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.
Conversation starters:
- 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.
15 Comments. Leave new
Carmen–You could not legally take the exemption as you gave up your ordination. You would have been penalized.
You might have mentioned that military active and retired(after 20 years service) also get this benefit.
Also persons in education from k-12 and some university and college educators who have housing provided also fall under this provision.
Also, the IRS did not start this rule in 1954, but it came through an act of congress.
i read the first few paragraphs of this article, as usual lost interest.
the truth is this. like most of us here i’ve been on this planet long enough to see for myself what goes on in this world. my next door neighbor just paid $470,000 for a lake front home with fabulous view in a country club community, spent a small fortune on renovations after that. he is the piano player/organist at the local church…go figure. across the street diagonally from us a few years back a retired priest and his ‘male companion’ paid about $650,000 for an equally impressive spread. down the street around the bend is a retired Protestant minister, on the same lake, in another first class spread. there are no words that can justify this, i’m sorry, especially after taking a vow of poverty chastity and obedience. i always find it comical to hear that a minister has “retired”, so much for eternal commitment to the kingdom…this world has hopelessly lost it’s way, all we’re witnessing now is rearranging of the soiled deck chairs and filthy lucre.
The elephant in the living room that no one in the PCUSA wants to discuss is that while many pastors earning good salaries are able to purchase fine homes, there are some ministers willing to serve smaller, less than median salary churches, and live in manses. This means that they do not build home equity and must spend their senior years paying for housing when most people have a mortgage paid off, and don’t have that large expense.
The ELCA, LCMS, and PCA denominations have housing equity set-asides for their pastors in parsonages so that they are able to purchase a home when they retire. The PCUSA does not, except for National Capital presbytery.
Anon, how much is your mortgage payment every month, and what age will you be when it is paid off? Would you like to comment on this issue? I would like to hear your thoughts, and the thoughts of others on this issue, if we can do so in a gracious and civil manner.
At Anon
I know of few Protestant clergy, let alone any Presbyterian clergy who take a vow of poverty. Your comments are just angry anecdotes that probably are not true. Is your anger the fact some clergy might live as well as you? Probably.
Presbyterian clergy are at the top of the income scale, but few are paid more than $90,000 per year. And those clergy hold advanced degrees and work —50-60 hours per week.
Spare me the righteousness indignation.
Troll alert as applies to anon
This is not a 1% vs. 99%, or wealth inequality polemic. There are many quirks in the federal tax code. Yes, active duty military personnel do have tax exempt housing allowance provided if they live off base. Yes, doctors are able to claim depreciation on medical equipment, as lawyers claim travel and books, even those are the two highest compensated professions, go figure.
There are two clauses in the 1st amendment. Yes, congress cannot pass laws, policies or programs that constitute a “formal establishment of religion”, neither shall it prohibit the “free exercise” thereof. And yes, to have a class or group of clergy, catholic priests, ordered priests, those who live in a church owned manse who in essence get their housing in a tax advantaged or non-taxed portion of their benefit package and those who for whatever reason do not and need to rent or buy their housing does run afoul of both of the establishment clauses, from a tax perspective. The playing field, tax code, does need to treat all people in a certain profession or industry on an level basis.
Fess–Military personnel on active duty who live “off base” draw a housing allowance which is non-taxable.. (I served 34 years on active duty at 13 different locations, lived “on base ” at four of those for 12 years total, and ” off base” at eight for 22 years.) When they live “on base,” the house is provided in lieu of a housing allowance.
Retirees receive only “retired pay,” based on a percentage of their active duty “base pay,” which is fully taxable. We don’t qualify for either government housing or a housing allowance, so the housing allowance tax exemption ends upon retirement.
Make that 12 locations, not 13. (I should know better than to commit math in public !)
Uh, so you’re saying I could send away for one of those online pastor licenses and start deducting a portion of my home?
I need to go now…..
Thanks to the Layman for presenting an important issue for all churches. It is a similar issue to the question of exempting church property from the property tax. Quite simply, the government has given a gift to all churches in the form of reduced taxation of the church or minister. Both of the exemptions are possibly unconstitutional, but that is a decision that must be made by the courts. On the other hand, whether it is fair to accept these tax exemptions is a decision for the church and the minister.
I should point out that the minister only gets the housing tax exemption if the employing church actually designates a portion of the minister’s compensation package to be “housing allowance.” In Presbyterian polity, that means that the congregation must vote to designate the housing allowance. Has anybody ever raised with their congregation, at the time of that vote (which is usually done yearly) the question of whether the tax exemption is fair, and whether it is appropriate to take advantage of it?
The discussion must include the constitutional provision often referred to as separation between church and state. If the government can tax, the government can attempt to control through taxation. The reason churches are tax exempt is that it insures that the government cannot selectively financially pressure churches or clergy because they bother government officials.
Mary- Actually no. The IRS is not fooled by the ruse. There has to be an actual denomination. That said, the “Church” of Scientology is a tax dodge. Legal in the US and illegal and banned in Germany.
And to Charles Forbes—some church members have protested the exemption that church pastors are allowed. Crazy.
I take advantage of the tax break but think it is one that probably should be eliminated.
First, I know of no clergy who entered the ministry “for the money.” While a few ministers seem to do fairly well, the vast majority are out serving small to medium sized churches on a salary which provides at best, a decent living.
Second, I think the local congregation most benefits from the housing allowance by being able to offer a smaller salary. The minister only benefits by paying less in taxes. If, for example, a minister has a $10,000 housing allowance, $1500 less FICA is due. SECA IS paid on the housing allowance. If t he pastor is living in a manse, in the PCUSA, a $33,000 salary would result in a similar $9900 effective salary housing equivilent, and the pastor does pay SECA on the $9900.
What this means for the local congregation, is that without the benefit of the housing allowance, a larger salary would be needed for the pastor to meet the tax burden.
There are many, many smaller churches across America who are barely able to pay a FT pastor as it is. Removing the housing allowance could and likely would result in many churches no longer being able to afford a FT pastor. This situation would not only be true in the PCUSA, but nearly every other Protestant denomination.
In explaining the housing allowance tax benefit to a session one time, one session member started to complain about the special benefits for being a minister. Knowing he was on the local school board, I asked how their pastor’s salary compared to teachers with an MA, or the HS principal. At a moment he said, “It’s about half, less than half of the principal.” I said, the housing allowance doesn’t begin to level the playing field, but it helps. He didn’t say another word.
I agree with the comment above that it would be good if the PCUSA did requires churches to designate some housing equity when pastor’s live in manses. At the same time, pastors need to learn to be better financial managers. Since there are not in it for the money, most are poor managers of what little money they make.
By your admission that taxes are owed on the value of a manse, it COSTS a minister to live in a manse, while not building equity for old age. that hardly makes living in a manse a benefit to a pastor, though it is a benefit to a congregation.
you wrote that most pastors are poor money managers. would you please cite your source for that, or did you just make it up? What evidence do you show?
Yes, it costs SECA for a minister to live in a manse. Churches need to allow for that by providing a SECA allowance up to 1/2 of effective salary.
I’d love to find statistics for ministers being poor money managers. My comment comes from experience working with pastors, listening to stories about the financial messes some pastors have gotten into, and even from comments by people who work with clergy taxes. Many clergy are not even much interested in paying attention to the financial situation in the churches they serve. They see no problem spending accumulated assets as operating capital.
The point I often make in working with other clergy is that because they are not in it for the money and often receive a low salary, they need to be even more fiscally responsible and financially savvy with what they have.