The Freedom From Religion Foundation sued to have our housing allowance disallowed as an income tax deduction. The U.S. District Court for the Western District of Wisconsin found in favor of the plaintiff and ruled as unconstitutional the clergy housing exclusion for pastors who don’t live in a church-owned parsonage.
What does it mean?
If allowed to stand, this ruling means pastors will have to begin paying income taxes on all of their income, not just whatever’s left after deducting the housing allowance. Most of our pastors present to their boards, on an annual basis, an estimate of how much they’ll spend in the following year on their housing. That amount includes mortgage or rent payments, insurance, real estate taxes, utilities and repairs. Upon approval in advance by the church board, the “housing allowance” amount is subtracted from what the church reports to the I.R.S. as salary for the pastor. So if a pastor makes $30,000 per year but has an approved housing allowance of $12,000 per year, the church would only report $18,000 in salary and the pastor would only pay income taxes on $18,000. The pastor would still need to pay Social Security and Medicare taxes on that $12,000 housing allowance, but would save the income tax. For the average pastor, this unique benefit has meant around $2,500 in tax savings per year. So for the average pastor, if this ruling stands, it’s like a $200/month pay cut.
No. IF you live in a church-owned parsonage, you are not affected. But if you live in housing that you provide yourself, and you turn in a “housing allowance” which reduces what the church reports as your income to the I.R.S. (and that’s most Free Methodist pastors) you will no longer be able to do so if this ruling stands.
Does it apply right away?
Here’s the one bit of good news. It doesn’t apply YET. The federal government MAY appeal the ruling by the District Court to the Seventh Circuit Court. If it does so, the ruling will be “put on hold” until the appeal is heard. We don’t know yet if the government will appeal, but they have 60-days to do so. Therefore, the chances that this ruling will impact us FOR 2013 INCOME TAXES is highly unlikely. We’re probably safe for this year, and you should go ahead and get your housing allowance for 2014 approved as normal, if you haven’t done so already. For now, don’t do anything any differently. We will keep you posted.
The Evangelical Council for Financial Accountability (ECFA) is following this matter closely and will provide updates. As a member of the ECFA I’m pleased to announce that the Free Methodist Church can now offer all churches and pastors FREE access to lots of information on financial and governance issues that affect local churches. Have a question on legal or financial issues? You’ll find 300 “knowledge center documents” with answers to frequently asked questions about everything from clergy tax to background screening when hiring an employee. To sign up, go to: www.ecfa.org/FreeMethodist . Click on “free subscription”. As a Free Methodist Church, it’s free to you and it’s good forever, no renewals or costs.
On behalf of all of us at the World Ministries Center: happy Thanksgiving!
May our Lord be praised and thanked for all His blessings upon our lives, our churches, and our country. (Even if our country charges us more income taxes next year.)
In Christ’s love,Larry Roberts
Chief Operating Officer