Church & Clergy Tax Guide

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Every effort has been made to make the materials in this text current as of the date of publication. Federal tax law, however, is subject to change. Congress can modify the law, as it has on numerous occasions over the past few years. Also, court decisions and IRS rulings can significantly affect the application of federal tax laws to individual circumstances. Such changes may affect the accuracy of this book. These changes are updated on our website, ChurchLawAndTax.com.

Also note that tax forms can change. Always be certain to use the most recent copy of any tax form.

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Credits

Author: Richard R. Hammar, J.D., LL.M., CPA

Editor: Matthew Branaugh, J.D.

Art director and cover designer: Tim Downs

Layout designer: Dawn Brandon

Cover image © 2024 www.GettyImages.com

ISBN 979-8-9907785-6-6 

28 27 26 25   1 2 3 4

Printed in the United States of America.

We gratefully acknowledge the assistance of the Orlando-based CPA firm of Batts, Morrison, Wales & Lee, P.A., in the preparation of the illustrated tax return and other information in Chapter 13. Batts, Morrison, Wales & Lee, P.A. is dedicated exclusively to serving churches, nonprofit organizations, and their affiliates. The firm’s website is nonprofitcpa.com.

Long ago, an eminent judge observed: “In my own case the words of such an act as the income tax . . . ​merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception—couched in abstract terms that offer no handle to seize hold of—leaving in my mind only a confused sense of some vitally important, but successfully concealed purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion . . . ​that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.” I. Dillard, The Spirit of Liberty: Papers and Addresses of Learned Hand 213 (1960).

Former Treasury Secretary Paul O’Neill once lamented that “our tax code is so complicated, we’ve made it nearly impossible for even the Internal Revenue Service to understand.”

Sound familiar? Few persons have more ably described the frustrations created by the federal income tax. Our tax law is so complex that it is incomprehensible to most taxpayers. A small and declining number of taxpayers are able to complete a Form 1040. And, as if this were not enough, the tax law is always changing.

Ministers’ taxes are especially frustrating since a number of unique rules apply to the reporting of ministers’ federal income and Social Security taxes. The reporting of ministers’ income taxes also involves a number of complex and sometimes controversial issues. To illustrate, a debate has raged for years over the question of whether ministers should report their federal income taxes as employees or as self-employed persons. With so many unique and complex rules, it’s no wonder there is confusion among tax practitioners, the courts, and even within the IRS regarding the application of tax law to ministers.

This book has two objectives. The first is to help ministers (1) understand the many unique features of our tax laws that apply to them, (2) correctly report their federal income taxes, (3) understand the basis for exempting themselves from Social Security (and why it does not apply to most ministers), (4) correctly report Social Security taxes (if not exempt), and (5) reduce income tax and Social Security liability as much as possible.

A second objective is to help church treasurers, board members, bookkeepers, attorneys, CPAs, and tax practitioners understand (1) the definition of income in the church environment, (2) how to handle and report employee business expenses, (3) the substantiation rules that apply to charitable contributions, (4) how to handle designated contributions, and (5) the federal tax reporting requirements that apply to churches and church employees.

Some tax guides lose most if not all of their relevance after April 15. This book is different—it was designed to have direct and immediate relevance to ministers, churches, and their advisers throughout the year. For example, entire chapters are devoted to charitable contributions, clergy retirement plans, Social Security, and church reporting requirements. Other chapters contain vital information of continuing relevance, such as the mechanics of the housing allowance and a business-expense reimbursement policy. A generous supply of illustrations and legal forms makes this a resource that you will refer to again and again throughout the year.

Since tax laws change from year to year, this book is republished annually to provide readers with information that is as accurate and up to date as possible. This edition addresses all of the important tax developments that occurred up until the time of publication in late 2024.

Of course, I welcome your suggestions for future editions. Please send your ideas to support@gloo.us. My objective is to make this the most helpful, accurate, and comprehensible guide available.

—Richard R. Hammar, J.D., LL.M., CPA

Congress enacted the following major tax laws over the past few years, containing provisions that affect tax reporting by both churches and church staff for 2024 and future years.

The more important provisions in these laws that took effect in 2024 or later are summarized in this introduction and throughout this text.

