Shock waves have reverberated across the land over the past two weeks as clergy and the religious organizations that employ them got word of a federal court ruling that may mean the end to the clergy housing allowance tax exclusion.
On October 6, Judge Barbara Crabb of the District Court of the Western District of Wisconsin struck down as unconstitutional the provision in the U.S. tax code that allows clergy to exclude from income tax the portion of their compensation designated for housing allowance. The judge viewed the exclusion as a violation of the U.S. Constitution’s Establishment Clause on the basis that it amounted to preferential treatment of religion. She did, however, make it clear that the special tax treatment of housing provided to clergy by their employers (i.e. parsonages) is not affected by this ruling.
The ruling is of significant concern, in that this tax benefit has a major impact on the value of clergy compensation. The tax-free housing allowance has enabled the overall compensation package offered to many clergy to be much more robust. Losing that benefit would mean a significant drop in net income to clergy through increased taxes. If the housing allowance tax exclusion goes away, churches may have to pay clergy substantially more to attract and retain them, and compensate them fairly. In addition, this may affect many retired clergy who continue to benefit from the tax exclusion.
We don’t know the full extent of what this ruling means. The judge has yet to determine a remedy and has given the parties to the suit until the end of October to file additional briefs on the matter. In addition, in a similar ruling in a case brought before her in 2013, the judge suspended enforcement of that ruling pending an appeal and it is expected that this may happen in this case as well. A stay may also be sought by the government or by intervenors (a group of individual clergy involved in the current case). And, without doubt, an appeal is going to be made to the Ninth Circuit Court of Appeals.
The bottom line: For now, churches should continue to designate a housing allowance and ministers should continue to claim it, until it is conclusively determined in the courts that the exclusion is unconstitutional and the ruling is applied nationally by the IRS. Clergy and churches should stay tuned for further developments. If the exclusion goes, clergy should be ready to increase quarterly estimated tax payments and churches will have to consider increasing ministerial compensation as an offset.
Your Conference leaders are very concerned about what this ruling might mean for our clergy and churches. The United Church of Christ’s General Counsel, the UCC Pension Boards, and our ecumenical partners will continue to advocate on behalf of clergy and the churches that employ them. Rest assured that the Massachusetts Conference will be supporting these advocacy efforts in every way we can, that we will keep you posted about any further updates, and that we are holding our churches and their authorized ministers in prayer in this time of uncertainty.
On October 6, Judge Barbara Crabb of the District Court of the Western District of Wisconsin struck down as unconstitutional the provision in the U.S. tax code that allows clergy to exclude from income tax the portion of their compensation designated for housing allowance. The judge viewed the exclusion as a violation of the U.S. Constitution’s Establishment Clause on the basis that it amounted to preferential treatment of religion. She did, however, make it clear that the special tax treatment of housing provided to clergy by their employers (i.e. parsonages) is not affected by this ruling.
The ruling is of significant concern, in that this tax benefit has a major impact on the value of clergy compensation. The tax-free housing allowance has enabled the overall compensation package offered to many clergy to be much more robust. Losing that benefit would mean a significant drop in net income to clergy through increased taxes. If the housing allowance tax exclusion goes away, churches may have to pay clergy substantially more to attract and retain them, and compensate them fairly. In addition, this may affect many retired clergy who continue to benefit from the tax exclusion.
We don’t know the full extent of what this ruling means. The judge has yet to determine a remedy and has given the parties to the suit until the end of October to file additional briefs on the matter. In addition, in a similar ruling in a case brought before her in 2013, the judge suspended enforcement of that ruling pending an appeal and it is expected that this may happen in this case as well. A stay may also be sought by the government or by intervenors (a group of individual clergy involved in the current case). And, without doubt, an appeal is going to be made to the Ninth Circuit Court of Appeals.
The bottom line: For now, churches should continue to designate a housing allowance and ministers should continue to claim it, until it is conclusively determined in the courts that the exclusion is unconstitutional and the ruling is applied nationally by the IRS. Clergy and churches should stay tuned for further developments. If the exclusion goes, clergy should be ready to increase quarterly estimated tax payments and churches will have to consider increasing ministerial compensation as an offset.
Your Conference leaders are very concerned about what this ruling might mean for our clergy and churches. The United Church of Christ’s General Counsel, the UCC Pension Boards, and our ecumenical partners will continue to advocate on behalf of clergy and the churches that employ them. Rest assured that the Massachusetts Conference will be supporting these advocacy efforts in every way we can, that we will keep you posted about any further updates, and that we are holding our churches and their authorized ministers in prayer in this time of uncertainty.
Author
Jonathan New
Jonathan is available to assist churches with: Stewardship campaigns; Capital campaigns; Planned giving; United Church Mission OCWM and Fellowship Dues interpretation; Church financial management. His Administrative Assistant is Ms. Karen Methot, ...