Housing allowance tax break may be doomed

Pastors and teachers, have you seen this?

As tax time begins, church legal expert Richard Hammar warns ministers, pastors and clerics to be mindful of a legal battle that has strong financial implications on their personal and church taxes in 2011.

In the January 2011 issue of Church Law & Tax Report, Hammar highlights tax developments, drawing special attention to a California court case that threatens to extinguish a federal tax break which dates back to 1954, the parsonage exemption.

Many churches give their pastors and ministers an allowance to help ease housing-related expenses, such utility bills, repair and yard work costs. The parsonage exemption allows ministers to receive this money free of any federal, and in parts of the country, state taxes.

However, a lawsuit set for trial in 2011 threatens the constitutionality of sections 107 and 265(1)(6) of the federal tax code, which establishes the housing allowance for ministers.

Atheist group Freedom from Religion Foundation filed the federal lawsuit in 2009. The group asserts the unique benefit set aside especially for “ministers of the gospel” is a violation of separation of church and state.

The FFRF cites the 1989 U.S. Supreme Court case Texas Monthly, Inc. v. Bullock to assert that tax benefits given only to religious institutions violate the Constitution’s Establishment Clause.

FFRF Co-President Annie Laurie Gaylor states in a 2009 press release that the benefit is unfair to those who are not religious ministers.

“All other taxpayers pay more because clergy receive this privileged benefit,” she proclaimed.

via Church Legal Expert: Minister Housing Tax Break Under Attack | Christianpost.com.

Granted that it is an important benefit to church workers and that we would be sorry to see it go, can anyone answer the objections to it?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • TE Schroeder

    While I can’t find an objection to it off the top of my head, the follow-up court case is obvious: Tax the Church!

    The rationale will hold up the same. 1) Tax-exempt status for the Church is a violation of separation of Church and State. 2) If the Church doesn’t pay taxes, the rest of the county has to make up the difference, creating an unnecessary burden.

  • TE Schroeder

    While I can’t find an objection to it off the top of my head, the follow-up court case is obvious: Tax the Church!

    The rationale will hold up the same. 1) Tax-exempt status for the Church is a violation of separation of Church and State. 2) If the Church doesn’t pay taxes, the rest of the county has to make up the difference, creating an unnecessary burden.

  • Paul

    Are Ministers of the Gospel truly “self-employed.” On the one hand, they are not supervised by their employers; in fact, they supervise those who employ them; so in that sense they might be considered self employed. Self employed people cannot exempt any compensation, including housing allowances, from Self Employment tax (15.3% of total compensation = both the employer’s and employee’s portion of FICA). Hence, the calling Ministers of the Gospel “self-employed” get congregations out of paying FICA for those qualified as Ministers of the Gospel which is (was) often the only employee of the congregation. So the first benefit is really to the churches as employers. The second benefit is to the IRS which does not need to wrestle with churches that objected to insurance on doctrinal grounds. To offset this added burden to the Minister, the housing deduction was given to the Ministers of the Gospel on the income tax portion of their total tax bill. Those Ministers of the Gospel who opt out of Social Security and Medicare on Doctrinal grounds are the ones who lose the benefit of Social Security and Medicare. If churches could opt out without any consequence (the consequence of opting out is to the Minister who retires and/or reaches benefit age, not to the church), then they would all opt out. So now the Minister of the Gospel has the both the option and the burden (no future benefits) of opting out. It might be more fair to say that Ministers who opt out of Social Security and Medicare also would lose the offsetting housing allowance deduction, but the IRS didn’t go there. So, the overall purpose is to get the congregations out of the position of opting out their ministers who must bear the consequence.

    Note to LCMS Ministers: The Lutheran Church Missouri Synod has stated repeatedly that we have no doctrinal basis to opt out of Social Security and Medicare, so if you try it and the IRS calls you on it, you will lose that battle and be subject to years of back taxes and penalties.

