(for ministers who own or rent their home)
The following resolution was duly adopted by the board of directors of First Church at a regularly scheduled meeting held on December 15, 2018, a quorum being present:
Whereas, ministers who own or rent their home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as a housing allowance, to the extent that the allowance represents compensation for ministerial services, is used to pay housing expenses, and does not exceed the fair rental value of the home (furnished, plus utilities); and
Whereas, Pastor John Smith is compensated by First Church exclusively for services as a minister of the gospel; and
Whereas, First Church does not provide Pastor John Smith with a parsonage; therefore, it is hereby
Resolved, that the total compensation paid to Pastor John Smith for calendar year 2019 shall be $50,000, of which $15,000 is hereby designated as a housing allowance; and it is further
Resolved, that the designation of $15,000 as a housing allowance shall apply to calendar year 2019 and all future years unless otherwise provided.
CAUTION Note that the legality of the housing allowance is being challenged in federal court on the ground that it is an unconstitutional preference for religion. As of press time, oral arguments were scheduled to occur in October 2018, with a ruling from the Seventh Circuit Court of Appeals expected sometime after that. Whatever the result, the case likely will be appealed to the United States Supreme Court, although it is far from certain that the Supreme Court would accept an appeal. If the housing allowance ultimately is declared unconstitutional in a final ruling, then churches and ministers should be prepared to take the following steps:
- Many ministers will experience an immediate increase in income taxes. As a result, they should be prepared to increase their quarterly estimated tax payments to reflect the increase in income taxes in order to avoid an underpayment penalty. Note that there will be no effect on self-employment taxes for which the housing allowance is not tax-exempt.
- Many churches will want to increase ministers' compensation to offset the adverse financial impact. Thousands of ministers have purchased a home and obtained a mortgage loan on the assumption that the housing allowance would continue to be available as it has for more than a half century. The sudden elimination of this tax benefit will immediately thrust many clergy into a dire financial position with a mortgage loan based on a tax benefit that no longer is available. Many church leaders will want to reduce the impact of such a predicament by increasing compensation. Such an increase could be phased out over a period of years to minimize the impact on the church.
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