An important case is currently making its way through the federal courts which will impact ministers, and to a lesser extent churches, nationwide. On Oct. 6, 2017, the federal district court declared the clergy housing allowance unconstitutional in the Western District of Wisconsin. In response, certain Chicago area ministers have appealed the case to the Seventh Circuit Court of appeals. A decision is expected to be reached in the second half of 2018.
The court case challenging the Clergy housing allowance was first introduced in 2011 when the co-founders of the Freedom From Religion Foundation (FFRF) challenged the provision as unconstitutional, preferential, and discriminatory for permitting tax-free housing to “ministers of the gospel.” The case was voluntarily dismissed by the FFRF. A second suit was filed in 2013 and the district court judge ruled the Housing Allowance was unconstitutional. A year later, a circuit court vacated the lower court’s judgement. A third case has been brought before a district court and again, the court found the clergy housing allowance was unconstitutional. Now, the seriousness of the case (i.e. Gaylor v. Mnuchin) is being realized as an appeal is being heard by the U.S. Seventh Circuit Court..
The minister’s housing allowance has allowed PCA churches and church-related organizations to use limited resources more effectively. A loss of this benefit would negatively impact PCA ministers and their families and would limit resources available to them in Gospel ministry throughout the United States.
This article addresses three basic questions surrounding the housing allowance case.
What is the housing allowance?
The housing allowance is a provision, section 107(2) of the Internal Revenue Code, which permits minsters to exclude from federal income tax all or a portion of their income designated as a housing allowance.
The allowance is commonly misunderstood in the Christian community as an additional monetary stipend. However, the allowance is not a bonus. Rather, it is part of the pastor’s salary, set aside for housing and free from federal income tax. The exclusion was created by Congress in 1954 to protect ministers and other workers whose jobs require them to live in the communities they serve from disadvantageous tax treatment.
Who will be affected if the housing allowance is invalidated?
If the Seventh District Court overrules the appeal supporting the housing allowance, then the case could be subject to review by the Supreme Court. Ministers everywhere would feel the effects of the exclusion’s annulment.
Ministers in Illinois, Indiana, and Wisconsin would feel the disruption first if the district court’s decision stands. But because the provision applies to ministers of all churches, ranging from small neighborhood churches to nationwide, multi-site churches, some ministers will be affected more than others.
Most churches within the Presbyterian Church of America are not large multi-staff churches. The PCA is made up of many small churches that serve their communities, often with less than three or four employees. It is these churches led by ministers with modest pay that benefit the most from the housing allowance. Smaller churches with solo ministers will be the most disadvantaged by the decision.
How should churches prepare?
Start setting aside money for ‘a rainy day fund.’ Pray for the Lord’s care and provision and begin planning for changes to the stewarding of your church finances. If the housing allowance is discontinued, churches may want to offset all or part of the increase in the minister’s ‘new’ income tax liability. For instance, the loss of a $20,000 housing allowance would amount to a tax liability of around $5,000.
Many churches remain unaware of their pastor’s tax exclusion and could be caught off guard by the disappearance of funds. Small congregations do not typically have lots of discretionary income to help ministers, so saving money in advance is the best option to compensate church leaders.
If the court appeal is denied, your rainy day fund can be used to allow the pastor to continue serving your church. Should the appeal stand, your congregation can decide how to spend or reallocate the saved funds, which for most churches should not be a challenge.
While the appeal is still being reviewed, an Amicus Brief was filed with the Seventh Circuit Court by several organizations including the Church Alliance, with which PCA Retirement and Benefits is affiliated. The brief describes in detail the lengthy history of the housing allowance and the immense financial burdens ministers would face without it.
If churches or ministers have questions about contingency planning, they should schedule an appointment with one of our Financial Planning Advisors – 678-825-1198 or firstname.lastname@example.org
Geneva Benefits Group serves those who serve others, providing practical support for the financial, physical, and mental wellbeing of people who work in full-time ministry.