By G. Jeffrey MacDonald

As priests file 2017 taxes ahead of this year’s April 17 deadline, experts in tax and constitutional law have a message for them and their congregations: enjoy these good times while they last, because a clergy tax hike could be coming.

The clergy housing allowance, a cherished perk that lets the ordained avoid federal income tax on some or all of their compensation, faces the stiffest challenge in its 64-year history. With a 2017 ruling from the Western District of Wisconsin, federal judge Barbara Crabb found the allowance unconstitutional and rendered a decision that could have national implications.

“I don’t want [Judge Crabb’s ruling] to be a good opinion, but I’ve read it, and it’s a pretty good, well-written, well-reasoned opinion,” said attorney Nathanael Berneking, director of finance and administrative ministries for the Missouri Annual Conference of the United Methodist Church. “It’s going to be pretty hard to argue with her on that.”

Experts say it’s not time to panic. Defendants have appealed the ruling in Gaylor v. Mnuchin to the Seventh Circuit Court of Appeals. If they lose there, they could ask the U.S. Supreme Court to hear the case, which could stretch the process into 2019 or 2020.

Even if the Seventh Circuit were to uphold the ruling, it would be binding (at least initially) only in the appeals court’s jurisdiction of Wisconsin, Illinois, and Indiana. But the Internal Revenue Service could at any point opt to take the standard national, said Myron Steeves, director of the Church Law Center of California and an attorney with a focus on nonprofit organizations. Such an outcome would bump up taxes owed by more than 600,000 clergy who minister in settings across the United States.

“It’s a significant part of an ordained minister’s compensation package,” said Simeon May, chief executive officer of the Church Network, an association of church administrators that is based in Richardson, Texas. “It can be a huge tax savings for that ordained minister. If it goes away, it’s going to mean a significant increase in taxes for that minister.”

How much more a priest would have to pay depends on several factors, including taxable income levels and cost of housing (rent or mortgage plus utilities, furnishings, and more). A cleric’s tax bill could jump by several thousand dollars, Berneking said.

He cites an example of a cleric who earns $39,000 in taxable income before considering housing and who claims a $20,000 housing allowance. That cleric would suddenly pay as much as $4,400 more in federal income taxes (22% of the housing income, based on the tax bracket).

Observers are reluctant to speculate on what courts will do, but they urge congregations to take the challenge seriously. Though a prior challenge from five years ago failed, it was defeated on procedural grounds. A technicality meant plaintiffs lacked standing to bring the case.

The current challenge is different in that plaintiffs now have standing to sue, at least according to the lower court. The Wisconsin-based Freedom from Religion Foundation is claiming disenfranchisement because its employees tried to claim housing allowances and were denied by the IRS. Judge Crabb’s opinion supports the claim on its merits.

Despite uncertainty, denominations urge pastors and parishioners to prepare for a worst-case scenario. On March 12, the United Church of Christ released a memo advising all local churches and clergy on specific steps to take now. The Church Pension Group, which provides financial benefits to Episcopal Church employees, declined to comment on the outlook for housing allowances but furnished advisory documents from the Church Alliance, an association of church pension programs.

Listening to guidance from denominations, advocates and attorneys, congregations and clergy are hearing common themes. Here are some of the most common recommendations for next steps.

For Churches

Keep paying housing allowances while the challenge is litigated. The Church Alliance notes that Judge Crabb put a stay on her order until appeals are complete. That means housing allowances remain legal in all 50 states, at least for now.

Do not convert your parsonage to a housing allowance. In a trend of recent decades, congregations sold parsonages and began paying housing allowances instead. Experts caution against this strategy now. Unlike housing allowances, parsonages are not affected by this case. Congregations that own parsonages should, if possible, hold on to them while the litigation plays out, Berneking said. One reason: if housing allowances end, parsonages could become more valuable assets for attracting clergy.

Save up to make clergy whole. Congregations can help their clergy absorb a tax increase by budgeting to pay them more in years ahead. A congregation would need to boost salary by $5,368 just to keep after-tax income and spending power at the current level for a cleric earning $39,000. No matter the amount, churches would do well to start a nest egg. “Consider adding a reserve to your budget for some or all of that amount so that a jump in compensation in a future year is not so large or unexpected,” wrote Heather Kimmel, UCC general counsel, in a March 12 memo to local churches and clergy. “If the housing allowance does not end, then you can use the reserve for other purposes.”

Expect ripple effects. A tax increase for clergy could affect career decisions and, in turn, affect congregations. For instance, pastors who do not receive raises sufficient to cover their new tax burden might take on second jobs to maintain their spending power, May said.

Remember retired clergy, who could be hit especially hard. Retired clergy who rely on church pensions and fixed incomes could have difficulty absorbing this tax increase. Checks they now receive from church entities are permitted to count toward qualifying housing expenses. But if allowances go away, they will have few options even if they did careful retirement planning, May said. “An active minister might be able to get the church to give them a raise to offset the difference [in taxes], but a retired minister doesn’t have that,” May said.

For Clergy

Alert vestries and finance committees about what might be coming. Clergy should not assume congregations are tracking this issue and its potential ramifications as closely as they are. Kimmel is advising UCC clergy to encourage their employers to plan, in consultation with accountants or legal consultants, for a future without housing allowances.

Do not make housing allowances a factor in long-term financial planning. “Any pastor who is considering buying a house right now, anywhere in the country, should bear in mind that they need to calculate their budget on the possibility that they may not be able to rely on the housing allowance,” Steeves said. Otherwise, clergy could find themselves overextended and unable to cover monthly payments.

Beyond these steps, experts say, congregations and clergy will need to see what comes down from the courts. A decision from the Seventh Circuit Court of Appeals is expected later this year. If it is appealed again, the Supreme Court might decline to hear the case, Steeves said. A Supreme Court hearing becomes more likely, he noted, if another federal jurisdiction were to hear a similar case and render a different ruling. Years could elapse before the matter becomes settled law.

“It’s a wait-and-see situation,” said Kevin DePrey, parish administrator of Trinity Church in Indianapolis, where the plan is to take action only if necessary after all appeals are exhausted. “You could waste a lot of time in prep because there’s not a notion that this could go one way or the other.”

Meanwhile, hope endures among clergy even if court judgements do not break their way. In the event of a defeat, advocates are vowing to propose legislation that would expand housing allowances as a benefit for more than just clergy, perhaps including many or all employees of nonprofit agencies. Whether that would be politically palatable in Washington remains to be seen.

“If Congress were to broaden [the allowance provision] to even include, not all sectors, but other sectors of the nonprofit world, it would solve the constitutional problem,” Berneking said. “The political question is going to be much more difficult. … The problem with it is going to be cost to the federal government because the broader the exclusion is, the more cost. And I just don’t know if Congress is willing to spend in the nonprofit world.”

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