Thursday, October 12, 2006

Religion-Based Tax Breaks: Housing

A legal battle between the IRS and the author of, ''The Purpose Driven Life,'' by Pastor Warren recently ended with positive results for leaders of houses of worship.

The housing deduction is one of several tax breaks that leave extra money in the pockets of clergy members and their religious employers. Ministers of every faith are also exempt from income tax withholding and can opt out of Social Security. And every state but one exempts religious employers from paying state unemployment taxes -- reducing the employers' payroll expenses but also leaving their workers without unemployment benefits if they are laid off.

For Tens of thousands of ministers -- and their financial advisers -- Pastor Warren will also be remembered as their champion in a fight over the most valuable tax break available to ordained clergy members of all faiths: an exemption from federal taxes for most of the money they spend on housing, which typically represents roughly a third of their compensation. Pastor Warren argued that the tax break is essential to poorly paid clergy members who serve society.

The Housing Exemption
The one small passage in the vast federal tax code that originally conferred the housing-expense exemption on clergy members did not cap the deduction. But in 1971, the Internal Revenue Service limited it to the ''fair market rental value'' of the furnished home, utilities included.
During a routine audit in 1996, according to court documents, the I.R.S. decided that Pastor Warren's housing deduction exceeded the rental value of his new home on Via Del Sol in the rugged Trabuco Canyon, southeast of Los Angeles.

Pastor Warren, who gives 90 percent of his considerable income to charities, later explained in an open letter to other ministers that he decided to sue because the housing allowance was the only way small churches could pay their pastors enough to live -- and he knew that those ministers could not fight the I.R.S. as he could.

It took four years -- and far more of Pastor Warren's money than the $55,300 disputed in the audit -- but on May 16, 2000, the United States Tax Court struck down the I.R.S.'s cap and ruled that clergy members could deduct ''the amount used to provide a home,'' however much that might be.