Housing Allowance May Cease to Exist

By Raul Rivera

Once Again, the Housing Allowance is Under Fire.

On October 15^th, 2009, the Freedom From Religion Foundation and 21 of its members filed a lawsuit in California's Eastern District Court in Sacramento, complaining that the Minister's Housing Allowance was unconstitutional because it gave a preferential tax benefit to ministers.  They claim that the Housing Allowance law, as stated in section 107, conveys "a governmental message of endorsement, unconstitutionally favoring religious employees and institutions over all others."  In the suit they also claim that the Housing Allowance, as administered by the IRS, violates the establishment clause of the constitution because it provides tax benefits only to "ministers of the gospel" rather than to the general public.

The Federal Government responded by asking the court to dismiss the case because the plaintiffs lacked legal standing.  However, on October 21st, 2010, the court denied the government's request to dismiss the case and has allowed the suit to proceed.  This once again puts the housing allowance in serious jeopardy because the District Judge, William B. Shubb, gave allusion that the Housing Allowance may go "too far in aiding and subsidizing religion."   

What happens If we lose the case?

If the Plaintiffs win, the Government will ask for a stay while they appeal to the Ninth Circuit Court of Appeals; the same court that heard the Rick Warren Housing Allowance trial in 2002.  The Ninth Circuit Court of Appeals has given serious indication that the Housing Allowance is unconstitutional.  Unless Congress steps in and deprives the court of jurisdiction to hear this case, the only other option we have is an appeal to the Supreme Court.  Though the chances of the Supreme Court hearing an appeal are higher than normal, the Supreme Court usually hears a tiny fraction of appeals sent to it.

How this impacts the church

Whether the minister owns his home, rents the home or the church has a parsonage it provides, it will have a big tax impact.  Let me illustrate three ways it will impact a minister.

1. The minister will have to report the qualifying Housing Allowance as taxable income.

2. If the minister owns his home, he will no longer be able to double dip the interest and taxes he pays for his house.   Let me explain.  Minister Tom owns his house.  In 2010 his property taxes were $4,500.00.  The interest he paid on the mortgage on his house was $15,500.00.  That is a total of $20,000.00.  Today's law allows him to report $20,000.00 for housing allowance and it also allows him to report the same $20,000.00 as an itemized deduction on his tax return (section 265(a)(6)).  So in essence, the $20,000.00 has a $40,000.00 positive impact.The amount of taxes a minister would owe will go up dramatically.  Let me give you a real life example. 

3. Minister Tom has 2 children and makes $55,000.00 per year at his church.  He is exempt from self-employment tax.  The Housing Allowance allows him to exclude $25,000.00 a year.  The church does not withhold any taxes from his paycheck.  When he filed his tax return he received a $7,069.00 refund.  If the housing Allowance is struck down, he will owe $719.00.  Ouch! 

My opinion

This case will likely take all of this year and a good part of next year to play out.  Now is the time to do two things. 

1. You need to make sure that you are properly designating the Housing Allowance now.  Most churches and ministers do not fully understand it and get in tax trouble because they improperly use it.

2. Ministers need to get properly educated on what it means to apply for Self Employment Tax exemption.  This exemption is not being challenged, and in my opinion many ministers qualify for this exemption but they do not know it.

Finally, and above all, pray with the mindset that regardless of the final outcome, our God is still perfectly in charge of our lives and we will overcome.  After all, we are His church and the gates of hell shall not prevail against it.