    My wife who is a CPA and has looked into this extensively sees that the housing allowance deduction on the income tax side is closely tied to the added burden of the self employment tax side. If done correctly, they tend to balance out, but only for Ministers who itemize their deductions. We do only slightly better by itemizing our deductions and taking the housing allowance deduction than we would by not having to pay the employer’s portion of FICA (the difference between 15.3% self employment tax verses 7.65% FICA for employees). The real and probably unfair benefit goes to the Minister who can claim 100% of his pension as housing allowance in retirement – but only if he can demonstrate the expenses.

    An often mistaken argument for the housing deduction is that Ministers cannot always choose the region or even the house that they live in. Those who are “forced” to live in a parsonage for the benefit of the congregation because ministry takes place there can already deduct that income from income tax under another part of the tax code.

    So, it is important to note three things: (1) Ministers of the Gospel pay self employment tax and housing is not deductible from that. (2) the housing deduction and the added Self Employment tax roughly offset each other for the majority of Ministers, and (3) those Ministers who attempt to “opt out” of Social Security and Medicare will bear the consequences if they lose an IRS challenge and also will most likely not save up enough for their own retirement without Social Security and Medicare benefits. With these three things in mind, it’s a “wash” to the government as a whole. The problem for Ministers would arise if they lose the housing deduction but are required to continue paying Self Employment tax.

  • Paul

    Are Ministers of the Gospel truly “self-employed.” On the one hand, they are not supervised by their employers; in fact, they supervise those who employ them; so in that sense they might be considered self employed. Self employed people cannot exempt any compensation, including housing allowances, from Self Employment tax (15.3% of total compensation = both the employer’s and employee’s portion of FICA). Hence, the calling Ministers of the Gospel “self-employed” get congregations out of paying FICA for those qualified as Ministers of the Gospel which is (was) often the only employee of the congregation. So the first benefit is really to the churches as employers. The second benefit is to the IRS which does not need to wrestle with churches that objected to insurance on doctrinal grounds. To offset this added burden to the Minister, the housing deduction was given to the Ministers of the Gospel on the income tax portion of their total tax bill. Those Ministers of the Gospel who opt out of Social Security and Medicare on Doctrinal grounds are the ones who lose the benefit of Social Security and Medicare. If churches could opt out without any consequence (the consequence of opting out is to the Minister who retires and/or reaches benefit age, not to the church), then they would all opt out. So now the Minister of the Gospel has the both the option and the burden (no future benefits) of opting out. It might be more fair to say that Ministers who opt out of Social Security and Medicare also would lose the offsetting housing allowance deduction, but the IRS didn’t go there. So, the overall purpose is to get the congregations out of the position of opting out their ministers who must bear the consequence.

    Note to LCMS Ministers: The Lutheran Church Missouri Synod has stated repeatedly that we have no doctrinal basis to opt out of Social Security and Medicare, so if you try it and the IRS calls you on it, you will lose that battle and be subject to years of back taxes and penalties.

    My wife who is a CPA and has looked into this extensively sees that the housing allowance deduction on the income tax side is closely tied to the added burden of the self employment tax side. If done correctly, they tend to balance out, but only for Ministers who itemize their deductions. We do only slightly better by itemizing our deductions and taking the housing allowance deduction than we would by not having to pay the employer’s portion of FICA (the difference between 15.3% self employment tax verses 7.65% FICA for employees). The real and probably unfair benefit goes to the Minister who can claim 100% of his pension as housing allowance in retirement – but only if he can demonstrate the expenses.

    An often mistaken argument for the housing deduction is that Ministers cannot always choose the region or even the house that they live in. Those who are “forced” to live in a parsonage for the benefit of the congregation because ministry takes place there can already deduct that income from income tax under another part of the tax code.

    So, it is important to note three things: (1) Ministers of the Gospel pay self employment tax and housing is not deductible from that. (2) the housing deduction and the added Self Employment tax roughly offset each other for the majority of Ministers, and (3) those Ministers who attempt to “opt out” of Social Security and Medicare will bear the consequences if they lose an IRS challenge and also will most likely not save up enough for their own retirement without Social Security and Medicare benefits. With these three things in mind, it’s a “wash” to the government as a whole. The problem for Ministers would arise if they lose the housing deduction but are required to continue paying Self Employment tax.

  • WebMonk

    Schroeder, don’t get hysterical; churches wouldn’t be taxed.

