Monday, September 3, 2012

How do you explain your government tax break, the clergy Housing Allowance?

I have seven articles on the clergy housing allowance, our Sacred Tax Loophole. Seven is a good number, the number of completion, unfortunately there will be more to follow, since there is an active case challenging its constitutionality.

Such is the tension between church and state in America that a 21st Century Jesus might say "the lawsuits over the first amendment you have with you always."

The challenge to the housing allowance is in my view a constitutional long shot and the clergy who live in pastoriums need not worry at all here, since there is parity between their income tax treatment and that of secularly employed workers who live in employer provided housing.

But I would ask my clergy colleagues who own or rent their own home and who receive a housing allowance check each month exactly how  they explain this business to their congregation, deacons, church finance committee, and/or church treasurer?

I envision a conversation like this:

Treasurer: "Pastor, why do I need to write you a separate housing allowance check each month and have this paperwork on file about it?" 

Pastor: "Because tax law gives me an exemption from income I use for my housing."

Treasurer: "Is this something that I can do,  get a separate check for the amount I spend on my housing and have that free from income taxes?

Pastor: "Well, no. You cannot because you are not ordained and because you have a secular job. The tax break is only for ministers."

Treasurer: "So why does the government give you a tax break that they do not give me?"

Pastor: "I guess because there are a lot of low paid clergy and it was thought to be beneficial to the citizenry as a whole that we get some break on income taxes."

Treasurer: "Well, I don't mean to be argumentative but you are not one of those low paid ministers. You are paid about the average around here, $60,000 or so if you include these housing allowance checks. And your wife works and has an income. Come to think of it every other pastor I know around here lives in a two income family and with any kind of second income those families have an income and benefits over six figures. That is hardly poor. This doesn't seem to make much sense to me."

Pastor: "I see your point but would you just write the check, hand it over, and then call our congressman if you don't like the law. I didn't write it."

Treasurer: Scribble, scribble, scribble..."Here you are."

When asked about the challenge to the constitutionality of the housing allowance, our Convention Attorney advanced an economic argument, that the tax break was important to many SBC clergy who are not highly paid.

This is both an accurate statement and is probably the best argument for keeping the tax policy. There are 45,000 or so SBC churches in the SBC and many tens of thousands of pastors, church staff members, and retired pastors. No doubt there are many for whom a thousand dollars or so in tax savings is not just welcome but critical.

But clergy aren't the penurious demographic we once were. Churches by the thousands have sold their pastoriums and their minister no longer has to live in church owned property. Pay has increased and we are about three generations into two income families being the norm.

Life in the Christian ministry isn't perfect but it has improved financially.

Facts on clergy pay for Southern Baptists can be a slippery. I'd speculate that few in your church know how much you are paid, in total, even though they see the financial reports every quarter. One of the ways they are unintentionally misled is by the division of cash payments into a salary and a housing allowance. Members look at the salary check and think, "I don't see how our minister can get by on that," but overlook the housing allowance check which often is the larger sum.

The LifeWay Compensation Study gives state-by-state figures and the average for all of the states where the vast majority of SBC churches are located is around $57,000. That is a 2010 figure and includes salary plus housing allowance but not retirement benefits and insurance.

Get the sum in your head: $57,000, average senior pastor pay. 

Now, take an average school teacher's salary. Here in Georgia it is about $53,000, slightly less than the average senior pastor. The teacher almost certainly has a mortgage and utility expenses but the law does not allow he or she to exclude what might amount to about one-third or so of their salary from gross income as does the senior pastor.

He gets a fat tax break and cuts his gross income for income tax purposes by $20,000 or so. She gets...well...nothing.

Why give a tax break for the minister and not the teacher? Some clergy wag might say because the teacher gets all summer off, to which some lay wag would reply, "But ministers only work one day a week."

We all have our jokes and arguments but the bottom line is that there is not really any persuasive explanation for the clergy housing allowance. It's just a longstanding government tax policy.

Most of us hate the idea of the government arbitrarily picking winners and losers, like with the housing allowance but I suppose we can certainly get used to the concept so long as we are among the winners.

Add to the discussion the reality that some very affluent ministers who earn into seven figures and live in multimillion dollar homes are able to exclude as much as they can justify. It is not unreasonable to presume that there are many ministers who exclude several hundred thousand dollars of income, annually, through the housing allowance. Make some sense out of that.

So, how do you explain this to someone in your church who takes an interest?

