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Rev. Richard Nugent, Church Staff Finances director of the UUA

Tax-exempt housing allowances for clergy thrown into question

Federal court decision opens controversy over constitutionality of long-used clergy benefit seen as offsetting low salaries.
By Elaine McArdle
1.13.14

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It’s a time-honored practice in many religious denominations: clergy getting free or low-cost housing to offset the typically low salaries they earn. In decades past, clergy often lived in church-owned parsonages without paying rent; today many receive a significant portion of their salary in the form of a tax-free housing allowance to help them pay for rent or a mortgage. This perk is essential for clergy to support themselves and their families, many say, and to enable churches to attract good leaders without breaking the church coffers.

But in November, a federal judge in Wisconsin ruled that the housing allowance for clergy is unconstitutional. The decision affects more than 44,000 ministers, rabbis, priests, imams, and others across the country, including Unitarian Universalists. (The ruling did not address clergy living in parsonages or rectories provided by their congregations.) If the decision survives the appeals process, it will result in the equivalent to a 5- to 10-percent pay cut for clergy receiving the housing allowance. For example, a minister might be paid $60,000 in salary, on which she pays taxes, but an additional $16,000 in a tax-free housing allowance. Taxes on the housing allowance would be about $4,000.

The Wisconsin-based Freedom from Religion Foundation filed the lawsuit claiming that by giving clergy a special tax break, the housing allowance violates the separation of church and state and the equal protection clause of the U.S. Constitution. The decision will almost certainly be appealed to the 7th U.S. Circuit Court of Appeals, which has jurisdiction over Wisconsin, Indiana, and Illinois; from there, it could be appealed to the U.S. Supreme Court. Until this process is exhausted, the housing allowance remains intact. But clergy and others—including UUs—are watching with great interest.

If the decision stands and clergy do lose the housing allowance, congregations would have to decide whether to offer their ministers a commensurate pay raise as an offset. “I would suspect if the benefit were to be lost, there would be at least some increased turnover because of congregations not being able to [make up the loss] and ministers who can’t sustain the pay cut would start looking for a new job,” said the Rev. Richard Nugent, Church Staff Finances director of the UUA.

What makes the case interesting for UUs, more so than many other denominations, is that many members may agree with the judge’s decision. “If you look at the argument on its face, it raises the issue of why we are treating religious people more favorably than non-religious,” says the Rev. Daniel O’Connell of the First UU Church of Houston. “That’s an argument that maybe a significant number of UUs will agree with.”

For now, it’s premature to worry about the decision’s effect on clergy or congregations, Nugent says. If the case were to end up before the U.S. Supreme Court, a decision wouldn’t be issued before 2016, he predicts. For that reason, Nugent said, “I advise ministers and congregations to be aware of the decision but to wait until we get more clarity over the course of the coming year.”

And in the meantime, the U.S. Congress might choose to address the issue, he adds. There are many much larger denominations that have more to lose financially if their clergy lose the housing allowance, he noted, and pressure is likely to be brought on Congress to act. One option would be for Congress to address a strange inconsistency in the way the IRS tax code regards clergy. For purposes of the social security tax, clergy are considered self-employed and pay the entire social security tax, about 12 percent of their net earnings. But for other tax purposes, clergy are considered employees of the church. This dual status is complicated and confusing, especially for congregations that rely on volunteer treasurers who typically have no experience with the tax implications of clergy compensation. Nugent notes that Congress could amend the tax code to eliminate that dual status so that clergy would be regarded as employees of the church for social security purposes, and congregations would pay half of the clergy’s social security tax. That would help offset the loss of the tax-free housing allowance.

It would be a fair trade, says the Rev. Beverly Boke of First Parish UU in Canton, Mass. “I would be happy to pay taxes on all of my salary and get rid of the housing exemption altogether if we could be considered employees of the church for IRS purposes,” she said. “A lot of people say, ‘If they take away my housing allowance, it’ll make a terrible difference in my ability to pay my bills.’ I agree.” For that reason, she continues, “Let us pay taxes on the money we get, and let the churches pay their share [of the social security tax], and everybody will come out a winner.”


Photograph (above): Following a federal court decision finding tax-exempt clergy housing allowances unconstitutional, the Rev. Richard Nugent, Church Staff Finances director of the UUA, advised congregations to wait for more clarity before making any changes to their clergy compensation packages (Nancy Pierce). See sidebar for links to related resources.

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