By Tiffany Vail
Associate Conference Minister for Communications
United Church of Christ General Counsel Heather Kimmel is advising churches and clergy to recognize that the end of the clergy housing allowance is a possibility.
The clergy housing allowance is compensation provided to ministers by their employers which the ministers can exclude from their income for purposes of calculating federal income tax. The amount excluded is limited to the fair rental value of the home.
In a memorandum issued to the Council of Conference Ministers, Kimmel advised that a Wisconsin court recently ruled that the clergy housing allowance is "unconstitutional as an Establishment Clause violation, because it is a preference for religion." She goes on to say that the court order "applies only to those who receive compensation in the form of a clergy housing allowance; it does not apply to ministers who live in church-owned parsonages."
Kimmel said the ruling will not go into effect immediately because it is being appealed in the appropriate federal appeals court. She said a decision is expected before the end of 2018.
Kimmel said it is possible that the lower court ruling will be upheld, and that the court order would make the clergy housing allowance unconstitutional in the Seventh Circuit, which covers Wisconsin, Illinois and Indiana. The Internal Revenue Service could then choose to enforce that decision nationwide to promote consistent tax policy.
Associate Conference Minister for Communications
United Church of Christ General Counsel Heather Kimmel is advising churches and clergy to recognize that the end of the clergy housing allowance is a possibility.
The clergy housing allowance is compensation provided to ministers by their employers which the ministers can exclude from their income for purposes of calculating federal income tax. The amount excluded is limited to the fair rental value of the home.
In a memorandum issued to the Council of Conference Ministers, Kimmel advised that a Wisconsin court recently ruled that the clergy housing allowance is "unconstitutional as an Establishment Clause violation, because it is a preference for religion." She goes on to say that the court order "applies only to those who receive compensation in the form of a clergy housing allowance; it does not apply to ministers who live in church-owned parsonages."
Kimmel said the ruling will not go into effect immediately because it is being appealed in the appropriate federal appeals court. She said a decision is expected before the end of 2018.
Kimmel said it is possible that the lower court ruling will be upheld, and that the court order would make the clergy housing allowance unconstitutional in the Seventh Circuit, which covers Wisconsin, Illinois and Indiana. The Internal Revenue Service could then choose to enforce that decision nationwide to promote consistent tax policy.
"Ministry settings should be prepared for this worst-case scenario, even as we acknowledge the outcome may be more positive," she said.
Kimmel said the UCC Office of the General Counsel will continue to provide updates on the issue. In the meantime, she recommends the following:
What Should Conferences, Local Churches, and Other Ministry Settings Do?
- Conferences, Local Churches, and other ministry settings should continue to designate housing allowances for clergy until all appeals have been exhausted and a final ruling goes into effect. Office of General Counsel anticipates that you will have plenty of notice before the final ruling goes into effect. The housing allowance is a valuable benefit to ministry settings and clergy and should continue to be provided until further notice.
- Recognize that the end of the housing allowance is a possibility.
- Determine by what amount compensation of your clergy will need to be increased to account for the additional income tax liability should the housing allowance end, and whether you will offer this increase if the housing allowance ends. You may need to consult with an accountant for assistance with this.
- Consider adding a reserve to your budget for some or all of that amount so that a jump in compensation in a future year is not so large or unexpected. If the housing allowance does not end, then you can use the reserve for other purposes.
What Should Clergy Do?
- Clergy should recognize that the end of the housing allowance is a possibility.
- Ensure that employers are made aware of the issue by providing them with this memorandum and encouraging them to speak with their accounting or legal consultants.
- Do not make financial decisions based on current income, but consider the additional tax liability that you may face if the housing allowance ends, especially if your employer does not increase your compensation to account for the liability.
- Recognize that quarterly tax payments (or voluntary withholding) may need to be increased to account for the additional liability