Clergy Housing Exclusion – An Update

It was a deafening gavel that banged tremors throughout the religious communities in the United States. Last November, a federal judge in Wisconsin sided with an organization called the Freedom From Religion Foundation (FFRF) that filed a lawsuit against the IRS code that excludes clergy from taxes on housing costs received from the church she or he serves. The atheist leaders of FFRF claimed in the lawsuit that the practice violates the freedom from religion clause.

The U.S. Department of Justice has filed an appeal of that ruling. The government is defending the constitutionality of the law arguing that the provision does not cause any personal injury to FFRF at the hands of the government, that the law does not impact the tax liabilities of the FFRF or any other non-religious organization and that the exemption has a larger secular purpose intended by Congress to provide exclusions (and even some deductions) for specific employer-related housing benefits.


The clergy housing exclusion has been in place since 1921. That law exempted clergy from paying taxes on a house provided by the congregation. Thirty-three years later, the law was extended to clergy who owned housing and not just lived in a parsonage.

So What’s Next?

The judge’s ruling does not take effect until all appeals are resolved. If the appeals court upholds the ruling that the exclusion is unconstitutional, it will impact churches and clergy in Wisconsin (the state where the case of tried), Indiana and Illinois. Clergy in the rest of the country would not be affected. However, the IRS could choose to make the policy uniformly effective across the country. As we all know, appeals can take many months and even years. The “experts” think it will take at least a year before the appeal is heard.

We recommend that the principles of good stewardship and integrity govern your church until this issue is resolve. There is a Biblical admonition to be above reproach (1 Timothy 3:1-5). The Evangelical Commission on Financial Accountability recently published “Commission Recommendations – Clergy Housing Exclusion” to encourage behavior that will be best examples of good citizenship and sound moral conduct and good government. It recommends:

  • That churches not attempt to skirt the law or abuse its advantages.
  • That the IRS clarifies many confusing aspects of the tax law. For example, the law states that: (a) clergy are employees and clergy are self-employed, and (b) the housing exclusion applies to income tax but not to social security tax.
  • That the IRS clarify and simplify the tax forms to better reflect the intent of the law, and
  • That Congress defer to the religious organizations as to determination of who is a minister in their organizations.
  • That Congress should not apply a dollar limit to the clergy housing exclusion.

We’ll keep on top of this for you as the case makes its way up the appellate system.

The certified public accounting firm of Cox and Associates CPAs has been serving churches and nonprofit organizations since 1996. Our goal is to achieve excellence in the provision of tax, accounting, auditing, financial education, consultation, and other related businesses services to our clients. Call us with your questions at (281) 399-8153.