I would be curious to know.
________________

Resources:
  • General information and a strong argument against the constitutionality of the housing allowance: Here and here.
  • Argument that although it is not unconstitutional, it is bad tax policy: Here.
  • Abuses of the housing allowance: Here, here, and here.
  • All glazed over about the whole thing and don't want to think about it: Here.
Many of the links are to a Forbes blogger and CPA, Peter Reilly, who is among the few who seem to have an interest in the matter. His most succinct and interesting treatment of the matter is, Work, Fight or Pray - Vestige of the Medieval in our Tax Code.











26 comments:

Mark Mitchell said...

After reading this post I am just as lost as to what the issue someone would have with the tax break is as I was when I read the title. Clergy do not pay taxes the same as everyone else, because of that the comparison between pastor and teacher is apples and refrigerators.

William Thornton said...

The difference between clergy and teachers as to how each pays taxes (the higher self employed taxes for Social Security vs employee taxes where half is in theory paid by one's employer) is the economic argument to justify the HA. But one cannot ignore the reality here that clergy have their dual status because they insist on it not because it is imposed, sort of like the man who murdered his parents and then asked for mercy because he was an orphan.

Incidentally, churches may elect to treat their ministerial staff as employers under SS if they wish.

Bringing into this discussion one's total federal taxes, SS plus income tax, mixes two things that have separate treatments in the law. As an aside, income tax law already has a small provision, available to all taxpayers not just clergy, that reduces gross income for those who pay self-employment taxes.

I make no argument against the position that the housing allowance is a welcome tax break for many but a pastor could not legitimately explain to his treasurer that he gets the HA break to offset his SS taxes.

Jack Carver said...

I would like to see churches as well as pastors get honest about clergy compensation. When looking for a staff member we had a big discussion on the amount to pay a youth minister. The total package (salary, housing, insurance, retirement, reimbursables, etc...) came to an amount slightly higher than the published salary of a beginning school teacher. Finally,a member of the group who worked in the finance dept. of the local school board explained that a new hire acutally cost the board twice the published amount due to the benefit package provided. I have always been as honest as possible whenever questioned about my compensation. I just wish church leaders would be just as honest when evaluating that compensation against what is provided in the secular arena.

Anonymous said...

When I am asked about clergy housing allownace, I share that the government has long given clergy the same housing allowance tax break that military get. One day it will (and should be) eliminated. However, for now, I would be a poor steward if I did not take advantage of every tax deduction available, just as you, or any Christian would be.
Also, a separate check does not to be written as long as the church (Personnel, deacons, etc) has designated that a set amount of the total compensation shall be designated housing allowance. There is a standard form for this, that only needs to be done once as long as the amount is not changed.

Peter Reilly CPA said...

There is some similarity between the housing allowance for the military and clergy in that it probably has its roots in their historically being provided housing as part of the job and the cash payment be in lieu.

The military housing allowance is different however in that it is not at all troubling for the government to be involved in determining who is and is not entitled to it.

Also it does not in anyway invite abuse. It is set by the government varying by rank and region (more by region than rank) and is fairly modest. If I was kind for a day, I would probably set a dollar limit on the clergy housing allowance exclusion equivalent to the highest military housing allowance (which is round four grand a month, if I remember correctly).

Peter Reilly CPA said...

Ooops. Meant to type "king for a day".

There is a link to the military housing allowance table in my Work, Fight or Pray post.

Anonymous said...

I certainly understand the issue that some have with the compensation and tax break for pastors. I would point just a couple of things out. One is that it has been viewed that clergy were a group of people that would benefit a community by living in it. The government made it easier for them to live in a community because of the benefits of having a man of God live in a community.

The second is you can throw out your $57,000 dollar figure. That means nothing to this conversation and only confuses things. I for one raise that average considerably with my income. Most pastors in the SBC do not make any where near that amount. Most are bi-vocational and have very little wiggle room financially. Think how mega churches impact that average. I can remember pastoring a church running 50 and getting paid 175 a week. The tax break was a big deal to me then. I am sure there are many who still feel the same way.

Peter Reilly CPA said...

As far a the benefit to the community by living in it, that would support the exclusion for church provided housing but not the cash housing allowance. If the congregation is requiring the minsiter to live in church owned housing that rental value would most likely be excluded by Section 119 convenience of the employer which has broad application to all sorts of people.

A very low income pastor with a family would actually be harmed by taking a housing allowance because of losing out on the earned income credit. This was something that was noticed and fixed for low ranking military who were coming out behind from the combat pay exclusion.

Anonymous said...

If the case ever gets the attention it deserves, it may be that a lot of nice poor folk are going to be quite indignant about the argument that nice, poor preachers are more entitled to the government handout (income tax free housing) per IRC 107 than they are.