Tax Law Changes Made by Congress

Setting Every Community Up for Retirement Enhancement Act (SECURE 2.0 Act of 2022)

In December 2022, Congress enacted the Setting Every Community Up for Retirement Enhancement Act (SECURE 2.0 Act) as part of the 4,100-page Consolidated Appropriations Act. President Biden signed the measure into law a few days later. This legislation is designed to increase retirement savings, simplify and clarify retirement plan rules, and encourage employees to contribute more to their retirement accounts. Those provisions that took effect in 2024 or later and are of most interest to churches and church leaders are summarized below and throughout this text.

One of the main reasons many Americans reach retirement age with little or no savings is that too few workers are offered an opportunity to save for retirement through their employers. However, even for those employees who are offered a retirement plan at work, many do not participate. Automatic enrollment in 401(k) and 403(b) plans significantly increases participation. Since first defined and approved by the Treasury Department in 1998, automatic enrollment has boosted participation by eligible employees generally, and particularly for Black, Latinx, and lower-wage employees. An early study found that adoption of automatic enrollment increased participation in a 401(k) plan by short-tenure employees from 19 percent to 75 percent. 

Section 101 requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter, that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than three years), church plans, and governmental plans.

Section 101 is effective for plan years beginning after December 31, 2024.

If you make certain contributions to an employer retirement plan or an Individual Retirement Arrangement (IRA), or if you contribute to an Achieving a Better Life Experience (ABLE) account of which you are the designated beneficiary, you may be able to take a tax credit.

The amount of the Saver’s Credit can be as low as 10 percent or as high as 50 percent and is generally based on the contributions you make and your adjusted gross income. For more information, refer to Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs); the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions; and Do I Qualify for the Retirement Savings Contributions Credit? at IRS.gov. The lower your income (or joint income, if applicable), the higher the credit rate; your credit rate also depends on your filing status. These two factors will determine the maximum credit you can take. You’re not eligible for the credit if your adjusted gross income exceeds a certain amount. Dependents and full-time students are also not eligible for the credit.

The match is 50 percent of retirement plan contributions, up to $2,000 per individual. For 2024 (taxes filed in 2025), the match phases out between $46,000 and $76,500 in the case of taxpayers filing a joint return ($23,000 and $38,250 for single taxpayers).

Section 103 repeals and replaces the credit after December 31, 2026, changing it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s retirement plan.

Under prior law, participants are generally required to begin taking distributions from their retirement plans at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The SECURE Act of 2019 increased the required minimum distribution age to 72. Section 107 of the SECURE Act 2.0 further increases the required minimum distribution age to 73 starting on January 1, 2023, and increases the age further to 75 starting on January 1, 2033. 

Under prior law, the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50. Section 108 indexes this limit and is effective for taxable years beginning after December 31, 2023.

Under prior law, employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2021 was $6,500 except in the case of SIMPLE plans, for which the limit is $3,000. Section 109 increases these limits to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62, and 63. The increased amounts are indexed for inflation after 2025. Section 109 is effective for taxable years beginning after December 31, 2024.

Section 110 is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt and thus are missing out on available matching contributions for retirement plans. Section 110 allows such employees to receive those matching contributions by reason of repaying their student loans. Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. Governmental employers are also permitted to make matching contributions in a section 457(b) plan or another plan with respect to such repayments. For purposes of the nondiscrimination test applicable to elective contributions, Section 110 permits a plan to test separately the employees who receive matching contributions on student loan repayments. Section 110 is effective for contributions made for plan years beginning after December 31, 2023.

Under current law, employers may provide matching contributions as a long-term incentive for employees to contribute to a 401(k) plan. However, immediate financial incentives (like gift cards in small amounts) are prohibited even though individuals may be especially motivated by them to join their employers’ retirement plans. Section 113 enables employers to offer de minimis financial incentives not paid for with plan assets, such as low-dollar gift cards, to boost employee participation in workplace retirement plans by exempting de minimis financial incentives from section 401(k)(4)(A) and from the corresponding rule under section 403(b). Section 113 is effective for plan years beginning after the date of enactment of this Act.

The SECURE Act (2019) requires employers to allow long-term, part-time workers to participate in the employers’ 401(k) plans. The SECURE Act provision provides that employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service (where the employee completes at least 500 hours of service).

Section 125 of the SECURE 2.0 Act reduces the three-year rule to two years, effective for plan years beginning after December 31, 2024. Section 125 also provides that pre-2021 service is disregarded for vesting purposes, just as such service is disregarded for eligibility purposes under current law, effective as if included in the SECURE Act to which the amendment relates. This provision also extends the long-term part-time coverage rules to 403(b) plans that are subject to the ERISA.

