Court throws out pastors’ housing allowance tax break

Court throws out pastors’ housing allowance tax break November 25, 2013

Pastors and other church workers have long been able to take part of their compensation as an untaxed housing allowance, resulting in substantial tax savings.  But a federal court has ruled in a suit brought by the Freedom from Religion Foundation that the tax break for clergy is unconstitutional.

The ruling has been stayed, pending appeal, but if it stands, pastors and their families will take a significant hit in their income.

From Sarah Pulliam Bailey,  A federal judge’s significant decision: Clergy tax-free housing allowance is not constitutional | Religion News Service.

A federal judge has ruled that clergy’s exemption from paying taxes on housing is not constitutional, an exemption currently applied to an estimated 44,000 ministers, priests, rabbis, imams and others. If the ruling stands, some clergy members could experience an estimated 5 to 10 percent cut in take-home pay.

U.S. District Court’s Judge Barbara Crabb ruled on Friday (Nov. 22) in favor of the Freedom From Religion Foundation, saying the exemption violates the establishment clause because it “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”

The case decided in the U.S. District Court for the Western District Of Wisconsin will likely be appealed to the the 7th Circuit, which could reverse the decision. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana. Earlier this month, the 7th Circuit barred the enforcement of the contraceptive mandate, a church-state issue being considered by the Supreme Court.

If the court decision stands, it could have a significant impact on clergy income. Clergy, who make an average of about $50,000 per year, have access to some additional income through tax-free housing.

A clergy member who receives a salary of $50,000 receives another a third of income from a housing allowance, the person could spend $16,000 tax-free on housing, essentially earning $66,000. The cut in taxes ($4,000 in this case), would mean an 8 percent cut in salary.

The Hosana-Tabor v EEOC case decided last year that a teacher could be considered a “minister,” so people using the exemption could extend beyond who people traditionally consider to be clergy.

The exemption is worth about $700 million per year to the U.S. government, according to the Joint Committee on Taxation Estimate of Federal Tax Expenditure.

Judge Crabb ruled that the law provides that the gross income of a “minister of the gospel” does not include:

“the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

Peter J Reilly, a contributor to Forbes, writes that the “stunning decision” that applies to an exclusion that goes back to 1921.

“I’m not sure what Congress could do in this instance,” he said. “There is strong clergy influence on both sides of the aisle though, so there is a good chance that Congress will at least try to make it look like it has done something.”

The housing allowances of pastors in Wisconsin remain currently unaffected as the ruling has been stayed by the judge until the appeals are exhausted.

“The idea goes back to the traditional way churches paid clergy when many churches own parsonages,” said Tobin Grant, a political science professor at Southern Illinois University. “Over time, fewer churches owned parsonages and instead gave clergy housing allowances, which were also treated as tax-free. The difference, however, was that these were regular salaries that now had an exclusion. Part could be tax free, part couldn’t. So, why not give a pastor a huge housing allowance, which is tax free?”

The ruling addresses the housing allowance while parsonages are still exempt.

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