After the holidays are over, the church must sort out which “gifts” to employees and ministers were taxable and which were not. Generally, it is assumed that no gift is taxable. However, the Internal Revenue Service does not agree with that assumption. “Gifts,” such as a church paid trip to Israel for the pastor or an all expense paid weekend away, are taxable items to the recipient.
Smaller “gifts” often create more discussion and controversy. In a ruling a couple of years ago, the IRS addressed the tax consequences of these smaller gifts. Simply put, the IRS has determined that any “de minimis fringe benefit” does not constitute taxable income. Examples of a “de minimis fringe benefit” include a ham, turkey, or gift basket as an annual holiday gift. However, the ruling goes on to point out that a “cash equivalent,” such as a gift certificate, is a taxable gift. Even though the goods acquired with the gift certificate would have been a nontaxable “de minimis fringe benefit” had it been provided by the employer, the gift certificate is taxable as income.
A simple rule of thumb is that all larger gifts given by the employer/church to the minister or staff is reportable as taxable income. Smaller items given as holiday gifts may not be taxable. However, a cash gift or gift certificate, regardless of the amount, must be reported as taxable income to the recipient.
The other question on gifts that arises concerns those that are given directly to a minister or staff person by a church member. Again, the simple rule of thumb is that if the gift is given directly to the minister/staff person by the member, it is a nontaxable gift. This general rules applies whether the gift is an object or cash. The donor gets no charitable gift deduction on their tax return. On the other hand, if the member makes a gift to the church, either of an item (a car for example) or of cash, and designates that it be given to a particular minister/staff person, the gift is then taxable to the recipient. Of course, the donor generally is also able to claim a charitable gift deduction on his or her tax return.
To get more details on the gift rules, please research IRS Letter Ruling 200437030.