Federal tax law requires all forms of compensation to be reported as taxable income unless specifically excluded by law. Gifts are one such exclusion. The question, then, is whether retirement gifts are taxable compensation for services rendered or tax-free gifts. This answer is not always clear. In a series of cases in the early 1950s, four federal appeals courts concluded that certain retirement gifts to ministers were tax-free gifts rather than taxable compensation.
Here lies the conflict. While the members of the church are truly giving a love gift, the IRS says it is taxable income because section 102(c)(1) says that “any amount transferred by or for an employer to, or for the benefit of, an employee” shall be treated as gross income.
According to Revenue Ruling 55-422 payment(s) to a retired minister may be considered non-taxable gifts because of the close personal relationship that exists between a minister and his congregation. Payment(s) which are made out of gratitude and appreciation to a minister who received appropriate compensation while employed could be considered non-taxable. In order for the payment(s) to the retired minister to be considered non-taxable gifts it is important that the following conditions are true.
- The minister is not expected to perform any services in exchange for the payment(s).
- The payment was not made in accordance with any enforceable agreement, or past practice.
- The minister will no longer be rendering services to the church.
- The recipient’s relationship to the organization was greater than mere employment; senior pastors, executive pastors, etc. having a deeper relationship with the church than regular staff.
- The recipient had been adequately compensated for his past service. These love gifts cannot be reminiscent of or connected to his early years of uncompensated, sacrificial labor. It is very important that a church carefully calculate its words when presenting this gift.
Particular care needs to be exercised in relation to retirement gifts. It is often suggested that these gifts should be ‘in kind’ or, if it is a cash gift, that it be handled informally by members of the congregation rather than officially through the church. Ultimately, the church will need to make the decision whether the gift is taxable or nontaxable.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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