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Are minister's predetermined charitable contributions to his own church not included in taxable income on W2?

by Anonymous
(Alabama)

I have a new client who is a minister. He has made an agreement with his church that they will take a predetermined amount from his salary, donate it to itself, and not take tax out of that part of his salary.

His previous tax preparer said that this is not taxable income because he never received or had access to the money, so this minister has done this for the past ten years and does not want to change.

I think this is very risky for him and the church since most people should include this in taxable income and then claim it on their tax return as an itemized deduction.

There are multiple things on my W2 where my employer pays for a benefit or donation on my behalf that I never see the money but pay tax on.

My employer actually has a forced donation to United Way taken out that I pay tax on. Is there a special rule for ministers, though?

In all my research on the internet, I can't find anything that says this approach is reasonable, but I have found sources online that say ministers should recognize them as an itemized deduction just like everyone else.

If anyone else has taken this approach, do you have backup you can provide to help me justify it going forward?

Comments for Are minister's predetermined charitable contributions to his own church not included in taxable income on W2?

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Jan 08, 2020
Mandatory Tithes Withheld Should be Reported as Income on W-2
by: Vickey

I was hoping someone would post their experience on this issue since it seems that after I post ...no one else chimes in =)

BUT it has been over a week and no one posted, so here is my "opinion" on "mandatory tithes" =)

I addressed this in 2014 in this post:
https://www.freechurchaccounting.com/tithe-withholding-from-paycheck.html

The difference now is that with the new tax laws ... most ministers are NOT itemizing ... so it is really a moot point on whether or not a minister can even claim those mandatory tithes as a business expenses. However, all eligible charitable contributions can be claimed as such when itemizing deductions and thankfully those are still deductible on a Sch A.

BUT...not claiming those manatory tithe deductions as income is as you stated is "very risky for him"!

The IRS's Audit Techniques Guide states on page 14:
https://www.irs.gov/pub/irs-utl/ministers.pdf

"Ministers often pay a small annual renewal fee to maintain their credentials, which constitutes a
deductible expense.

However, ministers' contributions to the church are not deductible as business expenses. They may argue that they are expected to donate generously to the church as part of their employment. This is not sufficient to convert charitable contributions to business expenses.

The distinction is that charitable contributions are given to a qualifying organization
(such as a church) for the furtherance of its charitable activities. Dues, on the other hand, are
usually paid with the expectation that a financial benefit will result to the individual, as in a realtor's multi-list dues or an electrician's union dues.

A minister's salary and benefits are not likely to directly depend on the donations made to the church. They may still be deducted as contributions on Schedule A but may not be used as a business expense to reduce self employment tax."

Sounds like you cannot exclude it as income to me.

Jan 13, 2020
It can be an expense
by: Anonymous

Our organization policy on tithing to their district is mandatory along with reporting to their district. If they don't comply they will lose their credentials. Also if they don't pay their credential fees to the parent organization they will lose their credentials.
Here is an article I found:
In the 1992 tax court case mentioned above, Forbes v. Commissioner, T.C. Sum. Op. 1992-167 (unpublished), the local church had adopted a "tithing policy" that mandated that every minister and employee of the church had to
pay a tithe of 10 percent of their total compensation back to the church. In a review of the church’s policy, the court found that several employees had been terminated for failing to comply with the tithing policy. The court
found that "ordinary and necessary expenses" incurred in carrying out a business can be claimed as business expenses. Since a minister or church-employee for this local church could not retain their position unless they paid the "mandatory" tithe, the court reached the conclusion that the tithe was a business expense and therefore, could be deducted pretaxes.

Jan 16, 2020
Original Poster's Response
by: Anonymous

Thank you both for responding to my post. This greatly helps.

Vickey - thought I scanned thoroughly through all of the previous posts for this topic, but I completely missed the 2014 post. Thanks for linking that. I found the same IRS Audit Technique Guide in my research; glad to see you interpret it the same as I do.

Anonymous - I have not seen that case mentioned in my research, so I'm really grateful for that. I think that explains why some people use this approach. However, I don't think you can count it as an expense. This article shows the difference between the IRS audit guidelines and the case you mentioned: https://benefitsboard.wordpress.com/2012/02/27/ministers-should-not-deduct-tithes-pre-tax-2/

To summarize it, if the IRS audited the pastor/church, the case couldn't be cited in a hearing before the IRS or Tax Court since it is unpublished and cannot be cited cited in a legal argument.

I think a pastor and the church treasurer should know about the risk they're taking on if they choose to treat mandatory tithes as an expense or in my client's case, not reported at all. I will let him know what I've found. I greatly appreciate what I've learned here. If anyone else has anything to add, I appreciate that too.

Jan 19, 2020
Good Article!
by: Vickey

That article does a good job spelling out the dangers of withholding tithes pretax AND explains how to properly handle the deduction of tithes from an employee's paycheck.

Thank you for responding and providing the link to the Church of God Benefits Board's article!

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