Quickest way to lose your housing allowance...

...other than resigning, getting defrocked, or sacked from your church: fail to properly set it up.

GuideStone, clergy tax specialists, and state convention financial staffers all give the right counsel to churches and clergy about the housing allowance to assist them in following the rules of the Internal Revenue Service.

GuideStone says, in part:

Churches should designate a housing allowance in writing before the beginning of a calendar year. Although the IRS has recognized oral designations, they are difficult to prove. The “governing board” of the church should designate the allowance

 Churches can designate a housing allowance only prospectively, not retroactively. In other words, the church must designate the housing allowance before the minister earns the income on which the church designates the housing allowance.

 A minister cannot exclude income as a housing allowance unless the church designated it before the minister earned income for ministerial services. In other words, it has to be designated in advance (prospectively), not retroactively.  

Ah, but no church or pastor has to listen to anything GuideStone, clergy tax specialists, or anyone else has to say. The brethren are often irrationally recalcitrant when it comes to listening and taking advice. Some of my colleagues decided long ago that they had the sum total of all knowledge necessary for the pastoral ministry.

Alas, the IRS doesn't recognize clergy omniscience.

Consider the case of pastor Ricky Williams whose housing allowance was flatly disallowed by the IRS, a decision upheld by the tax court. My CPA blogging buddy Peter J. Reilly, who has a keen eye for clergy tax issues, especially when they concern the housing allowance, gives the details:
Pastor Loses Parsonage Exclusion to Poor Planning

Granted in the case of Brother Williams, he did attract the IRS' attention by reporting income of $103,733 along with about $82,076 in expenses, including the $33,126 housing allowance. He was audited and found not to have properly taken the housing allowance. He owes the IRS a ton of money.

Peter Reilly concludes with the some advice:

Church governing bodies need to set housing allowances up front.  I’m sure that having learned this lesson the hard way Reverend Williams and St. John Missionary Baptist Church won’t be making the same mistake again. 

Our Sacred Clergy Tax Break, the Housing Allowance, is revered by all Southern Baptist clergy that I know. If we are to keep it individually we have to follow the rules, or lose it. Thankfully, most of my clergy colleagues understand dollars and cents and nothing gets their attention quicker than the possibility of losing some.

Details and particulars aside, the Housing Allowance is being challenged in our courts. Nothing new here but stay tuned.

Better get it right in your church's giving acknowledgements

Some of the political discussion these days is on eliminating loopholes to the tax code and thereby raising revenues. Want to read about Richard Land waxing indignant? Try this:

Charitable deduction cap would be 'devastating'

"This [idea of capping the amount of charitable giving that could be deducted by rich folks] would be catastrophic in its impact, particularly on those large gifts that many religious organizations, colleges, universities and ministries, as well as churches, depend upon for continuing operations," Land told Baptist Press Thursday (Nov. 29). "Everything we know from past experience tells us if they cap deductions it will seriously erode charitable giving."

I think Dr. Land also said that the barbarians were at the ecclesiastical gates, churches would die by the thousands, preachers would be begging on the street corners but that did not make it into the Baptist Press article.

But all that is speculation and may not come to pass.

Here is hard reality: If you and your church fails to provide the correct documentation for charitable gifts of any size, then your members may have them disallowed by the IRS.

How about that? You give your money. The church gets it and may even thank you for it but it doesn't count with the IRS unless the church gives you the correct giving acknowledgement.

Donors must receive a contemporaneous acknowledgement along with certain explicit wording. Take it from a CPA who, in this link ( Churches and other NFPs need to send better acknowledgments), covers the case of a donor who lacked the proper explicit wording from the church:

The substantiation requirements for charitable contributions are strict.  How strict ?  Stricter than you probably thought.  You must get a contemporaneous written acknowledgment from the donee for donations over $250. [In another forum someone pointed out to me that the rule is $250 or more, not more than $250].  The acknowledgment needs to detail the value of any ..The acknowledgment needs to detail the value of any goods or services you received in exchange for the donation or explicitly state that you received none (Intangible religous benefits do not count. 

Ticky. Ticky. Ticky, you say?

Costly. Costly. Costly...if your church fails to follow the rules on this.

My state convention says the same thing in this article: 'Church Contribution Credit'

I don't know but would guess that many smaller SBC churches are not providing the necessary documentation to their members for their gifts. I would also speculate that not a few of our church members knowingly or unknowingly are counting as gifts that money paid to their church for books, suppers, study courses, camp fees, etc. Sorry, you don't get to deduct for those fun church camps that cost you so much or for the fried chicken fingers on Wednesday night at the church supper.

Heads up here. You have about a month to straighten out your church's mess on this.

[And I'd bet that most pastors have a story about some church or member working some funny business on giving. Feel free to share it in a comment here.]

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.

Housing Allowance: Rick Warren giveth, will Ed Young taketh away?

My last post on the Minister's Housing Allowance, our Sacred Tax Loophole, was probably unwelcome with some of our Southern Baptist colleagues (Nope. You cannot use your housing allowance for a second home) because it shared the bad news that the more affluent clergy among us cannot expect Joe Sixpack to subsidize their second home at the beach or in the mountains.

Let's not get too upset about it because that first home that does qualify can be the Biltmore House and a high-income clergy person can pour as many hundreds of thousands of dollars into that as he can in order to maximize his or her tax break.

Makes sense in the same way that a lot of federal tax policy makes sense.

And, no, Rick Warren didn't originate the housing allowance but he was the catalyst for the federal law passed a decade ago that made it a bit smoother for us.

