Holy Deduction! Judge Rejects Housing Tax Break for the Clergy

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MADISON, Wis. -- A federal judge has struck down a law that gives clergy tax-free housing allowances in a decision that could have far-reaching financial ramifications for pastors across the U.S. In her decision Friday, U.S. District Judge Barbara Crabb in Wisconsin wrote that the exemption "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," the Wisconsin State Journal reported.

The Madison-based Freedom From Religion Foundation filed the lawsuit against U.S. Treasury Secretary Jacob Lew and acting IRS commissioner Daniel Werfel. Treasury Department spokeswoman Victoria Esser and IRS spokesman Grant Williams referred questions Saturday to the Department of Justice, which is representing Lew and Werfel. A spokeswoman for the Justice Department did not immediately respond to an email seeking comment Saturday.

Under the law, passed by Congress in 1954, ministers don't pay income taxes on compensation that is designated part of a housing allowance. The Freedom From Religion Foundation says that a clergy member to use the untaxed income to purchase a home, and then, in a practice known as "double dipping," deduct interest paid on the mortgage and property taxes.

"It's a really big deal," said Annie Laurie Gaylor, co-president of the foundation. "A church currently could pay a minister $50,000 but designate $20,000 of it a housing allowance so that only $30,000 would be taxed as salary."

In her ruling, Crabb referenced a 2002 statement by then-U.S. Rep. Jim Ramstad of Minnesota that said the exemption would save clergy members $2.3 billion in taxes from 2002-2007. Crabb said the magnitude of the benefit only underscores what's wrong with the law. Crabb said the defendants did not identify a reason that a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for the many millions of others who must pay taxes on income used for housing expenses.

Given the dollar figures at stake, Gaylor expects clergy members to pressure the White House to appeal the decision to the 7th U.S. Circuit Court of Appeals in Chicago.

More about housing and taxes:
Homeowner Tax-Filing Tips: What New Owners Should Know
Avoid These Home Tax Deduction and Credit Mistakes
Disaster Tax Relief: How to Optimize Your Refund If Your Home Has Been Damaged

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