A church would like to "gift" 10% of the sale price of the parsonage to a pastor towards his retirement. Is the pastor going to be subject to income tax on that gift? Is it taxable if put into an IRA
on his behalf?
Whether the gift is paid is paid to him directly or through contributions to his Traditional IRA, the “gift” will be taxable and reportable on Form W-2, Box 1. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The IRS has consistently applied this provision to self-employed (non-employee) individuals who provide services for an organization as well. Only the facts and circumstances surrounding a gift can determine whether IRC section 102(c) does or does not apply; a letter stating that a payment is a gift will not override the substance of a transaction (2008 Blog).
Having said this, the church may wish to consider other alternative means. For example, cooperation with the pastor to have the amount directed to a IRC 403(b) account as an elective deferral may accomplish the same goal with considerably different consequences. This is only an example of one of the many tax-savings concepts that are discussed in other postings on this blog (the annual limits to a 403(b) can be as high as $24,000 annual while the Traditional IRA limit is at most $6,500 and, unlike 403(b) contributions, will likely have SE tax ramifications).