Virtual Voices

Terminating pastors' tax breaks

Religion

Most church-goers are likely unaware of the special provisions the Internal Revenue Service has for taxing earnings of clergy. Some are beginning to argue that it's an antiquated statute passed when clergy made very little money. However, in many American churches being a pastor can be quite lucrative and it's aided by very generous tax provisions.

Under current statutes, clergy can opt out of dumping money into the social security system. Good call! However, clergy can also apply their mortgage payment against their income. Here's how the housing provision works according to the IRS:

A minister who is furnished a parsonage may exclude from income the fair rental value of the parsonage, including utilities. However, the amount excluded cannot be more than the reasonable pay for the minister's services.

A minister who receives a housing allowance may exclude the allowance from gross income to the extent it is used to pay expenses in providing a home. Generally, those expenses include rent, mortgage interest, utilities, repairs, and other expenses directly relating to providing a home.

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The minister's employing organization must officially designate the allowance as a housing allowance before paying it to the minister.

The fair rental value of a parsonage or the housing allowance is excludable from income only for income tax purposes.

Let's say I'm clergy in a local church (those poor people), and I'm paid $120,000 annual salary, with a housing allowance for my $200,000 home . Under the current system, the church gives me a "housing allowance" in the amount of my mortgage payment of $1,617 per month, embedded in my salary, so that my taxable income goes from $120,000 per year to $100,596.

Additionally, because the church is giving me a "housing allowance" any expenses associated with maintenance of the home I may itemize and deduct. New windows, deduction. New kitchen, deduction. New furnace, deduction. Building an additional room, deduction. New lawnmower, deduction. Toilet paper, deduction. Dishwasher detergent, deduction. New plasma screen television, deduction? Again, reducing taxable income even more.

While most pastors make fairly modest incomes, others garner salaries ranging from $100,000 to $250,000 per year. I understand that our convoluted tax system is arbitrary, but is there a point at which a pastor decides to opt out of a system designed to aid lower income pastors?

I am by no means implying that it's wrong (sinful) for the higher salaried pastors to participate in the system. But should there be a federal salary cap so that lower income pastors would be the primary beneficiaries of the provision as designed?

I actually don't care how much a church pays a pastor. Most are underpaid anyway. However, the question is should high salaried pastors opt out of the system? Of course, I realize how silly opting out would be given the fact that there is no financial incentive to do so and there is nothing morally wrong with using a system designed for low income clergy.

Last fall Christianity Today conducted research about pastor salaries and discovered the following:

Presbyterian senior pastors earned the most in our survey-their average salary plus housing/parsonage was $78,000, while Baptist senior pastors earned next to last--$67,000. But virtually the opposite was true for youth pastors. Baptist youth pastors earned near the top--$44,000 in salary plus housing, while Presbyterian youth pastors earned near the bottom--$36,000. Why?

The answer comes from two factors: church income and denominational values.

Our research consistently shows that the biggest single factor in determining any pastor's pay is the church's income. And among churches with senior pastors, Presbyterian churches have the highest-reported church income, so some of that gets passed along to their senior pastors.

Given the growing strategy to undermine faith-based institutions through the tax code, perhaps this may be one area where the Church may continue to wean herself off of federal preferred treatment and the strings that come attached.

Anthony Bradley
Anthony Bradley

Anthony is associate professor of theology and ethics at The King's College in New York and serves as a research fellow at the Acton Institute for the Study of Religion and Liberty. He is author of Liberating Black Theology. Follow Anthony on Twitter @drantbradley.

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