August 13, 2008

Designated Contributions

Question:

If I make a contribution to my church and make a note on the envelope that it is for Vacation Bible School, I was told it is not a tax deductible contribution. Is this true and why?

Answer:

Generally, contributions to support the general ministries and programs of the church are tax deductible. If the church VBS program requires a fee for materials or other costs, then payment of such a fee for oneself or an identified individual beneficiary will not be deductible. These contributions fall under the quid pro quo rules of the Internal Revenue Code (i.e., the donor received goods or services in exchange for the contribution). Unless these conditions apply, the gift should be deductible.

Follow-up to July 26 Posting re: Retirement Distributions as Housing Allowance

Question:

If a minister is retired, he would have no congregation, so who would his "designated appointee" be to declare the appropriate dollars as housing allowance?

Answer:

I recommend that the minister contact the local church under which he retired to request the housing designation. Obviously, this is a good thing to take care of prior to retirement but can still be accomplished. I suppose that an earlier congregation under which he (and perhaps the church itself) made 403(b) contributions would work as well. Recall, IRA distributions do not appear to qualify since they are not considered employer plans.

Minister's Use of Church Vehicle

This posting is a follow-up to August 10th regarding gifts of cars to ministers.

If the church owns a vehicle and allows the minister to use it for personal use, then it's generally best to have the church pay 100% of all expenses (including fuel) and to consider personal use as additional taxable compensation. In accordance with Internal Revenue Code Section 61(a)(1), vehicles used primary for business purposes, but occasionally for personal purposes by employees qualify for use of the standard mileage rate for taxation. For example, the minister records 1,500 miles of business use in August 2008, but 200 of personal use. Under the current $.585 standard mileage rate, $117.00 should be added to the minister's taxable earnings for August.

2008 IRS Publication 15-B provides a succinct explanation on page 20. A link is provided here:
IRS Publication 15-B

August 10, 2008

Gifts to Ministers

Question:

The church gave its pastor a car during an appreciation service. The fair market value of the car was not included in income on Form W-2. Is this an issue?

Answer:

In accordance with Internal Revenue Regulation Section 1.61-2(d)(2)(i) (reproduced in part below), there is virtually no condition under which an employee may receive a gift from an employer and it not be considered taxable compensation. Further, in the case of a minister, it's also subject to Self-Employment tax.
  • "...if property is transferred by an employer to an employee ... as compensation for services, for an amount less than its fair market value, then regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation and shall be included in the gross income of the employee."
Solution:

Absent more information regarding the specific situation, I'll provide an answer that "fits" in almost all situations. The church will need to prepare a corrected Form W-2c. The minister will need to amend his original return. In this difficult circumstance, the church may wish to aid its minister in paying the tax--wonderful, but any financial assistance will be taxable in the year received by the minister.

Follow-up Question:

What about cash gifts given directly to a pastor (not by the church) versus those collected by the church and then distributed? Are they taxable?

Follow-up Answer:

Gifts given by an individual to another individual (not in exchange for services rendered) are not taxable income to the recipient, nor itemized deductions for the donor.

Housing Allowance Clarifications

Question:

If a minister doesn't want to keep records, can he simply accept the fair market rental value (plus actual cost of utilities)?

Answer:

Unfortunately, the Clergy Housing Allowance Clarification Act of 2002 clearly says, "No." The amount excluded from the minister’s gross income as a housing allowance is limited to the least of the following: (a) the amount actually used to provide a home, (b) the amount officially designated as a housing allowance, or c) the fair rental value of the home (plus utilities). I've found that the fair rental value is rarely the lowest amount, except when the minister's home undergoes considerable remodeling costs or a large mortgage prepayment is made.

But... what happens when a minister pays off his home mortgage? Can he simply claim the fair market rental value? Again, unfortunately, "no." I know it sounds weird, but prepayments on a minister's home may be counterproductive, taxwise.

Follow-up Question:

How does one determine the fair market rental value?

Follow-up Answer:

The IRS will expect the minister to do his homework on this one. Local advertised comparable home rental rates may help. Ministers have also called upon knowledgeable realtors. Ask for the realtor's response in writing so that documentation is available in case of an audit. Most realtors' estimates will fall in a range and will not include the fact that the home is furnished--an obvious increase in value to any potential renter.