Clergy Housing Allowance is Ruled to be Constitutional

A Wisconsin case was reversed in the 7th US Circuit Court of Appeals meaning that no changes are expected to the current IRS rules dealing with clergy housing.

Clergy will continue to have the benefit of tax free housing expenses, due to the reversal of an earlier ruling in a case before a federal district court in Wisconsin. This means there will be no change to the treatment of the housing allowance that many churches pay their congregational leaders.

Many churches own houses that are furnished to their ministers as part of their compensation for the work they do for the church. It can be a convenience for the church and the ministers. Other churches without a parsonage often pay a separate housing allowance to their clergy that is intended to offset the cost to purchase and maintain a home.

At issue is whether the housing allowance or the value of parsonage use is subject to income tax. Longstanding IRS rules stated that the housing allowance is permissible as a tax free benefit. Ministers who receive an allowance do not have to include it in their taxable income. However, they do have to include it for purposes of calculating their self employment income. Nationwide, the tax-free allowance saves clergy an estimated $700 million of taxes annually, according to the Congressional Joint Committee on Taxation.

In the case that was reversed, the Freedom From Religion Foundation argued that the tax free housing allowance violates the Establishment Clause of the First Amendment. With the current ruling, it appears there will be no change in the treatment of clergy housing costs anytime soon. Of course it’s possible that another case will challenge the rule, but any new challenge will take time. So for now, the tax-free housing allowance continues to be an option for churches and clergy.

If you have questions about clergy compensation or the housing allowance, please contact your KerberRose trusted advisor, or Andy Mathes in the Oshkosh office of KerberRose (920) 426-1040.

Andrew Mathes

About the Author

Andrew Mathes
Andrew has nearly ten years of public accounting experience. He specializes in providing accounting, tax, and consulting services to closely-held corporations and partnerships in the manufacturing, construction, and retail industries. Andrew also works extensively with businesses operating in multiple states and is an active participant on several committees to stay up to date on the latest changes in state taxation and nexus laws. Andrew also provides tax planning and compliance services for individuals.

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