The clergy housing allowance (sometimes called a parsonage allowance or a rental allowance) is an allowance paid to ordained ministers and
rabbi
A rabbi () is a spiritual leader or religious teacher in Judaism. One becomes a rabbi by being ordained by another rabbi – known as ''semikha'' – following a course of study of Jewish history and texts such as the Talmud. The basic form of ...
In order to qualify, the clergy must be duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination or synagogue, and the clergy must be given the authority to conduct religious worship according to the prescribed tenets and practices of that religious organization.Treasury Regulation Section 1.107-1: Rental value of parsonages . ''Internal Revenue Service''. Legal Information Institute. Cornell University Law School. Retrieved October 25, 2017.
The allowance must be for the minister's or rabbi's services performed:
* as sacerdotal functions;
* conducting
religious worship
Worship is an act of religious devotion usually directed towards a deity. It may involve one or more of activities such as veneration, adoration, praise, and praying. For many, worship is not about an emotion, it is more about a recognition ...
;
* in the exercise of the ministry;
* in the exercise of duties as required by the religious order;
* writing religious books or articles;
* the administration, maintenance, direction, management, or promotion of religious organizations and their integral agencies under the authority of a religious body constituting a church or church denomination or synagogue;
* in the exercise of the minister's profession as a Christian Science practitioner or reader;
* teaching and administrative duties at theological seminaries;
* duties of clergy performed as an employee of the United States (other than as a chaplain in the Armed Forces), a
state
State may refer to:
Arts, entertainment, and media Literature
* ''State Magazine'', a monthly magazine published by the U.S. Department of State
* ''The State'' (newspaper), a daily newspaper in Columbia, South Carolina, United States
* ''Our S ...
,
possession
Possession may refer to:
Law
* Dependent territory, an area of land over which another country exercises sovereignty, but which does not have the full right of participation in that country's governance
* Drug possession, a crime
* Ownership
* ...
District of Columbia
)
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, image_caption = Clockwise from top left: the Washington Monument and Lincoln Memorial on the National Mall, United States Capitol, Logan Circle, Jefferson Memorial, White House, Adams Morgan, ...
.Treasury Regulation Section 1.1402(c)-5: Ministers and members of religious orders . ''Internal Revenue Service''. Legal Information Institute. Cornell University Law School. Retrieved October 25, 2017.
In order to qualify, the service must be performed for a church or synagogue or an integral agency of a religious organization. An integral agency of a religious organization is generally one where several of the following apply.
* The integral agency is incorporated by the church or synagogue;
* The integral agency has an incorporated name indicating a church or synagogue relationship;
* The integral agency is continuously controlled, managed, and maintained by a church or synagogue;
* The integral agency has trustees or directors that are approved by, and may be removed by, the church or synagogue;
* The integral agency is required to report its finances and general operations to the church or synagogue;
* The integral agency is supported by the church or synagogue; and
* The integral agency in the event of its dissolution, would turn over its assets to the church or synagogue.
The following services do not qualify:
* Services performed as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions, even if performing sacerdotal functions or conducting religious worship.
* Services performed as an employee of a public hospital.
The home must actually be used as a home by the clergy. The allowance cannot exceed the
fair rental value Rental value is the fair market value of property while rented out in a lease. More generally, it may be the consideration paid under the lease for the right to occupy, or the royalties or return received by a lessor ( landlord) under a license t ...
of the home, furnishings,
appurtenance
An appurtenance is something subordinate to or belonging to another larger, principal entity, that is, an adjunct, satellite or accessory that generally accompanies something else.The Minister’s Housing Allowance . ''
Evangelical Council for Financial Accountability
The Evangelical Council for Financial Accountability (ECFA) is an American financial standards association representing Evangelical Christian organizations and churches, which qualify for tax-exempt, nonprofit status and receive tax-deductible c ...
''. Retrieved December 24, 2017. The minister's or rabbi's total compensation, including salary, fringe benefits, and clergy housing allowing, cannot exceed reasonable compensation for the services performed.Publication 1828: Tax Guide for Churches & Religious Organizations . ''Internal Revenue Service''. 2015.p. 22
Retired clergy are also eligible to claim the exclusion for the housing allowance because the Internal Revenue Service deems clergy housing allowance as compensation for past services as clergy. Clergy housing allowance is generally subject to
self-employment tax
Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return n ...
except for retired clergy.p. 23 After year-end, the church or religious organization must provide a written notice indicating the total amount of clergy housing allowance for the year; using box 14 of a Form W-2 is an example of such a written notice.