    They would still qualify as non-profit organizations, and just like all the other non-profit organizations out there would not be taxed on their income. To tax a church, a special exemption particularly against a church type of non-profit organization would need to be made.

  • WebMonk

    Schroeder, don’t get hysterical; churches wouldn’t be taxed.

    They would still qualify as non-profit organizations, and just like all the other non-profit organizations out there would not be taxed on their income. To tax a church, a special exemption particularly against a church type of non-profit organization would need to be made.

  • http://lwtheology.wordpress.com tdoig

    Just curious, but doesn’t this portion of the tax code apply to Rabbis, imams, and eastern gurus? If this is the case, then I think there is no ground to stand on or they should press for the spiritual leaders of other religions to lose their exemptions as well.

  • http://lwtheology.wordpress.com tdoig

    Just curious, but doesn’t this portion of the tax code apply to Rabbis, imams, and eastern gurus? If this is the case, then I think there is no ground to stand on or they should press for the spiritual leaders of other religions to lose their exemptions as well.

  • http://www.utah-lutheran.blogspot.com Bror Erickson

    From the comments following the article Vieth linked to there is a man claiming this all stems from a battle Rick Warren was having with the IRS over an $80,000 housing allowance. That blows my mind and I do wonder if there is any credibility to the allegation.
    One might ask, I thought this was for “Ministers of the Gospel” how does he qualify for the exemption?
    $80,000 housing allowance? Like all things in tax codes they get abused.
    But if what Paul outlines above is true, and it seems that it is, maybe we can all then question the constitutionality of Medicare and Social Security, the constitutionality of Fica in general, or taxes when not at war, which requires congress to declare war. maybe even the constitutionality of the IRS.
    Just another case illustrating what happens when you don’t sufficiently beat the hall monitor out of kids and let them grow up to be societal hall monitors.

  • http://www.utah-lutheran.blogspot.com Bror Erickson

    From the comments following the article Vieth linked to there is a man claiming this all stems from a battle Rick Warren was having with the IRS over an $80,000 housing allowance. That blows my mind and I do wonder if there is any credibility to the allegation.
    One might ask, I thought this was for “Ministers of the Gospel” how does he qualify for the exemption?
    $80,000 housing allowance? Like all things in tax codes they get abused.
    But if what Paul outlines above is true, and it seems that it is, maybe we can all then question the constitutionality of Medicare and Social Security, the constitutionality of Fica in general, or taxes when not at war, which requires congress to declare war. maybe even the constitutionality of the IRS.
    Just another case illustrating what happens when you don’t sufficiently beat the hall monitor out of kids and let them grow up to be societal hall monitors.

  • http://www.bikebubba.blogspot.com Bike Bubba

    I remember when this case started about ten years ago. Warren was more or less taking his entire compensation as his housing allowance. My pastor at the time was ticked–yes, housing is a big expense, but a man’s gotta eat, too.

    I can personally see the dubious Constitutionality of tax exemptions for religious organizations and personnel, to be honest, but the big problem here is not the exemption. It’s the 16th Amendment. Go back to Constitutional taxation, and a lot of the fights we have simply disappear.

  • http://www.bikebubba.blogspot.com Bike Bubba

    I remember when this case started about ten years ago. Warren was more or less taking his entire compensation as his housing allowance. My pastor at the time was ticked–yes, housing is a big expense, but a man’s gotta eat, too.

    I can personally see the dubious Constitutionality of tax exemptions for religious organizations and personnel, to be honest, but the big problem here is not the exemption. It’s the 16th Amendment. Go back to Constitutional taxation, and a lot of the fights we have simply disappear.

  • DonS

    Bike Bubba is right — the ultimate problem is with the privacy-invasive income tax. Government’s license to snoop into your personal matters at will and without even a reasonable suspicion. It is also a mechanism for politicians to exert their power by riddling the tax code with deductions and credits for their favored constituents. And those who normally rail against any government intrusion into one’s personal affairs not only do not protest, but typically support this abuse.

