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Appeals Court Ruling Preserves Clergy Housing Exemption


(This article was updated 11/14/2014.)

A ruling yesterday by the U.S. Court of Appeals for the Seventh Circuit preserved the federal income tax exemption for clergy housing allowances, a significant benefit for ministers who rent or own a home. The decision threw out a lower court decision that found the exemption unconstitutional.

The plaintiffs in the suit — Freedom from Religion Foundation and its two co-presidents — are reportedly reconsidering their legal options, saying they would not drop the case.

The appeals court did not address the constitutionality of Section 107 of the Internal Revenue Code, which allows ministers to exclude, for federal income tax purposes, part or all of their gross income as a housing allowance. Instead, it ruled that the plaintiffs lacked standing to challenge constitutionality.

“The plaintiffs were never denied the parsonage exemption because they never asked for it,” the decision states. “Without a request, there can be no denial.” The decision directs the U.S. District Court in Wisconsin that ruled favorably on the complaint on November 21, 2013, to dismiss it.

Noted church and clergy tax expert Richard R. Hammar, co-author of the Board of Pensions’ annual Tax Guide for Ministers, cautioned that the challenge to the exemption is likely not over: “While this ruling extends the validity of the housing allowance for now, the ultimate outcome may be the loss of the housing allowance exclusion.”

(The court’s decision does not address church-owned manses, which are tax-exempt properties. Ministers who live in church-owned housing are exempt from taxes on the value of that housing.)

The housing allowance exemption is similar to that allowed other employees who are required to live in certain places for their employers’ convenience, including some military and diplomatic personnel. It has been a significant element of the compensation package for many congregations and ministers, for whom compensation is, typically, relatively modest.

For that reason, the Church Alliance filed an amicus brief in the suit. The Alliance is a coalition of the chief executive officers of 38 church benefit programs. Frank C. Spencer, President of the Board of Pensions, sits on its Steering Committee.

A congregation or other employer must approve a minister’s housing allowance amount before the payment of the compensation.  Thus, it should be made before the start of a new tax year. The maximum exclusion is limited to the lesser of the following:

  • fair rental value of the property, furnished and including appurtenances and utility costs
  • the amount of the housing allowance designated in advance by the employer
  • the amount this is actually spent to provide housing

For retired members of the Benefits Plan of the Presbyterian Church (U.S.A.), the housing allowance exclusion affects retirement planning. The Board of Pensions annually designates pension, retirement savings, and disability benefits income from the Benefits Plan as housing allowance for a minister. To the extent that they can justify it, retired teaching elders can exclude their pension, retirement savings, and disability income benefits from federal tax liability.

For additional information, visit the Tax Resource Center in the Board University section of