Tax-free Clergy Housing Allowance Ruled Constitutional 

Appellate Decision Reverses a Lower Court Ruling 

A federal appeals court has ruled that a tax-free housing allowance for ministers is constitutional, overturning a lower court’s ruling. While the ruling directly affects only ministries in the court’s jurisdiction—Illinois, Indiana, and Wisconsin—it has widespread implications. The IRS allows all ministers who receive a housing allowance as part of their salary to deduct its value from their income taxes. When a Wisconsin district court judge declared in 2017 that this tax exemption violated the First Amendment, it raised questions about the future of this popular tax benefit for ministers.

Why Was the Tax Exemption Challenged?

A nonprofit group called the Freedom From Religion Foundation sued the IRS, the U.S. Treasury Department, and the U.S. government several years ago, claiming that the minister housing allowance tax exemption is unconstitutional because it conditions a tax benefit on religious affiliation. The organization’s goal, according to its website, is to promote the separation of church and state and to educate the public on matters relating to atheism, agnosticism, and non-theism.

In October 2017, U.S. District Court Judge Barbara Crabb of Wisconsin ruled in the group’s favor, declaring the housing allowance tax exemption unconstitutional. Her opinion stated that the tax exemption “violates the establishment clause because it does not have a secular purpose or effect and because a reasonable observer would view the statute as an endorsement of religion.” The federal government and a group of faith leaders appealed Judge Crabb’s ruling.

Judges Uphold Pastoral Exemption

A three-judge panel of the 7th Circuit U.S. Court of Appeals ruled unanimously on March 15, 2019, that the federal statute authorizing the tax exemption for ministers does not violate the First Amendment’s establishment clause.

The housing allowance is designed to help ministers pay for expenses related to their apartments, houses, or church parsonages. This money is exempt from federal income taxes, as long as the recipient fits the tax code’s definition of a minister of the gospel and the ministry correctly designates the housing allowance. 

The Freedom From Religion organization chose not to appeal the ruling. It could have appealed to either the full 7th Circuit U.S. Court of Appeals or to the U.S. Supreme Court. For now, it appears that ministries may continue to designate housing allowances for all ministers who qualify for the tax exemption.