In 1954, the Internal Revenue Service (IRS) amended the tax code to allow religious clergy in the United States to exclude part or all of their gross income from federal taxes through an exemption called the ministerial housing allowance. In 2013, the exemption was challenged in federal court by an atheist group that alleged the exemption was a violation of the U.S. Constitution’s establishment clause.
On Thursday, November 13 (2014) the Seventh Circuit Court of Appeals in Chicago did not rule on the substance of the question but instead threw out the suit judging that the plaintiffs lacked “standing” to bring the case. Judge Joel Flaum, writing for the three judge panel, said, “the plaintiffs were never denied the parsonage exemption because they never asked for it. Without a request, there can be no denial. And absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance about [the allowance’s] unconstitutionality, which does not support standing.”
This will not be the end of the debate and it is a debate worth having.
While I agree that there are valid historic reasons for pastors to be allowed to exempt a portion of their pay to enable them to live in the community where they serve, the benefit is often exploited and not well understood by the public. We would do well to ask ourselves serious questions as we prepare for a protracted legal and ethical debate about the defense of the ministerial housing allowance going forward.
- What qualifies as a “church” and what constitutes a “minister?” (You might be surprised to discover the breadth of these answers.)
- Does a person with a $5 ordination from an online service qualify? Does the person on the other end of that “ordination” qualify as a Bishop of a denomination? (You’d be surprised to learn that answer to both questions is “yes.”)
- If the exemption was created because of the perceived “need” of ministers who would otherwise have to labor beyond the “church” in order live in the community they serve, then do “pastors” who are really multi-millionaire media personalities really “need” a clergy housing allowance?
- What about ordained people serving in industries that happen to be church-related and which are recognized as “religious non-profits” but offer no explicit religious services as originally conceived of by the law?
- What about bi-vocational pastors?
- What about church deacons and elders who are “ordained” and who are therefore technically eligible to use the exemption but whose work at and for the church is 100 percent volunteer?
- Do denominational officials who are technically “specialized clergy” but whose work is not directly related to a local church really “deserve” a clergy housing allowance? How does the answer differ for various denominational positions and or different denominations?
- Should retired clergy continue to be eligible for the exemption when they are no longer performing the duties of a pastor? Does this answer differ if they are retired from a denomination that pays them a pension versus those who are retired from a church that made no provision along the way for the pastor’s retirement?
- Should there be some kind of limit to the percentage of income that can be exempted?
- Should there be a limit to the number of years a particular person is eligible to use the exemption?
- How does all this affect things like clergy families filling out other government forms like Federal Student Aid, WIC, etc? Your pastor’s adjusted gross salary can make it appear as if their family is living below the poverty line when in actuality they make more than $100,000 a year.
The grey areas here are huge. The moral and ethical considerations are enormous. The difference between what is legal and what is righteous is profound. As believers, this conversation extends beyond the law of the land to the “standing before a Holy God” question. The IRS audit might scare most people enough to not report what they cannot prove, but the ultimate audit which each of us will endure should be at the forefront of our conscience when filling out our tax forms.
This conversation will lead you into very uncomfortable territory with your pastor, your session, your denominational officials, and others. This conversation is at the intersection of politics, religion and personal finances so its inherently volatile.
If you’re wondering, here’s the gist of the housing allowance: The tax code limits the nontaxable portion of housing compensation designated as housing allowance for ministers who own a home to the fair rental value of the home (furnished, plus utilities). The minister is personally responsible to report accurately the amount spent for housing in a given year. That calculation can include and is limited to: payments (including prepayments) on a mortgage loan to purchase or improve your home (including both interest and principal — and then, yes, the interest is also deductible from their taxes — a little added benefit known as “double-dipping”), real estate taxes, property insurance, utilities (electricity, gas, water, trash pickup, local telephone line, internet fees), the purchase and/or repair of furnishings and appliances, structural repairs and remodeling, yard maintenance and landscaping improvements, maintenance costs (including everything from household cleaning products and light bulbs to pest control). I bet you didn’t know all that.
And since you’re now wondering, no, I don’t take the exemption. I took the exemption for the years in which I was serving as a pastor of a local church but do not take the exemption now.