IRS Guidelines

• The IRS provides specific guidance about when gifts are and aren't taxable for ministers. According to Section 102(a) of the IRS code, gifts that are given "out of affection, respect, admiration, charity or like impulses" aren't considered taxable income. However, the IRS distinguishes between these gifts and gifts given as a result of a service rendered or a service-based relationship, such as counseling, pastoral care or preaching. Identifying which gifts qualify as detached gifts and which don't can be difficult, as a minister may play numerous roles with a particular person or group of persons at any time.
  
  

Gifts from the Church

• Churches often like to show their appreciation for their minister by accepting "love offerings" designated specifically for him and his family. Love offerings are commonly received at and around Christmas. Although these gifts are freely given and not attached to any specific services rendered, Subsection (c)(1) of the IRS code specifically denotes gifts that are given from a church to a minister for any reason are taxable income for the minister. Ideally, a church should indicate any such gifts on the minister's W-2 form as taxable income.
  
  

Excessive Compensation

• One danger of extending gifts from the church to a minister is the risk of creating what the IRS calls "excessive compensation." Excessive compensation is designated by the IRS as income that's out of proportion to the church's size and resources; because gifts are included as taxable income for tax purposes, any especially large gifts may risk receiving this designation. The consequences for excessive compensation are grave: A minister can be forced to return the excessive compensation and be penalized for up to 225 percent of its value, and the church can potentially lose its tax-exempt status.
  
  

Gifts from Individuals

• Church members often believe that gifts they give to their ministers directly are not included as compensation and therefore are tax-free for their ministers. However, because a minister has established a service-based relationship with his parishioners, the IRS generally considers such gifts as these as taxable income. According to IRS Section 102(c)(1), these offerings are taxable because the gift was motivated by a service-based relationship between the giver and the minister, whether the minister expected this form of compensation or not.