw77 wrote:

Thank you for the reply. My source is from PA Department of Revenue: "All housing allowances provided by the congregation to clergy are taxable as compensation, as cash is always taxable."

https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Gross-Compensation.aspx#:~:text=All%20housing%20allowances%20provided%20by,as%20cash%20is%20always%20taxable.

I will ask "@TomD8" to comment further on the reciprocal agreement.

In general, my understanding of the reciprocal agreement is that if you live in PA and work in NJ, you only file a PA tax return. (Technically, if you had other NJ income that was not compensation, that is taxed in NJ. That might be real estate income or a lottery win. But if your only NJ income is "compensation" then you don't file an NJ return at all.)

https://www.nj.gov/treasury/taxation/njit25.shtml

The fact that PA has a different definition of taxable compensation than the IRS or New Jersey works against you here. Your cash housing allowance is considered by PA (where you live) to be part of your taxable compensation, so that's how you file. You will pay PA state income tax on your housing allowance, even though it is excluded from your federal taxable income. You do not file a New Jersey tax return at all, unless you have other New Jersey sourced income. (Basically, you are always taxed first according to the laws of the state where you live, then you may or may not be taxed by the state where you work, depending on various laws and reciprocal agreements.)

I have never encountered this scenario before so I don't know if the PA state income tax module in turbotax will automatically add back your housing allowance, or if you will need to manually add it back. The state module will have one or more pages of "state specific additions and subtractions to income" and you should review those carefully.