October 28, 2009

Retired Minister Continued Support from His Congregation

Question:

Our pastor is retiring from our assembly in 2010. He will be remaining with our congregation as a member and will have no further duties or responsibilities with our church. He has been our shepherd for many years. If the church were to supplement his social security income with a monthly "benevolence" check would this qualify as non-taxable benevolence? 

Answer:

Rare exceptions to the taxability of gifts to employees (current or former) have been made by the IRS (Private Letter Rulings, I believe; but I am going on memory right now) in cases of former ministers with medical or other needs that typically merit benevolence. In the case here, it will likely appear to the IRS and other objective parties that the church is now aiding a former employee who received inadequate compensation during his tenure (at least inadequate in the sense that he did not accumulate funds for post-retirement living). This compensation, while appreciated by the minister, will be taxable.

However, the IRS Minister Audit Technique Guide published in April 2009 may provide some tax planning reminders (and IRS authority to back it up!).

"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107. (Rev. Rul. 63-156, 1963-2 C.B. 79, and Rev. Rul. 75-22, 1975-1, C.B. 49) The “least of” rules should be applied to determine the amount excludible from gross income. (My commentary here: please see my September 18 blog posting for a summary of these rules.)

"The retired minister may exclude from his/her net earnings from self-employment the rental value of the parsonage or the parsonage allowance received after retirement. The entire amount of parsonage allowance received is excludible from net earnings from self employment, even if a portion of it is not excludible for income tax purposes. In addition, the retired minister may exclude from net earnings from self-employment any retirement benefits received from a church plan. Rev. Rul. 58-359, 1958-2 C.B. 422."

The church should consider cooperating with the retiring minister to designate these ongoing payments as housing allowance. It has the potential to reduce his tax bite significantly.

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