By Bob Smietana
For six decades, the housing allowance tax break has been one of a minister’s best friends.
The allowance, which lets pastors use tax-free dollars to pay for housing, saves pastors about $800 million in income taxes, according to the congressional Joint Committee on Taxation.
But it could soon disappear.
“We have got to understand that this is not something that is permanent,” said Lifeway President and CEO Thom S. Rainer, in a recent podcast for church leaders. “It is going to go away at some point in time.”
A federal court ruled last fall that the housing allowance is unconstitutional. That ruling is now under appeal.
Critics of the housing allowance—chiefly the Freedom From Religion Foundation (FFRF)—say it gives an unfair advantage to churches. Other nonprofit leaders don’t get the allowance. So, they have argued in several lawsuits, pastors should not either.
Lawyers from the Becket Fund for Religious Liberty disagree.
Pastors are often required to live in a specific community and to use their homes for ministry, Becket says. And they aren’t the only ones who get a tax break on their housing.
Staff who live in housing provided by a school, military service personnel, government officials living overseas, and people living away from home for business all get tax breaks for their housing, according to a brief filed by Becket in the case.
About 8 in 10 full-time ministers get a housing allowance, reports Christianity Today.
Several ministers intervened in the latest case.
Among them is Chris Butler, a pastor at the Chicago Embassy Church. Butler is featured in a video about the case.
Losing the housing allowance would mean the church has to divert funds away from programs that help the community, in order to pay the pastor, says Butler.
“For the majority of churches, the pastors are like me and experience at some level the same problems that we’re trying to face in the community,” Butler says in the video. “If you take away even a little bit, it can become a lot of trouble quickly.”
About 5,000 churches and pastors have signed a friend-of-the-court brief in support of the housing allowance, which will be filed by the Christian legal group Alliance Defending Freedom.
Ministers who live in a church-owned parsonage don’t have to pay taxes on that benefit, a provision that remains intact under the federal court’s ruling. Since the 1950s, ministers who live in their own homes have received a similar tax break.
The housing allowance applies to “ministers of the gospel”—but the IRS also applies the tax break to the clergy of other faiths.
In a previous lawsuit, the federal government argued that atheist leaders might qualify as well.
The IRS, however, denied FFRF leaders a housing allowance in 2016.
“IRC Section 107 specifically requires that to exclude a housing allowance from income you must be a minister of the gospel,” the IRS told FFRF leaders. That denial led to the current lawsuit.
Losing the housing allowance could cost pastors thousands of dollars a year in new taxes, depending on where they live, said Christian Schmidt of Chalice Tax, a clergy tax preparer.
Elaine Sommerville, a nonprofit accounting expert, said it is hard to tell how much an individual pastor’s taxes could go up.
“There isn’t a good range on the potential cost, since it is dependent on a minister’s incremental tax bracket,” she said in an email. “The addition could be anywhere from 10 percent to 37 percent.”
In his podcast, Rainer suggested that pastors begin preparing now, in case the housing allowance is overturned.
He suggests pastors talk to a tax expert and get an estimate of how much extra they will pay if the housing allowance disappears. Then get ready, he advised.
“Live as if you are not getting a housing allowance—and put the difference in savings.”
BOB SMIETANA (@BobSmietana) is senior writer at Facts & Trends.
