Legal Update: Housing Allowance for Clergy

In 2013, a lawsuit was filed in Federal District Court in Wisconsin challenging the clergy housing allowance and parsonage exclusion. The long and the short of it is this: the Court ruled in favor of the Freedom from Religion Foundation declaring the clergy housing allowance unconstitutional. The court just dealt with the housing allowance and not parsonage, the latter being when a house of worship provides housing – a house or apartment – for its clergy rather than a housing allowance.

Parsonages have been a part of U.S. tax law since the Federal income tax laws were enacted in 1913. In 1954, Congress extended the tax exemption for “ministers of the gospel”, and the practice then became to apply the housing allowance to ministers – including rabbis and cantors – of all faiths.

For rabbis and cantors, and all other clergy, what this exemption means is that the amount of their income associated with their housing costs is not subject to Federal income tax. This would include their mortgage or rent, insurance, real estate taxes, utilities, and maintenance.

In November 2014, the U.S. Seventh Circuit Court of Appeals struck down the lower court ruling. The reason offered was that the two officers from the Freedom for Religion Foundation did not yet have a legal standing to file such a suit. They hadn’t been denied the housing allowance exemption when they filed their individual tax returns. So they hadn’t been denied anything yet that warranted such a lawsuit.

We know that such lawsuits take time to make their way through the courts. Look at what has been happening with Marriage Equality. But I have been reading articles that the people from the Freedom for Religion Foundation are pretty persistent.

A likely scenario is that the board of the Foundation in late 2014 passed a resolution approving a housing allowance for the two officers who originally filed the lawsuit. The Foundation officers’ 2015 individual tax returns will reflect a housing allowance. If the IRS conducts an audit on these individuals, then the legal proceedings will most likely begin again.

So what does this mean for clergy and synagogue leaders? In 2015 and 2016, not really much of anything. And this may never happen, or it may not happen for many years. I don’t like to be an alarmist. But I do believe it is a situation that should not simply be ignored.

Richard R. Hammar, a lawyer, CPA, and Senior Advisor to the Church Law and Tax Report suggests that clergy with housing allowances and their employers monitor this situation and be prepared.

Should this lawsuit be re-filed and regain its legs, then all clergy with a housing allowance and their employers will need to do some financial planning. Rabbis and cantors will experience a big jump in their income tax.

By way of example, if the portion of a clergy member’s salary earmarked for his/her housing allowance is $25,000, and they are in the 25% tax bracket, this would mean an additional $6250 needs to be paid to Uncle Sam.

The question as to whether salaries need to be increased to ease this new tax burden will most likely bring about some discussion as well.

Stay tuned.

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