    Webmonk is correct that most tax breaks for churches, other than the housing exemption for clergy, are also available to non-religious non-profit corporations, so would probably survive a legal assault rooted in the establishment clause. However, all non-profits are required to file an annual 990 tax return which is available to the public through websites such as guidestar.com, except for churches. (By the way, I recommend that you use this resource and review a non-profits’ tax return before donating substantially to it, because it will tell you how the organization spends its money, including salaries to its officers and highest paid staff.) I can easily see the next court case challenging the exemption from filing a 990 for churches if the ministerial housing allowance were overturned.

    I would prefer low flat tax rates, with no credits or deductions. They are fairer, and reduce political power. But, in answer to the question raised by Dr. Veith, it is easy to defend against this establishment clause attack on the ministerial housing allowance. This allowance is generally available to all churches, without regard to sect or creed — so no state church is being established. Moreover, there are a plethora of tax breaks and credits granted to all kinds of specific businesses and charities, without regard to issues of perceived fairness, all the time. There is a legitimate purpose for Congress to want to encourage religious activity in this country, and thus a legitimate reason for establishing this tax break. To say that Congress can establish special tax breaks for every sector of the population and business community, except for churches, would actually be discriminatory against churches and thus potentially a violation of the equal protection clause.

    What I would like to see is a law codifying the housing allowance so that it cannot exceed the minister’s actual housing costs. Current proposals limit the allowance to the reasonable rental value of the minister’s property, but that seems unduly complicated and open to interpretation. Moreover, I see no reason why the minister should also be able to deduct his mortgage interest costs — that seems like double-dipping to me.

    Again, the best approach is clearly to eradicate this corrupt and complicated tax code and start over with a clean sheet of paper.

  • DonS

    Bike Bubba is right — the ultimate problem is with the privacy-invasive income tax. Government’s license to snoop into your personal matters at will and without even a reasonable suspicion. It is also a mechanism for politicians to exert their power by riddling the tax code with deductions and credits for their favored constituents. And those who normally rail against any government intrusion into one’s personal affairs not only do not protest, but typically support this abuse.

    Webmonk is correct that most tax breaks for churches, other than the housing exemption for clergy, are also available to non-religious non-profit corporations, so would probably survive a legal assault rooted in the establishment clause. However, all non-profits are required to file an annual 990 tax return which is available to the public through websites such as guidestar.com, except for churches. (By the way, I recommend that you use this resource and review a non-profits’ tax return before donating substantially to it, because it will tell you how the organization spends its money, including salaries to its officers and highest paid staff.) I can easily see the next court case challenging the exemption from filing a 990 for churches if the ministerial housing allowance were overturned.

    I would prefer low flat tax rates, with no credits or deductions. They are fairer, and reduce political power. But, in answer to the question raised by Dr. Veith, it is easy to defend against this establishment clause attack on the ministerial housing allowance. This allowance is generally available to all churches, without regard to sect or creed — so no state church is being established. Moreover, there are a plethora of tax breaks and credits granted to all kinds of specific businesses and charities, without regard to issues of perceived fairness, all the time. There is a legitimate purpose for Congress to want to encourage religious activity in this country, and thus a legitimate reason for establishing this tax break. To say that Congress can establish special tax breaks for every sector of the population and business community, except for churches, would actually be discriminatory against churches and thus potentially a violation of the equal protection clause.

    What I would like to see is a law codifying the housing allowance so that it cannot exceed the minister’s actual housing costs. Current proposals limit the allowance to the reasonable rental value of the minister’s property, but that seems unduly complicated and open to interpretation. Moreover, I see no reason why the minister should also be able to deduct his mortgage interest costs — that seems like double-dipping to me.

    Again, the best approach is clearly to eradicate this corrupt and complicated tax code and start over with a clean sheet of paper.

  • http://www.toddstadler.com/ tODD

    From the end of the linked article:

    Hammar shares more church tax advice in the 2011 Church & Clergy Tax guide to be released next month. The publication is a product of non-profit communication ministry Christianity Today International.

    So is this a news article or a press release? Oof.

  • http://www.toddstadler.com/ tODD

    From the end of the linked article:

    Hammar shares more church tax advice in the 2011 Church & Clergy Tax guide to be released next month. The publication is a product of non-profit communication ministry Christianity Today International.

    So is this a news article or a press release? Oof.

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