What is the minister’s housing allowance?
In the US, many ministers own their own homes, and up to this point, the portion of their income designated by the church as a "housing allowance" is not subject to income tax. As long as it is used for housing and does not exceed the home's annual fair rental value (furnished, plus utilities), it is exempt. This housing allowance designation should be approved by the church by the end of the preceding calendar year.
New challenges
The clergy housing allowance is facing new challenges from the Freedom From Religion Foundation (FFRF). In October 2017, a federal district court judge ruled that this longtime tax benefit for ministers is an unconstitutional preference for religion. Any parsonage allowance related to church-owned housing is unaffected by this ruling. This district court decision would have to be affirmed by the Seventh Circuit Court of Appeals, which could occur in late 2018. It would then apply only to ministers in that circuit of Illinois, Indiana, and Wisconsin.
In order for this decision to affect all ministers in all states, the decision would have to either be affirmed by the US Supreme Court or by the IRS to promote consistency in tax administration through the country. This path is uncertain and even doubtful given the history of past challenges to religious tax benefits. Even so, churches should consider what steps they might take if this legislation is affirmed at the highest level.
What can you do to prepare?
Consider possible adjustments to minister’s compensation and the impact this will have on the church budget. The elimination of this valuable tax benefit would create a significant financial burden on most clergy who have been exempt under current IRS code. Many may have mortgage loans and other investments based on this tax benefit that is no longer available.
MInisters should consider the implications for future home purchases and not base financing decisions on the availability of housing allowances.
Begin preparing now for needed salary increases by setting aside a contingency reserve amount to get accustomed to the burden of additional costs. If the courts uphold the housing allowance, then the church has a nice rainy-day fund for other uses.
If the scenario with the court system and IRS plays out, a decision will not likely come out until 2019-2020. There are several actions that could delay or kill the district court’s ruling outright. You can best follow the progress of this case at www.churchlawandtax.com if you subscribe. Begin considering your budget and educating your ministers and keep them informed on the progress of this can and its potential impact on their finances.