Though individuals can save on their own, far too many fail to do so. According to a report by the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense. Many are forced to tap into their retirement savings. A 2022 study found that, in the prior year, almost 60 percent of retirement account participants who lacked emergency savings tapped into their long-term retirement savings, compared to only 9 percent of those who had at least a month of emergency savings on hand. Separating emergency savings from one’s retirement savings account will provide participants a better understanding that one account is for short-term emergency needs and the other is for long-term retirement savings, thus empowering employees to handle unexpected financial shocks without jeopardizing their long-term financial security in retirement through emergency hardship withdrawals.

Section 127 provides employers the option to offer pension-linked emergency savings accounts to their non-highly compensated employees (i.e., those earning less than $150,000 in the previous year). Employers may automatically opt employees into these accounts at no more than 3 percent of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap. Contributions are made on a Roth-like basis and are treated as elective deferrals for the purposes of retirement matching contributions with an annual matching cap set at the maximum account balance ($2,500 or lower as set by the plan sponsor). The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals. At separation from service, employees may take their emergency savings account as cash or roll it into their Roth defined contribution plan (if they have one) or IRA.

Under prior law, 403(b) plan investments were generally limited to annuity contracts and publicly traded mutual funds. This limitation cuts off 403(b) plan participants (generally, employees of charities and public schools, colleges, and universities) from access to collective investment trusts, which are often used by 401(a) plans to expand investment options for plan participants at a lower overall cost. Section 128 would permit 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans and IRAs and would be effective after the date of enactment.

Sometimes retirees mistakenly receive more money than they are owed under their retirement plans. These mistakes cause problems when they occur over time, and plan fiduciaries later seek to recover the overpayments from unsuspecting retirees. When an overpayment has lasted for years, plans often compel retirees to repay the amount of the overpayment plus interest, which can be substantial. Even small overpayment amounts can create a hardship for a retiree living on a fixed income. Section 301 allows retirement plan fiduciaries the latitude to decide not to recoup overpayments that were mistakenly made to retirees. If plan fiduciaries choose to recoup overpayments, limitations and protections apply to safeguard innocent retirees. This protects both the benefits of future retirees and the benefits of current retirees. Rollovers of the overpayments also remain valid. Section 301 is effective on the date of enactment of this Act.

Every year, thousands of people approach retirement but are unable to find and receive the benefits they earned, often because the company they worked for moved, changed its name, or merged with a different company. Similarly, every year, there are employers around the country ready to pay benefits to retirees, but they are unable to find the retirees because the former employees changed their names or addresses. Section 303 creates a national online searchable lost-and-found database for Americans’ retirement plans at the Department of Labor (DOL). The database will enable retirement savers, who might have lost track of their pension or 401(k) plan, to search for the contact information of their plan administrator. Section 303 directs the creation of the database no later than two years after the date of enactment of this Act.

Under current law, employers may transfer former employees’ retirement accounts from a workplace retirement plan into an IRA if their balances are between $1,000 and $5,000. Section 304 increases the limit from $5,000 to $7,000, effective for distributions made after December 31, 2023.

Because of the ever-growing complexity of retirement plan administration, Section 305 expands the Employee Plans Compliance Resolution System (EPCRS) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax. For example, section 305 allows for the self-correction of many plan loan errors, which is a frequent area of error, and it can be burdensome to correct a single loan error through the Internal Revenue Service (IRS). Section 305 is effective on the date of enactment of this Act. Any guidance or revision of guidance required by section 305 shall be promulgated no later than two years after the date of enactment of this Act. Revenue Procedure 2021–30 (or any successor guidance) shall be updated to take into account the provisions of this section no later than two years after the date of enactment of this Act.

Section 312 provides that, under certain circumstances, employees are permitted to self-certify that they have had an event that constitutes a hardship for the purposes of taking a hardship withdrawal. This is a logical step in light of the success of the coronavirus-related distribution self-certification rules and the current hardship regulations that already permit employees to self-certify that they do not have other funds available to address a hardship. Section 312 is effective for plan years beginning after the date of enactment of this Act.

A domestic abuse survivor may need to access his or her money in a retirement account for various reasons, such as escaping an unsafe situation. Section 314 allows retirement plans to permit participants who self-certify that they experienced domestic abuse to withdraw a small amount of money (the lesser of $10,000, indexed for inflation, or 50 percent of the participant’s account). A distribution made under section 314 is not subject to the 10-percent tax on early distributions. Additionally, a participant has the opportunity to repay the withdrawn money from the retirement plan over three years and will be refunded for income taxes on money that is repaid. Section 318 is effective for distributions made after December 31, 2023.

