A federal judge has struck down as uncontitutional an Internal Revenue Service exemption that gives clergy tax-free housing allowances. The exemption, whose origins go back to 1921, is currently claimed on tax returns by approximately 44,000 ministers, priests, rabbis, imams and others around the country who could experience an estimated 5 to 10 percent cut in take-home pay.
In an action brought by the Freedom From Religion Foundation, U.S. District Court Judge Barbara Crabb (for the Western District of Wisconsin) ruled against the IRS on Nov. 22, 2013, stating the exemption violates the establishment clause because it “provides a benefit to religious persons and no one else, even though doing so is not necessary to alleviate a special burden on religious exercise.”
Although the Justice Department has not commented, it is likely the case will be appealed to the the 7th Circuit, which could reverse the decision. If the 7th Circuit lets the ruling stand, then it could become precedent for courts in Wisconsin, Illinois and Indiana.
If the court decision stands, it could have a significant impact on clergy income. For example, if a clergy earns $70,000 per year, and receives another $20,000 from a tax-free housing allowance, essentially earning $90,000, the ruling would cost that clergy an additional $5,000 in taxes, which would mean a 5.6 percent cut in compensation.
The exemption is worth about $700 million per year, according to the Joint Committee on Taxation Estimate of Federal Tax Expenditure. Judge Crabb ruled that the law provides that the gross income of a “minister of the gospel” does not include:
“the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”
It is unclear what Congress will do in this instance, although the judge has issued a stay until the appeals are exhausted. There are strong lobbying influences representing this issue, so there is a reasonable chance that Congress will take up the matter during the current session.
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