Under a law passed by Congress in 1954, ministers don’t pay income taxes on compensation that is designated part of a housing allowance.
MADISON, Wis. — A federal judge has struck down a law that gives clergy tax-free housing allowances, a decision that could have far-reaching financial ramifications for pastors across the United States.
In her decision Friday, U.S. District Judge Barbara Crabb in Wisconsin wrote that the exemption “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise,” the Wisconsin State Journal reported.
Pastors can use the untaxed income to pay rental-housing costs or the costs of homeownership, including mortgage payments and property taxes.
The Madison-based Freedom From Religion Foundation filed the lawsuit against U.S. Treasury Secretary Jack Lew and acting Internal Revenue Service (IRS) commissioner Daniel Werfel. Treasury Department spokeswoman Victoria Esser and IRS spokesman Grant Williams referred questions Saturday to the Department of Justice, which is representing Lew and Werfel.
A spokeswoman for the Justice Department did not respond to an email seeking comment.
Under the law, passed by Congress in 1954, ministers don’t pay income taxes on compensation that is designated part of a housing allowance. The Freedom From Religion Foundation says that allows a clergy member to use the untaxed income to purchase a home, and then, in a practice known as “double dipping,” deduct interest paid on the mortgage and property taxes.
“It’s a really big deal,” said Annie Laurie Gaylor, co-president of the foundation. “A church currently could pay a minister $50,000 but designate $20,000 of it a housing allowance so that only $30,000 would be taxed as salary.”
In her ruling, Crabb referenced a 2002 statement by then-U.S. Rep. Jim Ramstad of Minnesota that said the exemption would save clergy members $2.3 billion in taxes from 2002-07.
Crabb said the magnitude of the benefit only underscores what’s wrong with the law.
She said the defendants did not identify a reason that a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses.
Given the dollar figures at stake, Gaylor expects clergy members to pressure the Obama administration to appeal the decision to the 7th U.S. Circuit Court of Appeals in Chicago.
“The court’s decision does not evince hostility to religion — nor should it even seem controversial,” foundation attorney Richard Bolton told the Wisconsin State Journal. “The court has simply recognized the reality that a tax-free housing allowance available only to ministers is a significant benefit from the government unconstitutionally provided on the basis of religion.”
Clergy may exempt from taxable income up to the fair-market rental value of their homes, a measure particularly helpful to well-off pastors, Gaylor told the Wisconsin newspaper.
“When you’re dealing with some of these megachurch pastors with huge mansions, they can be paid an enormous amount in housing allowances,” she said.