Pastor Housing Allowance Archives

I am getting a lot of questions about ministerial compensation. I thought I would try and explain it in a more detailed manner.

I am not an accountant, but I have found that many accountants have no clue about how to handle clergy compensation. The tax law affecting ordained clergy and Churches is complex and, at times, contradictory.

For example, I pastored 3 Churches that, in the past, had given their minister a 1099 instead of a W-2 at the end of the year. In two of the Churches it was their accountant that told them to do this. The accountant was wrong. In most every instance a pastor should be getting a W-2 from the Church. One accountant argued over and over with me about this. I refused to take the 1099 he provided. Finally, he educated himself on the matter and found out he had been for years erroneously giving the ministers a 1099. As I said, the tax law for ordained clergy and Churches can be complicated .

Take a 40,000.00 pile of money. If the money is wages then it will be taxed as wages. The 40,000.00 will show up on the person’s 1040 tax form as income. If the person is married, with two children, his taxable income would be 14,000.00 (minus 11,400.00 standard deduction14,600.00 personal exemptions) The person would owe 1,398.00 tax.

Give that same 40,000.00 to an ordained minister. With a few magical, but legal, tricks the ordained minister can turn 40,000.00 into zero tax liability. Using the tax code the pastor can deduct, deduct, deduct, until his tax liability disappears.

16,000.00 housing allowance
7,000.00 automobile allowance (car used strictly for ministry use)
3,000.00 books, education expenses, vestments, taking Church members out for dinner, computers,cell phones. (additional exemptions)

Without any trouble the pastor has reduced his taxable income (before exemptions) to 14,000.00

The pastor is married with two children. Using the standard deduction and personal exemptions, the pastor’s income is reduced to zero. Now this may not be to his benefit when it comes to the Earned Income Credit, so he may need to adjust his deductions to give him the maximum refund.

The pastor can also opt out of social security, and by doing so save himself an additional 15.3%. (ministers are generally taxed as self-employed) Only religious workers have the option of opting out of social security.

This is legal and is done by thousands upon thousands of ministers every year. It is what the tax code allows.

Is it moral? Is it ethical?

I’ll leave that discussion for another day.

At the very least, every Church member should know how their pastor is compensated. (and I suspect most don’t)

Last fall, the Freedom From Religion Foundation filed a lawsuit challenging the constitutionality of what is commonly called ‘the parsonage exemption” or “housing allowance”.

In a statement on their website the Freedom From Religion Foundation said:

The Freedom From Religion Foundation, along with 21 of its California members, has filed a nationally significant federal lawsuit in Sacramento to challenge tax benefits for “ministers of the gospel,” commonly known as “the parsonage exemption.”
Ministers, who are paid in tax-free dollars, also may deduct their mortgage interest and property tax payments. Under both federal and California law, allowances paid to “ministers of the gospel” are not treated as taxable income. “Ministers of the gospel” may uniquely claim these benefits, so the statutes convey a governmental message of endorsement, unconstitutionally favoring religious employees and institutions over all others, the Foundation maintains.
The lawsuit was filed Oct. 16 in California Eastern District Court, Sacramento office. Judge William Shubb will preside over the case. Attorney Richard Bolton, Madison, Wis., with local counsel Michael Newdow, Sacramento, represent the Foundation and its plaintiff members.
The Foundation seeks a declaration that, on their face and as administered, provisions allowing tax benefits for “ministers of the gospel,” provided for by the IRS and Treasury Department, violate the Establishment Clause of the First Amendment to the U.S. Constitution.
Defendants are Timothy Geithner, U.S. Treasury secretary; Douglas Shulman, Internal Revenue Service commissioner; and Selvi Stanislaus, executive officer of the California Franchise Tax Board, who are all providing tax benefits only to “ministers of the gospel,” rather than to a broad class of taxpayers.
The exemptions permit clergy to deduct from their taxable income housing allowances furnished as part of compensation. The unique benefits to clergy date to 1954, when Congress amended the tax code to permit all clergy to exempt their housing costs from their incomes taxes. U.S. Rep. Peter Mack, author of the amendment, declared:
Certainly, in these times when we are being threatened by a godless and antireligious world movement we should correct this discrimination against certain ministers of the gospel who are carrying on such a courageous fight against this foe. Certainly this is not too much to do for these people who are caring for our spiritual welfare.
Section 107(2) allows ministers to avoid paying taxes on income declared to be a “housing allowance.” The privilege also permits churches to save money on clergy salaries. Most egregiously, clergy may “double-dip,” i.e., deduct their mortgage payments and real estate taxes from income tax, even though they paid for these with tax-exempt dollars, amounting to a government subsidy solely for clergy.
In 2002, Congress acted to protect the exemption, after the IRS sued over an abusive housing allowance taken by Rev. Rick Warren, by limiting deductions in future to “reasonable rental value.”
“All other taxpayers pay more because clergy receive this privileged benefit,” said Annie Laurie Gaylor, Foundation co-president.
“The income taxation of ministers of the gospel under the general rules that apply to other individuals would not interfere with the religious mission of churches or other organizations or the ministers themselves,” the legal complaint maintains. The statutes are not an accommodation of religion, therefore, but a subsidy.

Here is how the housing allowance works. Let’s suppose Faith Church pays Pastor Bob 25,000.00 per year. Pastor Bob will have to pay income tax on 25,000.00 income minus the standard deductions. Faith Church decides to give Pastor Bob a housing allowance. The Church sets the housing allowance value at 15,000.00. Result? Pastor Bob’s taxable income is reduced to 10,000.00 minus the standard deductions. The 15,000.00 housing allowance is tax free income and not included in Pastor Bob’s income. In 2009, using the standard deduction, Pastor Bob would have ZERO taxable income. Pastor Bob is married and has two children. In 2009 Pastor Bob would receive 4,269.00 from the Earned income credit and 2,000.00 from the Child tax credit. In other words, Pastor Bob will receive 6,269.00 refund and not pay one penny of income tax.

Scandalous? Yes. Legal? Yes. Pastor Bob should not be faulted for taking advantage of what the tax code allows. Most of us would do the same. I know I did.

I spent most of my years in the ministry pastoring rural Churches. The Churches I pastored did not pay very well. The housing allowance allowed the Churches to get more of me for their money. Many years I had NO taxable income once the housing allowance was deducted from my gross income.

Ministers can opt out of social security if they have a religious reason for doing so. I opted out of social security in 1983. (I later opted back in) For many years not only did I not pay income tax but I paid no social security tax. Perfectly legal, according to the law.

The housing allowance provides quite a cash cow for low and moderate income ministers ( which is most ministers) since it reduces their taxable income dramatically. Since the housing allowance is not “taxable” it is not counted as income at all. (even though it was just a paper transaction, moving the money from one hand to the other) As a result, ministers and their families qualify for government programs, insurance, welfare, the earned income credit, etc that they otherwise would not qualify for if their housing allowance was included in their gross income.

Claiming the housing allowance also reduces the minister’s state tax liability since most states use the federal adjusted gross income for what state tax is owed.

The IRS eventually changed it rules and it now requires ministers to count their housing allowance as income when calculating the earned income credit. The Education department also requires any housing allowance to be counted as income when applying for Federal student aid.

I support the Freedom From Religion Foundation’s lawsuit. It is time to end ALL taxpayer support of religion.