Ed Young? He has a pretty spiffy house in Houston that is or was on the market for over $2 million and Tom Rich of SBC Jax Watchdog puts a hefty figure on what his housing allowance comes to, a quarter million dollars or so. 

Rick Warren giveth...so how does Ed Young cause it to be taketh away?

Does anyone misunderstand that when clergy claim such exemptions to income by right and tax law that sooner or later folks will pay attention and say that something just isn't right here? Why should the government subsidize a mansion for clergy and not some hourly worker's hovel?

Why indeed?

There is some news here, rumblings on the horizon, because of a new legal challenge to the minister's housing allowance: Challenge to clergy tax break gets green light... My friend and CPA Peter J. Reilly has an interest in such things. The link is to his blog on Forbes. Read and learn.

The suit is being brought by the Freedom From Religion Foundation and Peter Reilly explains it much better than I could.

The FFRF certainly has some material to work with, what with clergy  mansions like the one above, not to mention the clergy who are "qualified" for the housing allowance as ministers of loose basketballs, ministers of maintenance, ministers of fun overseas mission trips and other odd church staff positions.

I'm guessing that the FFRF lawyers know how to hit softballs out of the park.

The average SBC minister in my state has a compensation package (generally salary plus housing allowance, or rental value of a pastorium) of around $71,000 and the housing allowance probably translates into a savings of a thousand dollars annually or so. A thousand dollars is real money to most SBC clergy.

If asked, and I have been asked about this, I cannot say that we clergy deserve this tax break any more or less than any other group with some pull in D.C.

Is it unconstitutional? Guess we may see.

 

Nope. You cannot use your housing allowance for a second home.

My megacompensated SBC clergy brethren might have to reassess their use of the Sacred Clergy Housing Allowance for their homes in Sedona or on Virgin Gorda.

Last year I wrote about the housing allowance in You can have my Housing Allowance when you pry my cold, dead hands off of it...or when lawmakers get fed up with the abuse of the minister’s housing allowance by rich ministries, religious racketeers, and greedy pastors who have a second home and put much of their income in a housing allowance for that home, every dollar of it completely free from any income tax at all.

The piece linked above is on the scandal of trumpeter Phil Driscoll who was using about $200,000 of his clergy housing allowance for a second home. Not his first – a second (in some court filings the phrase the plural “second homes” is used).

I might have called it a scandal by a greedy ex-con ordained musician but it was perfectly legal. Join the ministry and shelter hundreds of thousands of dollars in income from any income tax, perfectly legal, and enjoy sun and fun while doing it.

Ridiculous.

The idea that Joe Sixpack is paying taxes and Phil Driscoll is being given tax breaks for money he uses to pay for vacation homes is both abhorrent and absurd to this retired SBC pastor who continues to receive part of his retirement in the form of a housing allowance.

CPA Peter J. Reilly, far more of an expert on this business than I, has a contribution in Forbes on the latest developments: Court Stomps on Clergy Tax Abuse

Seems that a federal appeals court has ruled that when the tax code refers to the housing allowance as “that rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home” it means A home, not a bunch of homes.

I offer a Baptist hurrah for the singular being interpreted as one and not many.

The problem for us non-trumpet playing hackers and plodders in ministry is that folks are always suing the government to eliminate the housing allowance. Cases like Driscoll’s may eventually arouse sufficient indignation at religious racketeers and greedy preachers to cause lawmakers to severely restrict or eliminate even our modest housing allowances.

I don’t care how many homes Phil Driscoll has. I do care if his use of the housing allowance brings down the ire of sensible people on ordinary, one domicile, clergy like myself and almost all of my colleagues.

I appreciate Peter Reilly calling my attention to the matter. Frank Page, Richard Land and GuideStone - pay attention, please.

We knew it was coming: Housing Allowance challenged, again.

Our sacred tax loophole, the housing allowance, survives once again

You can have my Housing Allowance when you pry my cold, dead hands off of it…

…or when lawmakers get fed up with the abuse of the minister’s housing allowance by rich ministries, religious racketeers, and greedy pastors who have a second home and put much of their income in a housing allowance for that home, every dollar of it completely free from any income tax at all.

Someone make the case that Joe Sixpack has to pay taxes on his income and doesn’t get any exclusion for his singlewide complete with a deck and a mangy dog sleeping under it, while Kenneth and Gloria Copeland live in an 18,280 square-foot lakefront parsonage on 25 acres valued at $6.2 million and exclude hundreds of thousands of dollars from income taxes under the housing allowance, or while Phil Driscoll enjoys not owing federal income taxes on $408,638 provided to him by his ministry to buy a second home on a lake near Cleveland, Tenn.

No less than the Wall Street Journal writes on this issue,
Tax Break for Clergy Questioned.

I appreciate the writing of CPA Peter J. Reilly in Forbes on the matter,
Wall Street Journal Catches Up With Me on Clergy Tax Abuse
. Reilly's December article on the matter examined the Driscoll case in detail.

The SBC Executive Committee’s attorney, Augie Boto, is quoted in the WSJ article to say that "the housing allowance is critically important for making ends meet—it is not a luxury." True enough for almost all of us hackers and plodders in the SBC’s 46,000 churches who might be able to put $20k or so of our income in the housing allowance and save a few thousand annually on income taxes. It's not us that cause the disgust with this particular tax law.

Augie Boto, Frank Page, the SBC Executive Committee and our favorite SBC lobbyist, Richard Land, ought to be proactive on this matter and find a way to support legislation that will preserve the Housing Allowance in a reasonable fashion while excluding the ridiculous abuses, legal though they may be, by people like Phil Driscoll and Kenneth Copeland.

Else we all will lose. Besides that, it just ain't right.