In the United States, the rental value of a home furnished to, or the rental allowance paid to, a minister of the gospel or rabbi is not included in his or her taxable income if certain conditions are met.
In order to qualify, the clergy must be duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination or synagogue, and the clergy must be given the authority to conduct religious worship according to the prescribed tenets and practices of that religious organization.
The allowance must be for the minister's or rabbi's services performed:
- as sacerdotal functions;
- conducting religious worship;
- in the exercise of the ministry;
- in the exercise of duties as required by the religious order;
- writing religious books or articles;
- the administration, maintenance, direction, management, or promotion of religious organizations and their integral agencies under the authority of a religious body constituting a church or church denomination or synagogue;
- in the exercise of the minister's profession as a Christian Science practitioner or reader;
- teaching and administrative duties at theological seminaries;
- duties of clergy performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia.
In order to qualify, the service must be performed for a church or synagogue or an integral agency of a religious organization. An integral agency of a religious organization is generally one where several of the following apply.
- The integral agency is incorporated by the church or synagogue;
- The integral agency has an incorporated name indicating a church or synagogue relationship;
- The integral agency is continuously controlled, managed, and maintained by a church or synagogue;
- The integral agency has trustees or directors that are approved by, and may be removed by, the church or synagogue;
- The integral agency is required to report its finances and general operations to the church or synagogue;
- The integral agency is supported by the church or synagogue; and
- The integral agency in the event of its dissolution, would turn over its assets to the church or synagogue.
The following services do not qualify:
- Services performed as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions, even if performing sacerdotal functions or conducting religious worship.
- Services performed as an employee of a public hospital.
The home must actually be used as a home by the clergy. The allowance cannot exceed the fair rental value of the home, furnishings, appurtenances, and utilities. Clergy may legitimately include housing costs such as cost of buying or renting a home, real estate taxes, mortgage interest, heat, electricity, basic telephone service, water, sewage, furniture, appliances, dishes, cookware, rugs, pictures, curtains, bedspreads, sheets, towels, insurance on the home and its contents, home improvements, home repairs, home cleaning, snow removal, and lawn mowing. The minister's or rabbi's total compensation, including salary, fringe benefits, and clergy housing allowing, cannot exceed reasonable compensation for the services performed.p. 22
Retired clergy are also eligible to claim the exclusion for the housing allowance because the Internal Revenue Service deems clergy housing allowance as compensation for past services as clergy. Clergy housing allowance is generally subject to self-employment tax except for retired clergy.p. 23 After year-end, the church or religious organization must provide a written notice indicating the total amount of clergy housing allowance for the year; using box 14 of a Form W-2 is an example of such a written notice.
Legal challenges to tax-free status
In November 2013, the clergy housing allowance faced judicial opposition. In Freedom From Religion Foundation, Inc. v. Lew, the Federal District Court of the Western District of Wisconsin issued a decision holding that the allowance violated the Establishment Clause of the First Amendment. However, the Justice Department appealed to the Seventh Circuit Court of Appeals. The Court reversed the decision, ruling that the plaintiff did not have standing; therefore the tax-free status remained unchanged.
Because the reversal pertained to standing of the plaintiff and not to the merits of the case, the same case, with minor revision, was reinstituted by the Freedom From Religion Foundation in the same federal district court in 2017.
On October 6, 2017, the federal judge struck down the clergy housing allowance, ruling that the law is an unconstitutional violation of the First Amendment's establishment clause, "Congress shall make no law respecting an establishment of religion", because the law "does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion".
The ruling only affects tax-free compensation paid to clergy, which the clergy uses to pay for the clergy's own home. The ruling does not affect housing actually owned by, or leased by, a church.
On March 15, 2019, the United States Court of Appeals for the Seventh Circuit ruled on the law exempting clergy housing allowances from income tax, saying that its effect was to "neither to endorse nor to inhibit religion". The Court of Appeals affirmed that Congress has the power to provide federal tax exemptions for religious organizations and that Congress has done so since at least 1802. The Court of Appeals stated that while any sort of financial interaction between a religious entity and the government may be considered a degree of entanglement, but the Establishment Clause of the United States Constitution is violated only with excessive entanglement.
The tax-exclusion for clergy housing allowance also applies to retired clergy. A retired minister or rabbi who receives compensation for past services, such as withdrawals from an employer-sponsored retirement plan, may designate a portion of the compensation as a clergy housing allowance, and this amount is excluded from taxable income to the extent it is used for expenses directly related to providing a home.
In the case of a widow of a deceased minister or rabbi, the tax-exclusion applies only if the housing allowance is designated with respect to a retirement plan representing compensation earned by the widow for the widow's past services that were in the exercise of ministry.
- "Ministers' Compensation & Housing Allowance | Internal Revenue Service". www.irs.gov.
- "Parsonage". Reform Pension Board.
- "Here's why rabbis can keep their housing expenses tax free".
- "U.S. Code § 107 - Rental value of parsonages". Internal Revenue Service. Legal Information Institute. Cornell University Law School. August 16, 1954. Amended on May 20, 2002. Accessed on March 29, 2016.
- "Publication 15-A: Employer's Supplemental Tax Guide". Internal Revenue Service. 2016.
- "Publication 517: Social Security and Other Information for Members of the Clergy and Religious Workers". Internal Revenue Service. 2015.
- Oster, Marcy. "US rabbis' housing expenses to remain tax free". www.timesofisrael.com.
- "Treasury Regulation Section 1.107-1: Rental value of parsonages". Internal Revenue Service. Legal Information Institute. Cornell University Law School. Retrieved October 25, 2017.
- "Treasury Regulation Section 1.1402(c)-5: Ministers and members of religious orders". Internal Revenue Service. Legal Information Institute. Cornell University Law School. Retrieved October 25, 2017.
- Rev. Rul. 62-171, 1962-2 C.B.
- Rev. Rul. 72-606.
- "The Minister’s Housing Allowance". Evangelical Council for Financial Accountability. Retrieved December 24, 2017.
- "Publication 1828: Tax Guide for Churches & Religious Organizations". Internal Revenue Service. 2015.
- "Freedom from Religion Foundation, Inc. v. Lew". United States Court of Appeals for the Seventh Circuit. No. 14–1152. November 13, 2014.
- Bruinius, Harry. "Why a former minister is challenging churches' tax privileges in US". The Christian Science Monitor. October 20, 2017.
- "Gaylor, Barker, Gaylor, and Freedom from Religion Foundation v. Mnuchin and Koskinen". United States Court of Appeals for the Seventh Circuit. April 6, 2016.
- Reilly, Peter J. "Clergy Housing Tax Break Ruled Unconstitutional - Again". Forbes. October 7, 2017.
- "Gaylor, Barker, Gaylor, and Freedom from Religion Foundation v. Mnuchin and Koskinen". United States Court of Appeals for the Seventh Circuit. October 6, 2017.
- Reilly, Peter J. "Tax Free Housing Benefits For Clergy Will Be Safe For The Present". Forbes. December 23, 2017.
- "Gaylor, Barker, Gaylor, and Freedom from Religion Foundation v. Mnuchin and Koskinen". United States Court of Appeals for the Seventh Circuit. December 13, 2017.
- Bauer, Scott (March 15, 2019). "Federal appeals court OKs tax-free housing for clergy". The Washington Post.
- Banks, Adelle M. (March 19, 2019). "Clergy housing allowance is constitutional, appeals court rules". Religion News Service.
- Internal Revenue Service Rev. Rul. 63-156.
- Internal Revenue Service Rev. Rul. 72-249.
- Internal Revenue Service PLR 8404101 (1984).