“They” would be the Freedom From Religion Foundation which gained a victory in a federal court district ruling in 2013 which disallowed the cash housing allowance. Unfortunately for them, the ruling was overturned at the appeals level. The appeals court found a problem with a technical legal issue, standing, and made no determination about the constitutionality of the cash version of the minister’s housing allowance.
This problem with standing has been resolved and we should expect the FFRF’s current lawsuit challenging the housing allowance to move forward without the problem that sank it last time.
For a good summary of the matter visit the blog of my CPA friend, Peter J. Reilly whose articles on the housing allowance are informative and insightful. He wryly notes that these challenges to the housing allowance are a “great source of ecumenical spirit” with we Southern Baptists joining with Khrisna, Muslims, Greek Orthodox and other groups. Perhaps Peter is unaware that ecumenicism is still in the Southern Baptist dictionary under “things to snarl and gnash one’s teeth about.”
A few things to note about this continuing tap dance that concerns our Sacred Tax Break that enables us to exclude thousands from income tax and in some situations take advantage, legally of course, of a double tax break:
Only the cash version of the housing allowance is being challenged
Ministers who live in church-owned parsonages need not worry. That is not the issue here. The issue is only for those ministers who receive a portion of their compensation as a cash payment housing allowance. Parsonage-dwellers, that beleaguered subset of clergy, are like caretakers or other employees who live in their employer’s housing as a convenience to their job. There is no challenge to that version of the housing allowance.
If God in heaven wanted to institute fairness in paying clergy He would surely double or triple the income exclusion for living in the church’s home. Any pastor who has lived next to their church likely has a long list of complaints that flow from that. But fairness in tax policy is up to legislators and God has apparently chosen not to profane Himself by dealing directly with congressional representatives. Good choice.
The FFRF believes that it is unconstitutional to limit this tax break to ordained clergy. The courts will ponder the matter.
I expect that the venerable housing allowance will survive the challenge.
This is pure conjecture, of course; however, it doesn’t help us that a very small minority of clergy who live in earthly mansions, literally, and are able therby to exclude hundreds of thousands of their income. If military personnel have a cap on the amount of their housing allowance, I don’t see why this wouldn’t be better public policy to do the same for clergy. But that’s another issue.
You should maximize your housing allowance this and every year.
Let the lawyers and judges sniff and snort and argue the grave constitutional issues. As long as you are eligible to take the housing allowance, get the maximum exclusion you can. (I offer this counsel only to the hardworking, modestly paid colleagues of mine who do not live in million dollar houses. The religious racketeers who live in 10,000 square foot homes should voluntarily limit themselves here, but if they have no spiritual compunction about living in a home as large as any third world dictator, then my counsel to them is likely not going to be heeded.)
You can take compensation as housing allowance for actual expenses (mortgage or rent, taxes, insurance, furnishing, repairs and improvements, utilities, etc.) so long as the total amount doesnt exceed the lower of (a) the fair rental value of the home, furnished, plus utilities, or (b) the amount your church approves as housing allowance.
Don’t ignore a couple of things here:
- Fair rental value is for a furnished house. Furnished homes may have FRV 50-70% greater than unfurnished. A state convention rep advised pastors to take 150% of FRV to allow for furnished rental value. And add utilities on top of that. I suspect that many ministers can exclude more that they presently are if these figures are considered.
- Make doubly sure that your church pre-approves and budgets the housing allowance. GuideStone has a good Q & A page that will help you. You can’t pull a figure out of the air and make it work with the IRS. Do it right.
- Oh yeah, you have to pay Social Security taxes on the value of your home. That’s the real killer tax for clergy. No relief in sight for that.