“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.
As a layman, I do think it immoral for a pastor to receive a tax-free housing allowance, buy a home, and deduct interest on his income tax declaration. It really is transferring more of the cost of governmental services to other taxpayers, than ought to be.
Bob, you said, “It really is transferring more of the cost of governmental services to other taxpayers, than ought to be.” How is that any different than the homeowners (who aren’t clergy) that deduct their interest on their Mortgage? Why can’t those who rent argue they are being disadvantaged because they can’t deduct any portion of their rent? Why isn’t it immoral for someone with a mortgage to get a tax break someone who rents not get? They are both paying a monthly payment to live somewhere. Perhaps you are in favor of no Tax Deductions whatsoever? I’m sure some… Read more »
I think Bob is referring to the double-benefit we get. Housing allowance, which should pay our mortgage, is tax-free entirely. Great benefit. Then, we can itemize our tax deductions and use the interest on that mortgage as a deduction on our taxable income. One of those benefits should be enough. The former is in place because of parsonages and employer expectations on the home. The latter is one that everybody gets to encourage home ownership. It allows someone to reduce their taxes a little bit to offset their mortgage. But a minister with a housing allowance gets to pay his/her… Read more »
My point is there will always be tax breaks some can get that others can’t. That is, unless you take away all tax breaks. Renters don’t get Mortgage Interest deduction. Why should they be penalized because they can’t come up with enough money for a down payment so they can buy a home and get the deduction? Those without children don’t get the Tax Credit (a huge savings). How is that fair? Where is the outrage over that? So because ministers get a tax break others can’t we should suffer. And, as Tarheel already noted, pastors pay the full measure… Read more »
This benefit works to offset the self employment tax we pay out of every penny of our salary and any allowances we may Recieve without deduction. Most other people enjoy thier employer paying that on thier behalf – contractors/self employed persons increase the cost to customers to ensure a better after tax income level – pastors have neither benefit – but still pay the self employment tax. Any pastor who thinks this unfair is free not to take it – there’s no mandate to take advantage of any tax deduction – if you do think it unfair to the govt.… Read more »
The answer to this, a perpetual technique that links the HA and clergy being self-employed thus rationalizing the former by the latter, is that the HA wasn’t created to offset clergy SECA taxes. Clergy are treated like millions of other self-employed individuals in regard to taxes. Also, every employer figures the employer share of SS when considering the cost and benefit of an employee. It is ‘hidden’ from the employee but lowers his or her cash pay in the same way that an employer paid health benefit does. I know well the cost of paying SECA taxes. At some point… Read more »
“Clergy are treated like millions of other self-employed individuals in regard to taxes.”
Kinda. Except we don’t get to pass along those taxes to customers. The self employed contractor can imbed his personal tax costs into his pricing….we are completely at the mercy of others as our salaries and benefits are set by others.
Also, I didn’t say HA was created to offset SECA taxes – I said it works to partially offset a tax burden pastors endure that others don’t- and therefore is a legit answer to the whining about it not being fair.
Sure you can. Clergy are perfectly able to negotiate with employers like any other worker regarding compensation. Market forces are valid in church/minister relationships. Your SECA taxes are a known amount. One can easily assess what salary + housing allowance amount is necessary. Either party may say that compensation offered/requested will not work for them. I don’t argue that it is key point for clergy to make that they pay the full 15.5% SECA tax (for parsonage-dwellers that means paying something in the area of $100+/month on income they do not receive) on all income (except any through an accountable… Read more »
Where does such treatment have its source. I think it develops from the churches which supported the American Revolution. King George III complained that his colonies in America had defected with a Presbyterian parson, but he seems to have forgotten the other denomination like the Congregationalists. Reformed, Lutherans, and, yes, the Baptists. Seems the latter were consider the cannon fodder, I have read where the committee of Virginia Baptists meet with the colonial legislators and made an agreement that in exchange for their freedom to practice their Faith, the Baptist ministers would go back to their communities and encourage their… Read more »
My heart smiled when I saw Dr. James Willingham had commented. Have a great Labor Day Dr J. It was great to see you comment.
me too, Dean.
Correction: Elijah Craig not Eligah
This is officially Dr. J’s shortest comment ever! Good to have you back.
Again, any pastor who feels that that HA is unfair to the govt., and or fellow citizens is free to not use it when filing their taxes. Again, no one is required to file the HA as an income tax deduction. Any retired pastor who has accepted housing allowance deductions over the yeas and now feels it is unfair/invalid is free to go back and calculate his deductions over the years and then cut a check to the IRS for that amount so as to soothe any damaged consciences. Or you could donate the amount to Guidestone’s Mission Dignity –… Read more »
Dang, you were doing so well and then ran off a cliff at the end.
Careful in slamming the FFRF, judges, and others in the suit. I’d rather deal with some FFRF people than many Baptist colleagues. I get facts, figures, legal cases, and cogent arguments from the former. Often, I get whinefests from the latter. Joe sixpack in your church might wonder why he can’t get an income exclusion for his doublewide like you for your 4/3 brick home. He figures he worked harder than you do.
Well most pastors wonder why they can’t get to deduct the purchase of a car like the church member who owns his own business and buys a new car uses it for both personal and business but because he as a decal on it – he deducts its purchase as “advertising.” Again, there is always deductions that some people get that others do not…. As for the antireligionists – as their very name and causes the fight for denotes – the HA in no way violates the first amendment as they clam because with it the govt. neither establishes an… Read more »
Tax policy need not be sensible nor fair. The FFRF suit is about me and thee, ordained ministers, getting special treatment while other non-ordained folks doing similar work don’t get the gummit’s special treatment. Some legal ex-poits judge the cash HA to be constitutional but bad tax policy. My view is that it is a modest tax benefit and should be kept but capped to eliminate the megapastor mansion racket. Looks like the federal appeals court will get to offer their view of the constitutionality…but we aren’t close to that just now. I’ll keep you informed…no need to thank me… Read more »
Welcome back, Dr. J!