July 02, 2013

Deductibility of Designated Gifts to a Minister

Question:

A member of a church would like to make a weekly donation to the pastor through the general fund, with a check designated as a gift for the pastor. Is this donation tax-deductible? Is it taxable to the pastor since it is a gift?

Answer:

The key in this situation is to realize that, as a general rule, the gift will be either 1) non-taxable to the recipient and non-deductible to the donor or 2) taxable to the recipient and deductible by the donor. IRS Publication 526 prohibits deduction of contributions to individuals: "You cannot deduct contributions to specific individuals." However, through church-initiated actions to individuals are treated differently because churches are non-profit organizations for tax purposes.

The deciding factors for this question are the initiation and control of the gift. Gifts initiated by the leadership or the congregation as a whole, even if directed toward an individual, are deductible because they are regarded as a corporate act. In virtually all cases, gifts initiated by the church body or leadership given to a pastor or other employee of a church are regarded as compensation for services performed and are deductible to the donors. In general, gifts given by an employer to an employee are taxable unless they are non-cash and less than $25 in value. Further, gifts of this nature are regarded as under the control of the church, and consequently are deductible. Therefore, if the intent of the donor is to give to the pastor as part of a church-initiated gift and to enjoy the benefits of a charitable contribution deduction, this treatment will apply.

A note of caution: A church must be very careful to avoid becoming a conduit for payments of personal obligations that would otherwise be non-deductible. For example, a church member who owes money to the pastor or another church employee cannot repay that money through tax-deductible contributions to the church offering designated to the pastor. However, if a church member gives to the missions fund to support a particular missionary identified by the church congregation as worthy of support, the donation can be deductible to the donor and taxable as compensation to the missionary.

If a donor gives a personal gift through the church for the sole purpose of maintaining anonymity, the gift will be non-taxable to the pastor, and is regarded as a non-deductible gift to an individual.

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