Many pastors across the country are paying attention to a federal court case in Wisconsin that could have a big impact on their taxes.
Last month, U.S. District Judge Barbara Crabb ruled that the federal tax law which allows a “minister of the gospel” to receive part of his or her income designated for housing expenses tax-free is unconstitutional.
The law has been around for almost as long as the federal income tax. In 1921, Congress passed a provision — part of the Revenue Act of 1921 — that said ministers do not have to include the housing provided by their church as taxable income.
The history here has to do with the way churches used to pay their pastors. Often times the church did not have the ability to pay their parson much of a salary. Instead, the congregation built a small house next door to the church where the preacher lived called a parsonage. This also allowed the parson to be available to church members pretty much anytime.
As a preacher’s kid, I grew up living in parsonages — or as my playground friends used to put it, I “lived at the church.” One parsonage we lived in while at a small rural church was literally built by members who volunteered the manpower on weekends.
But over the years, it became less common for a church to actually provide a parsonage for the pastor. The church is not really in the housing business and most pastors want to actually own a home of their own. So the law was amended back in 1954 to allow churches to designate a portion of their pastor’s salary as a housing allowance that they paid him instead of providing a parsonage. This amount is treated the same as the free housing for income taxes purposes, which provides a sizable tax benefit.
It is this provision that a group called the Freedom From Religion Foundation found objectionable and sued to overturn, saying it violated the principle of separation of church and state. You may have heard of this group from some of its other lawsuits, such as suing state capitols that display nativity scenes at Christmas time.
“May we say hallelujah! This decision agrees with us that Congress may not reward ministers for fighting a ‘godless and anti-religious’ movement by letting them pay less income tax. The rest of us should not pay more because clergy pay less,” said Freedom From Religion Foundation President Annie Laurie Gaylor following the court decision.
The order striking down the tax benefit was stayed by the court pending appeal. Otherwise, it would have affected pastors only in some parts of the country but the appeals could work their way up eventually to the U.S. Supreme Court.
According to a study by the Congressional Research Service, the provision will save pastors about $700 million in taxes this year. Eliminating this exclusion could lower the take-home pay of most of them by about 10 percent.
I think most would agree that our tax code could use a massive face-lift to make it fairer for everyone. An overhaul could close myriad loopholes to reduce everyone’s taxes. However, I don’t think singling out a provision pastors have relied on for almost a century is the place to start.