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The Parsonage Allowance Comes Under Fire

American flag in foreground, steeple in the back
photo by Marc Nozell

If you attend a place of worship with dedicated clergy, you may not know they are eligible for a particular federal tax benefit called “the parsonage exclusion.”

At least one group of atheists, however, is very aware – and very annoyed.

Priests, rabbis, imams, pastors and other clergy are permitted to exclude from their taxable income payments designated as housing allowances that they actually spend on housing. This is why you sometimes hear the benefit referred to as the “parsonage allowance;” many places of worship earmark part of a clergyman or clergywoman’s salary as a housing allowance to make tax calculations easier.

In October 2017, a federal district judge in Wisconsin ruled the parsonage exclusion unconstitutional. The Freedom From Religion Foundation, an atheist organization based in Madison, brought the case, arguing that the law as written discriminates against secular employees. They also argued that clergy could “double dip” by using untaxed income to purchase a home and then deducting the interest they pay on the mortgage and their property taxes.

Judge Barbara Crabb ruled that the relevant section of the tax code violates the Establishment Clause of the First Amendment “because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.” Crabb clarified that her decision was not about whether individual clergy deserved or did not deserve the exclusion, and suggested that a variety of secular employees could also benefit from such an exclusion. An appeal is nearly certain, and Crabb has stayed the decision until 180 days after the appeal is decided. In the meantime, clergy are left in suspense about the parsonage exclusion’s future.

The good news for clergy is that this is not the first time the parsonage exclusion has faced a legal challenge. This is not even the first time Crabb in particular has overturned it; she issued a similar decision in 2013, which the 7th U.S. Circuit Court of Appeals subsequently reversed. However, in that instance the reversal was not based on the argument’s merits or lack thereof. Rather, the 7th Circuit found that the plaintiffs (again the Freedom From Religion Foundation) did not have standing to sue because they had not been denied the deduction at issue. This time, because some of the plaintiff’s officers tried to claim the tax benefit and were denied, it looks more likely the case will ultimately be decided on its merits.

Ministers should bear in mind that this ruling is limited to allowance income earmarked for housing. Places of worship that own actual parsonages, or other housing in which they allow clergy to live rent-free or for a reduced rate, are not at issue in this case. Similarly, if a religious organization rents housing directly on clergy’s behalf, this case will not apply, regardless of how it is ultimately decided.

Interestingly, Crabb’s own ruling suggests a potential legislative fix that would not strip clergy of the parsonage exclusion. Congress could choose to extend the benefit to secular employees who work for tax-exempt not-for-profit organizations and who are expected to be on call at all times. (A similar housing allowance already exists for members of the military, which might serve as a model.) This change would, presumably, add relatively few new beneficiaries but cover most existing clergy.

In the meantime, the matter still rests with the courts, which cannot expand the rules, only determine the constitutionality of those that already exist. Should the 7th Circuit uphold Crabb’s ruling, the decision would technically only affect clergy in the court’s jurisdiction (Illinois, Indiana and Wisconsin) unless a subsequent appeal made its way to the U.S. Supreme Court. However, the Internal Revenue Service would have the option to follow the ruling more widely in order to promote consistency in national tax assessment. Individual clergy and their tax advisers should bear in mind that the parsonage exclusion could eventually be disallowed.

While the plaintiffs in the case point to televangelists and megachurch pastors as examples of the parsonage exclusion’s waste, most clergy live much more modestly. According to the congressional Joint Committee on Taxation, the parsonage exception collectively saves clergy about $800 million annually. But that figure is not evenly distributed. According to the Bureau of Labor Statistics, 90 percent of American clergy earn less than $80,000 annually, and their median hourly wage nationwide is $21.99. The likelihood that a huge number of clergy are getting rich without giving the government its due because of this exclusion is so vanishingly slight as to be practically nonexistent. And it is worth noting that while the parsonage allowance is exempt from income tax, it is not generally exempt from self-employment taxes – that is, Social Security and Medicare taxes. So it’s still subject to about a 15 percent tax in most cases.

The members of the Freedom From Religion Foundation do not like the idea of their tax dollars subsidizing clergy. While their stance is understandable, the parsonage allowance is not something the government or the IRS has shown much interest in targeting. Compared to other Western countries, America is still a very religious place. And for every minister with a private jet that the plaintiffs cite, supporters of the parsonage allowance will be able to produce dozens of everyday priests, imams and rabbis just trying to make ends meet.

This is a problem with a relatively simple legislative fix – one that expands the exclusion, rather than killing it. Congress should take note of the potential for an easy legislative win in 2018.

Managing Vice President Paul Jacobs, of our Atlanta office, is among the authors of our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He wrote Chapter 12, "Retirement Plans"; Chapter 15, "Investment Approaches And Philosophy"; and Chapter 19, "A Second Act: Starting A New Venture." He also contributed to the firm’s book The High Achiever’s Guide To Wealth.

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One Response to "The Parsonage Allowance Comes Under Fire"

  • Daniel Grasso
    January 8, 2018 - 1:39 pm

    I for one do not want my tax dollars going to support religion. Let people pay income tax on the amount just as they do medicare and social security taxes on it. For if any hardship arises out of paying tax on the housing allowance, if they are truly God’s servants, God will provide for them to continue their work and bless them with multiple times the amount of money they will pay in taxes.