The housing allowance, which has provided a tax break for many American pastors for nearly a century, is under scrutiny and likely will be adjusted in coming years.
A special commission will examine how churches and religious nonprofits use it—and what additional legislation may be needed to preserve its intended purposes.
The Evangelical Council for Financial Accountability (ECFA) will lead the independent commission, formed at the request of Senator Charles Grassley (R-Iowa). Grassley, a member of the Senate Finance Committee, completed a three-year, highly publicized investigation into six high-profile media ministries. The resulting 61-page report released in January details eight issues that Grassley now wants the ECFA-led commission to investigate. Housing allowances are near the top of the report’s list.
Grassley’s staff highlighted examples of lavish lifestyles led by the heads of various ministries, made possible, at least in part, by housing allowances. The report also flags at least one instance where a media ministry allegedly ordained its entire managerial staff so that all “could deduct 100 percent of their housing costs.”
It isn’t the first time clergy housing allowances have undergone public scrutiny. The Revenue Act of 1921 enabled ministers to exclude the fair rental value of church-owned parsonages from their gross income (meaning the amount isn’t taxed as income). In 1954, Congress widened the benefit to ministers who serve at churches without parsonages by permitting housing allowances that don’t count as income for Federal taxes. (The allowance still counts as income for FICA taxes).
In the early 2000s, when Pastor Rick Warren challenged an IRS ruling regarding his housing allowance, Congress passed the Clergy Housing Allowance Clarification Act of 2002 (CHACA) to limit the application to the fair rental value of the pastor’s housing.
In late 2010, the Tax Court stirred up more controversy, overruling (through a split decision) an IRS ruling that clergy can only apply an allowance to a single residence.
The allowances are a big help to pastors. (Richard Hammar notes in his annual Church & Clergy Tax Guide. They “represent the most significant tax benefits enjoyed by ministers.”)They’re a big help to churches, especially small ones, as they try to recruit and retain gifted pastors, often on tight budgets.
Church leaders also claim allowances help communities, keeping churches active and healthy in local neighborhoods. When CHACA was under consideration, one congressman warned the loss of the benefit might chase away many clergy who suddenly faced added housing costs on already-modest salaries.
With the economy still inching its way to recovery after a multiyear recession and many congregations struggling to offer pay raises, the housing allowance is a benefit churches don’t want to lose.
The greatest threat currently is a 2009 lawsuit filed in California by the Freedom from Religion Foundation Inc., which argues the tax benefit violates the Constitution’s Establishment Clause. A government request to dismiss the case was rejected in 2010, allowing it to proceed to trial. Experts like Hammar, senior editor of the Church Law & Tax Report, are wary of its possible outcome.
Interestingly, the Grassley report may prove a helpful ally against such judicial challenges. The report asks the ECFA-led commission to study whether legislative mandates should be pursued to limit the benefit’s use to a single residence, to specific dollar amounts, and/or to a more narrowly defined group of people.
But it also notes current abuses of housing allowances are the exception, not the rule, and in noting the value of the benefit, it also asks the commission to study whether legislative action is necessary “to withstand further constitutional scrutiny.”
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