I think the housing allowance exemption for pastors is a good idea and should be maintained (but obviously I have a dog in this fight). The less the government regulates the inner workings of churches the better. If it is allowed to stand, the ruling that invalidated the housing allowance exemption for pastors will have the effect of the government showing favoritism to Catholic Churches and historic denominations, and that cannot be allowed to stand. Beyond that, there are exemptions for military, for companies who have their employees live on site, etc., and it makes no sense to say that only churches cannot be the recipients of that kind of exemption.
Last week a federal judge ruled that the long standing practice of churches (and synagoges, mosques, dioceses, etc.) giving their pastors a housing allowance was unconstitutional. This story is likely to pick up steam in the media, and my experience with this topic is that most people (including many elders and pastors) have no idea how housing allowances work, or why they are there to begin with. So here are some FAQ’s about housing allowances and the recent ruling striking them down:
What is a housing allowance:
There are two ways pastors are paid housing allowances. Some churches have a parsonage (a house for the pastor owned by the church), and the pastor lives in that. Other churches simply pay the pastor a housing allowance as part of his salary. So, if a pastor earns $80k a year, he could designate that $50k (or whatever) of that as a “housing allowance.” That’s helpful to know, because if you hear of a pastor with a $50k housing allowance, that does notmean that he spends that much a year on his house. He could have, conceivably, designated his entire salary to be toward housing.
How is this taxed?
Pastors do not pay income tax on the amount that they actually spend on their housing. So if a pastor designates $50k as housing allowance, but only spends $20k on his housing, then he does pay income tax on that other $30k (and will probably be fined by the IRS for not withholding enough to begin with—so I’ve heard).
But pastors do pay social security tax on their whole salary (including housing allowance, or the rental value of the parsonage if they live in one). So while the housing allowance is a form of tax relief, this year the self-employment social security tax is 15%, so its not as big of a tax relief as some people make it out to be.
Why do pastors get a housing allowance tax exemption from the IRS?
The history of the housing allowance tax-exemption is long and convoluted. Going back to the NT time, Israel had its own currency and financial system in the temple that remained out of reach of Roman taxation. It the middle ages, the Catholic Church owned huge swaths of land through out Europe—and particularly in England, whose law structure the US more or less adopted—that were exempt from taxation.
When the United States began, most pastors lived in church-owned parsonages, and the US carried over the common European practice of not taxing that as income. Imagine the pastor of a small church in the 1790’s who lived in a parsonage and was paid meagerly by his small congregation—now imagine the government telling him that not only did he have to pay taxes on his salary, but also on the rental value of his parsonage, as if that were income too. That would have been a fairly unreasonable burden on those churches, and completely unheard of in Europe. It also would have shown considerable favoritism to those pastors connected to wealthy denominations back in Europe.
Over time, most pastors left the parsonage behind. The result is that by limiting the tax exemption to parsonages, the government was actually showing favoritism to established religions (and particularly historic denominations who generally owned parsonages). The government corrected this favoritism by allowing every religion/denomination to give their pastors a housing allowance income-tax free.
Short answer: it would be unreasonable to tax parsonages as income, and it would be showing favoritism to limit the housing allowance to only parsonages.
Are pastors the only ones who get this?
Sort of. There are analogous careers when it comes to this tax. For example, soldiers don’t pay tax on the value of their housing while they are active duty. A college professor who is asked to live on campus is not taxed on the rental value of his dorm room. Some employees that are required by their employer to live in certain housing are not taxed on that housing as if it were income. But those analogies all aren’t exactly like pastors.