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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.

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