The constitutional issue is determinable without regard to such criteria.

That the law (IRC 107) allows a benefit ONLY to "ministers" is, as some have proposed, sufficient to determine it is UNconstitutional.

That's why I am thinking that Judge Crabb could decide the case via a summary judgment. . . .and then it's on to the Appeals Court regardless of where she may come down on the issue.

Romney and Obama really should, in my opinion, be compelled to weigh in with their concurring or opposing opinions.

For now, Obama's Justice Department is defending the law.

Will that continue?

WWRD?

(What would Romney do?)


William Thornton said...

I am inclined to stick with the pay levels of full time senior pastors as being relevant to the conversation.

The tax break is a big deal economically to some ministers and I don't see either party being agressive in rolling back this longstanding item in our tax policy.

I do see that the general credibility of clergy as a group diminished by a small proportion of very affluent ministers whose mansions are effectively subsidized by the general populace.

Anonymous said...

Constitutional scholars were coming out of the woodwork over ObamaCare.

Here's another opportunity.

If neither party wants to change IRC 107 and wants to maintain an income tax exclusion exclusively for the "clergy class", they can certainly say so; and whether they approve of million dollar allowances and allowances for "basketball ministers".

However, whether they say so explicitly or through silence/evasion, the implication is that they think IRC 107 is constitutional.

Others don't think so.

They may evade overtly dealing with the issue, but I don't think they can evade dealing with the issue.

I would prefer they be compelled to overtly speak to the issue.

Anonymous said...

I guess I am a little confused what you are trying to accomplish here? I have met more pastors struggling financially than I have met rich ones. I also find it interesting that this has become so important to you after you retired.
Thanks for listening.

Anonymous said...

Most pastors pay the full 15% Self Employed Social Security (paying their part and the "employer" part). The housing allowance helps with this a tiny bit. So on the social security side the pastor still pays 15% on that housing allowance.

Anonymous said...

I think the effort to make an argument based on the Social Security tax is a semantic and accounting matter.

Preachers sometimes whine that they have to pay both "halves" of the Social Security tax.

Well, everyone else can just as easily claim they pay both "halves" as well because if the employer wasn't, as an accounting matter, making like he was paying half, he could pay the employee more.

So, in effect, the employee pays both "halves" just like the minister.

I think Rush Limbaugh regularly makes that argument when he talks about it.

Employers don't pay Social Security tax, according to Rush, employees pay Social Security tax; both halves.

Sincerely,
Robert Baty

William Thornton said...

What am I trying to accomplish?
1. To inform readers that there is an active constitutional challenge to the HA.
2. To show that there are uses of the HA that are unjustifiable and odious to the general public, were they to find out.
3. To ask my, presumably, mostly SBC clergy readers, exactly how they explain our tax break to laypeople in their churches.
4. To demonstrate that we clergy sometimes exhibit inconsistency in our attitude towards government subsidies provided by the tax code.

My anonymous critic may be unaware that one's retirement annuity payment may be arranged with GuideStone to be designated as a Housing Allowance. And, I was writing about this long before I semi-retired.

When I was pastor, I would take time to explain compensation matters, including the HA, to deacons, personnel, and finance committees. There's not much one can say about the HA other than it is the one tax break that clergy receive.

I never used my HA on my imaginary second home, not even on the pop-up camper I used to own.

Thanks for the comments.

Peter Reilly CPA said...

Interestingly the treatment of whether a retirement payment can be excluded as housing allowance is one of those things that the IRS has refused to rule on.

William Thornton said...

Uh oh.

I would guess that there would be some legislative pressure to nail this down if the IRS got agressive. Maybe we could get Rick Warren to retire and get on it.

Anonymous said...

The average income of SBC pastors is 57 thousand dollars. However if you think the average pastor makes this you are fooling yourself. In my association you can take most any three pastors and add their salaries together and they do not equal 60 thousand. That figure is so skewed.

As to an employee paying both halves of social security, I am about to mail a check to the IRS for my third quarter estimate. I guarantee you that no one who is not self employed has any idea how large that check will be. We also have non ministerial staff that when we figure their salaries we never discuss the social security portion. We pay them a fair salary and then pay half of their social security. Not once in over 25 years of ministry have we ever had a conversation, "Hey lets cut their salary to cover the social security."

I am grateful for my housing allowance.If it goes away I will be fine. God has always provided for me through His wonderful church. I am indebted to the churches I have pastored. I will tell you this however, there is a real spiritual problem with people who are miserable because others may have a blessing they do not have.

William Thornton said...