Legal challenges to tax-free status
In November 2013, the clergy housing allowance faced judicial opposition. In ''Freedom From Religion Foundation, Inc. v. Lew'', the Federal District Court of the Western District of Wisconsin issued a decision holding that the allowance violated the
Establishment Clause
In United States law, the Establishment Clause of the First Amendment to the United States Constitution, together with that Amendment's Free Exercise Clause, form the constitutional right of freedom of religion. The relevant constitutional text ...
of the
First Amendment
First or 1st is the ordinal form of the number one (#1).
First or 1st may also refer to:
*World record, specifically the first instance of a particular achievement
Arts and media Music
* 1$T, American rapper, singer-songwriter, DJ, and reco ...
. However, the
Justice Department
A justice ministry, ministry of justice, or department of justice is a ministry or other government agency in charge of the administration of justice. The ministry or department is often headed by a minister of justice (minister for justice in a ...
appealed to the Seventh Circuit Court of Appeals. The Court reversed the decision, ruling that the plaintiff did not have standing; therefore the tax-free status remained unchanged.
Because the reversal pertained to
standing
Standing, also referred to as orthostasis, is a position in which the body is held in an ''erect'' ("orthostatic") position and supported only by the feet. Although seemingly static, the body rocks slightly back and forth from the ankle in the s ...
of the plaintiff and not to the merits of the case, the same case, with minor revision, was reinstituted by the Freedom From Religion Foundation in the same federal district court in 2017.Bruinius, Harry. Why a former minister is challenging churches' tax privileges in US . ''The Christian Science Monitor''. October 20, 2017.
On October 6, 2017, the federal judge struck down the clergy housing allowance, ruling that the law is an unconstitutional violation of the First Amendment's
establishment clause
In United States law, the Establishment Clause of the First Amendment to the United States Constitution, together with that Amendment's Free Exercise Clause, form the constitutional right of freedom of religion. The relevant constitutional text ...
, "Congress shall make no law respecting an establishment of religion", because the law "does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion".Reilly, Peter J. Clergy Housing Tax Break Ruled Unconstitutional - Again . ''
Forbes
''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family. Published eight times a year, it features articles on finance, industry, investing, and marketing topics. ''Forbes'' also r ...
''. October 7, 2017.
The ruling only affects tax-free compensation paid to clergy, which the clergy uses to pay for the clergy's own home. The ruling does not affect housing actually owned by, or leased by, a church.
On December 13, 2017, the federal judge ordered that any injunction should be
stay
Stay may refer to:
Places
* Stay, Kentucky, an unincorporated community in the US
Law
* Stay of execution, a ruling to temporarily suspend the enforcement of a court judgment
* Stay of proceedings, a ruling halting further legal process in a tri ...
Forbes
''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family. Published eight times a year, it features articles on finance, industry, investing, and marketing topics. ''Forbes'' also r ...
''. December 23, 2017.
On March 15, 2019, the
United States Court of Appeals for the Seventh Circuit
The United States Court of Appeals for the Seventh Circuit (in case citations, 7th Cir.) is the U.S. federal court with appellate jurisdiction over the courts in the following districts:
* Central District of Illinois
* Northern District of ...
ruled on the law exempting clergy housing allowances from income tax, saying that its effect was to "neither to endorse nor to inhibit religion".Bauer, Scott (March 15, 2019). Federal appeals court OKs tax-free housing for clergy . ''The Washington Post''. The Court of Appeals affirmed that Congress has the power to provide federal tax exemptions for religious organizations and that Congress has done so since at least 1802. The Court of Appeals stated that while any sort of financial interaction between a religious entity and the government may be considered a degree of entanglement, but the Establishment Clause of the United States Constitution is violated only with excessive entanglement.
After retirement
The tax-exclusion for clergy housing allowance also applies to retired clergy. A retired minister or rabbi who receives compensation for past services, such as withdrawals from an employer-sponsored retirement plan, may designate a portion of the compensation as a clergy housing allowance, and this amount is excluded from taxable income to the extent it is used for expenses directly related to providing a home.
In the case of a widow of a deceased minister or rabbi, the tax-exclusion applies only if the housing allowance is designated with respect to a retirement plan representing compensation earned by the widow for the widow's past services that were in the exercise of ministry.Internal Revenue Service PLR 8404101 (1984).