Taxes and Love Gifts

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Homer
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Taxes and Love Gifts

Post by Homer » Wed Apr 04, 2012 2:53 pm

Recently an issue has come up regarding gifts to a pastor. The pastor has a serious rare medical problem that requires treatment at an out of state clinic. This is not covered by his insurance. The pastor, at the urging of the elders, announced his condition and predicament with the insurance company to the congregation, saying that he would be going to get treatment as soon as finances could be arranged, and that he and his wife were "saving their pennies". He began receiving donations almost immediately.

The church sent out a letter stating that "this is not a solicitation for donations" and that people should make donations directly to the pastor, bypassing the church, so that the funds would not be considered taxable income to the pastor, and would not be deductable for the donor. This seems problematic; the pastor's announcement and letter seem to imply a solicitation regardless of the disclaimer.

I immediately had a concern, as a member of the church benevolent committee, with the taxability issue. Research I have done indicates that to be tax free, the gift must be given "spontaneously with detachment and disinterest". What I understand this to mean is that the person given the gift must not be a person who provides any service or anything of value to you. You can gift your family or close friends but not a counsellor, contractor, etc. From a court cases and other information it appears that a pastor is considered as a person providing a service to the members of the congregation.

In one case I read a summary of a pastor who was in serious trouble with the IRS for not reporting love gifts as income. A person who had been her personal friend for twenty years had given her a gift of money as he left the church. She had been his pastor for the last three years but they claimed the gift was based on their friendship. The IRS won in court which ruled that since the pastor provided counsel to the giver the funds were taxable income.

This is an issue that seems to be ambiguous due to lack of clarity on the part of the IRS. Some sources of info for churches say that if the gift is given outside the involvement of the church it is non-taxable but many others disagree. One said that it is almost impossible for any funds given to a pastor by church members to be considered tax free.

I had advised the elders that they should set up a "Medical Expense Reimbursement Plan" funded by the church (donations could be made to the plan) which would cover expenses not covered by insurance. This kind of plan must include all full time employees and is approved by the IRS. It can even pay for documented over-the-counter medications. An elder I mentioned it to felt it was too late in this case.

Has anyone had any experience in these issues and how they are handled? I suspect many churches do not handle love gifts and benevolent donations properly out of ignorance of this matter.

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Paidion
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Re: Taxes and Love Gifts

Post by Paidion » Wed Apr 04, 2012 3:18 pm

As I see it, a money gift can be given to anyone with a severe medical condition, whether he normally provides a service for you or not. Since these gifts are not given to the church with expectation of receiving charitable receipts, I see no problem. In my area, a pastor's house burned down, and people both inside and outside the church gave generously to the family. I see this as an act of love having no relation to the services rendered by the pastor. I have never heard of the government taxing gifts given to help people who do not have the means to pay for necessary medical treatment. But of course, this is Ontario, Canada. I don't know what the requirements are in your state, but if they tax that kind of gift, then it's time that changed. It is immoral.
Paidion

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Homer
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Re: Taxes and Love Gifts

Post by Homer » Wed Apr 04, 2012 3:55 pm

Hi Paidion,

As I understand the IRS, when a gift is given it is non-deductable when given to a person whose house burned down but if a neighborhood was destroyed in a disaster then contributions to a fund could be tax deductable if set up for the entire class of people affected. Similarly, a "medical expense reimbursement plan" can be legal only if it applies to a class of people and is not intended for one individual.

What seems very wrong is that money we earn and pay taxes on is taxed again if given to the pastor. Then again, I understand what they are trying to prevent. Say a friend has a business roofing houses. I need a new roof and he says if I buy the shingles he will put the roof on at no charge to me. Then a week later I give (wink) him a boat I knew he wanted. See what I mean?

In cases where love gifts are given directly to a pastor hoping to keep him happy so he will not leave those gifts have been ruled to be taxable.

My info is from the federal government; I do not know if the state has a different view but here the state generally follows federal law.

PR
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Re: Taxes and Love Gifts

Post by PR » Fri Apr 06, 2012 9:17 am

Here's how we understand the IRS code on this topic at our church:

A contribution given directly to an individual through the church is not tax deductible. If the individual receives contributions for a church sponsored ministry or mission (such as a mission trip); or is a missionary receiving funds through another non profit organization, then it is tax deductible. Anyone receiving funds who does not meet this criteria will receive a 1099 at the end of the year, or have it treated as income in their pay if they're on staff.

When we explain this to someone who is making a contribution directly to another person for a reason such as benevolence, which is the most common situation, we tell them it is not tax deductible. However, the advantage of giving it through the church is that it can be made anonymously. I also tell them that they can simply give the donation directly to the individual. I've never had an objection to this explanation.

Now they can make a tax deductible contribution directly to the church's benevolence fund, but the benevolence committee will decide how the funds will be spent, not them.

I can certainly see how this is an area that could be abused, and agree with the IRS''s rational.

Thanks,

PR

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darinhouston
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Re: Taxes and Love Gifts

Post by darinhouston » Fri Apr 06, 2012 9:53 pm

this discourse shows exactly why the personal income tax is immoral

Colin
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Re: Taxes and Love Gifts

Post by Colin » Tue Oct 09, 2012 2:04 pm

I thought I would add to this post even though it is a few months old since I'm a CPA and know a bit about this. First, keep in mind that we're talking about tax law here, not scripture, and that tax law isn't based on scripture, or morals, or even common sense. It just is what it is. And for you non-US readers, none of this probably applies in your country.

There are really two things being discussed here. The first is what contributions are deductible to the giver. The second is whether the recipient has to report what they receive as income.

Contributions are only deductible to a giver if they are given to 501(c)(3) charitable organization. So even if you have charitable intent, there is no deduction unless it is given to a qualified charity (and churches fall under Sec. 501(c)(3)). The amount of the deduction has to be reduced by the fair value of anything you give. So, for example, if you give $100 but receive in exchange a sweatshirt worth $40, your charitable deduction is reduced to $60. There's plenty of other rules but that is the basics.

The taxation of ministers is convoluted. There are special rules regarding self employment tax (and the ability to elect out of it), exclusion from income of the value of housing provided by a church, or exclusion of a portion of their salary that is designated to go towards housing, and other items. The issue of what must be declared as income is somewhat muddied. For a non-minister, it is usually pretty obvious what should be reported as income. If you provide goods or services to someone and they compensate you for it, the compensation you receive is considered taxable income. For ministers, what they are deemed to provide is every aspect of their ministry. Since this is so expansive, it is generally presumed that anything they receive from the subjects of their ministry is in exchange for this. Certainly normal church salaries, honorariums, and offerings taken during a service would be. In addition, there is a general "taint" that any other "gifts" from subjects of the ministry should also be reported as income.

As was noted above, there is a legitimate (under tax law) means to both provide a deduction to the givers and exclude the income from the minister's income, and that is to set up a medical expense reimbursement plan at the church. There are requirements for this, of course, and the same expense reimbursement would have to be available to all employees of the church, but if set up correctly it could accomplish the goal.

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