By Bob Allen
A ministerial housing allowance provision that saves U.S. ministers an estimated $1.2 billion annually in tax exemptions is unfair to other taxpayers not entitled to the same benefit, according to a 2011 lawsuit by the Freedom From Religion Foundation.
A Wisconsin judge has given a green light to a lawsuit challenging a federal law that exempts clergy from paying income taxes on the fair rental value of their homes.
U.S. District Judge Barbara Crabb ruled Aug. 29 that the Madison, Wis.,-based Freedom From Religion Foundation has legal standing to challenge the constitutionality of a 1954 law that grants certain tax benefits to “ministers of the gospel.”
The same group dropped a similar lawsuit in 2011 after the U.S. Supreme Court ruled in another case that individuals can sue the government only if they are affected directly by a law and not just because they are taxpayers. The Freedom From Religion Foundation, which “advocates for the separation of church and state and educates on matters of non-theism,” responded by changing its salary structure to include housing allowances, which employees cannot claim on their tax returns because they are not members of the clergy.
The plaintiffs contend that the law violates the First Amendment ban on establishing religion and the Fifth Amendment guaranteeing equal protection under the law. A press release called it “pure discrimination” for the government to give tax privileges to clergy that are denied to atheist leaders.
Current law says: “The gross income of a licensed, commissioned or ordained minister does not include the fair rental value of a home (a parsonage provided), or a housing allowance paid, as part of the minister’s compensation for services performed that are ordinarily the duties of the minister.”
It allows employers to set aside a portion of a minister’s compensation to be used to rent or purchase a home, including furnishings and utilities. Around in some form since 1921, the exemption’s original intent was to reduce the tax burden on ministers, assuming they were poorly paid, and in acknowledgement that clergy conduct much of their ministry from their home, making their residence akin to a home office.
“The minister’s housing allowance is the most important tax benefit available to ministers,” says GuideStone Christian Resources of the Southern Baptist Convention. That is especially true, leaders say, for pastors in rural areas with lower incomes.
August Boto, general counsel of the Executive Committee of the Southern Baptist Convention, says for ministers of many of the convention’s 45,764 churches the ministerial housing allowance is “critically important for making ends meet.”
The ministerial exemption has faced legal challenge before, notably in 1996 when the IRS ordered Purpose Driven Life author Rick Warren to pay taxes on part of the nearly $80,000 he claimed as a housing allowance as pastor of Saddleback Church in Lake Forest, Calif.
Warren later won on appeal. During the process, however, focus shifted from whether Congress intended to allow an unlimited deduction or cap it at a fair market rental amount to whether or not the whole idea of exempting clergy is constitutional. Lawmakers responded in 2002 with the Clergy Housing Allowance Clarification Act to protect the parish exemption but limit it to the fair market rental value of a home.
Judge Crabb’s ruling does not address the merits of the law but only establishes the Freedom From Religion Foundation’s standing to sue.
One study estimated that the parsonage allowance saves U.S. clergy as much as $1.2 billion in tax exemptions each year.
I would have paid thousands less taxes in taxes each year if church provided housing were taxed as income, rather than paying 13.3% (or 15.3% in previous years) in Self-Employment taxes. My income was not taxable (5 dependents, child-tax and education credits, etc), but I paid dearly in Self-Employment taxes on $29,000 income (full-time) and the fair rental value of the housing.
I have been paying around $5000 a year in Self-Employment Taxes, but $0 in Income Tax because of the deductions and credits. If housing were counted as income, and not part of SE taxes, then I would save well over $1000 a year – and that would come in mighty handy. So, I question the estimate of over a billion in tax exemptions, and the net effect upon the taxes of clergy.
If this argument of unfair advantage is upheld, and the exemption is not allowed, then it won’t be long until property taxes are paid on church buildings and land.