Anonymous 9:30, so many people have trashed my point that used the $57k average salary that I will have do clarify and expand it.

The average full time senior pastor makes around $57k according to the data. You cannot say that the average pastor does NOT make this unless you have data, so I'm all eyes and ears if you have data.

I only use the facts that I have, not the ones I wish were present, or the ones that fit my anecdotes or experience.

But thanks for the comment. I understand your point anyway, especially the one about getting ready to write a fat check to the US Treasury for the Sep quarterly tax payment.

Brian Prucey said...

One of my ministries in our local association is to go into churches and educate treasurers and stewardship committees on various aspects of church financial management including the clergy housing allowance. I give a little history lesson.

I tell them that this provision of the tax code is similar to the tax-free housing and sustenance allowances military members receive. A hundred years ago when the Sixtieth Amendment to the Constitution was ratified creating the income tax system, Congress had to decide what types of employment benefits constituted “income” for taxation purposes. Most ministers at that time lived in church-owned parsonages. Most of these manses were very modest and Congress determined not to financially burden otherwise financially strapped clergy any further. The mega church and highly-compensated clergy of today was unknown 100 years ago.

As time went by, more and more ministers opted to purchase their own homes or to rent homes. Those ministers prevailed upon Congress to create a provision within the tax code that would extend to them similar benefits as those received by their parsonage-dwelling brethren. Thus, the clergy housing allowance exemption was born.

When Social Security and Medicare programs were created, Congress again had to decide what sources of income would be taxed under FICA. Congress chose not to exempt the fair rental value of church-owned parsonages provided as compensation to clergy. Congress also chose not to exempt the portion of clergy salary designated as a housing allowance. Further, to keep from burdening churches directly, Congress chose to make clergy pay both the employee and employer share of FICA through the self employment tax system (SECA), thus creating the dreaded dual-tax status.

The rise of the mega church and the highly compensated clergy has thrown a wrench in the system that was unforeseen a hundred years ago. The best response is not to trash the whole benefit, but to create reasonable limits on it. The housing allowance provision is not unconstitutional in and of itself. Congress has the power to determine what constitutes income for taxation purposes. Congress has created a convoluted tax system exempting certain income types while fully or partially taxing other income types.

The recent Supreme Court decision regarding the Affordable Care Act (aka Obamacare) further supports the power of Congress to use the tax code to reward or punish certain economic activities (or inactivities) using the tax code.

Some people complain that the clergy housing allowance is unfair to other non-clergy workers. However, that could be said about many provisions within the tax code. Does an increased personal exemption for blindness unfairly discriminate against sighted people? Does the Child Tax Credit unfairly discriminate against taxpayers without young children living at home? Does the Retirement Savers Credit unfairly discriminate against those who do not make contributions to qualified retirement plans? Does the American Opportunity Credit unfairly discriminate against those who do not seek qualifying higher education? Does the military tax exempt housing allowance discriminate against those who are not in the military?

The clergy housing allowance doesn’t create an establishment of religion since all religions benefit, including non-traditional religions such a Wicca. The phraseology “minister of the gospel” in Section 107 may be antiquated, but that does not mean that Congress lacks the power to exempt certain employment benefits from taxation while fully taxing others.

Brian Prucey said...

Sorry, meant to say "Sixteenth" Amendment. Fouled by autocorrect again!

Anonymous said...

Brian,

I am looking forward to the federal District, Appeals and Supreme Courts resolving the matter of our disagreement over the legal/constitutional analysis of the issue.

It just can't come soon enough to suit me.

Sincerely,
Robert Baty

Anonymous said...

William if four men make 20,000 and one makes 200,000 their average pay is 56,000. It is proposterus to say the typical pastor in that group makes 56,000.

William Thornton said...

There are about 3000 respondents in the GuideStone compensation survey for the states I used. An average with that large a data set is not preposterous. I have never used the term "typical" as you did. I use what the survey used, "average."

...of course there was that statistician who famously drowned in a river that averaged six inches in depth.

Peter Reilly CPA said...

The term "average" seems to be a bit of a problem. It is often used generically. Is the number you are citing the mean (add them up and divide by the number that are there) or the median. (Half are more than that/ half are less).

The median does tend to be a better measurement of central tendency because it is not skewed by exteme results. In a normal distribution the mean and the median are the same, but income is usually not normally distributed.

William Thornton said...

The SBC compensation study does not give the median. They use the mean which is labeled the "average."

Lesson on some Southern Baptists: We sometimes feel entitled to our own facts, data or no data.

I am unaware of a better source for SBC compensation than the one cited.

We should all be Episcopalians for compensation purposes, I suppose.