When an individual engages in a prohibited transaction with respect to his or her IRA, the IRA is disqualified and treated as distributed to the individual, irrespective of the size of the prohibited transaction. Section 322 clarifies that if an individual has multiple IRAs, only the IRA with respect to which the prohibited transaction occurred will be disqualified. Section 322 is effective for taxable years beginning after the date of enactment of this Act.

Current law imposes a 10-percent additional tax on early distributions from tax-preferred retirement accounts, but an exception applies to substantially equal periodic payments that are made over the account owner’s life expectancy. Section 323 provides that the exception continues to apply in the case of a rollover of the account, an exchange of an annuity providing the payments, or an annuity that satisfies the required minimum distribution rules. Section 323 is effective for transfers, rollovers, and exchanges after December 31, 2023, and for annuity distributions on or after the date of enactment of this Act.

Under current law, an additional 10-percent tax applies to early distributions from tax-preferred retirement accounts. Section 326 provides an exception to the tax in the case of a distribution to a terminally ill individual. Section 326 is effective for distributions made after the date of enactment of this Act.

Prior law required a distribution if too much was contributed to an IRA. The corrective distribution included the excessive contribution and any earnings allocable to that contribution. Section 333 exempts the excess contribution and earnings allocable to the excess contribution from the 10-percent additional tax on early distributions and is effective for any determination of, or affecting, liability for taxes, interest, or penalties that is made on or after the date of enactment of this Act, without regard to whether the act (or failure to act) upon which the determination is based occurred before such date of enactment.

Section 334 permits retirement plans to distribute up to $2,500 per year for the payment of premiums for certain specified long-term care insurance contracts. Distributions from plans to pay such premiums are exempt from the additional 10-percent tax on early distributions. Only a policy that provides for high-quality coverage is eligible for early distribution and waiver of the 10-percent tax. Section 334 is effective three years after the date of enactment of this Act.

Under prior law, the distribution rules for 401(k) and 403(b) are different in certain ways that are historical anomalies for varied reasons. For example, for 401(k) plans, all amounts are available for a hardship distribution. For 403(b) plans, in some cases, only employee contributions (without earnings) are available for hardship distributions. Section 602 conforms the 403(b) rules to the 401(k) rules. Section 602 is effective for plan years beginning after December 31, 2023.

The Inflation Reduction Act of 2022

On July 27, 2022, Senate Majority Leader Chuck Schumer and Senator Joe Manchin released legislative text for budget reconciliation legislation, also known as the Inflation Reduction Act of 2022. This text replaced the legislative text of the House-passed Build Back Better Act (BBBA; H.R. 5376) as a substitute amendment.

The tax provisions in the Inflation Reduction Act of 2022 include the following:

Those provisions of the Act having the greatest relevance to churches and church staff are summarized below.

Under current law, income eligibility for and calculation of the premium tax credit (PTC) incorporates temporary changes enacted under the American Rescue Plan Act of (ARPA). For 2021 and 2022, ARPA expanded income eligibility by eliminating the phaseout for households with annual incomes above 400 percent of the federal poverty level (FPL). For those same years, ARPA also increased credit amounts by adjusting the percentage of annual income that eligible households may be required to contribute toward the premium. Under prior law, the percentages ranged from 0.0 to 8.5 percent of household income, with higher-income groups subject to larger percentages as specified. The Inflation Reduction Act extends these ARPA changes to 2023, 2024, and 2025.

Prior to 2017, an itemized tax deduction was allowed for state and local taxes. There was no limit for this deduction. Congress enacted legislation in 2017 capping the deduction for state and local income, sales, and property taxes at $10,000 ($5,000 if married filing separately). The expiration date for this provision is at the end of 2025. Efforts to significantly increase this cap during negotiations on the Inflation Reduction Act were unsuccessful.

The Inflation Reduction Act gives the IRS $80 billion over 10 years, $45.6 billion of which is earmarked for tax-enforcement activities such as hiring more enforcement agents, providing legal support, and investing in investigative technology. The funds could also be used to monitor and enforce taxes on digital assets such as cryptocurrency.

Other Tax Developments of Interest to Churches, Clergy, and Lay Church Employees

In March 2019, a federal appeals court rejected an atheist group’s challenge to the constitutionality of the housing allowance. The atheist group did not appeal this ruling, and there have been no further legal challenges. This historic ruling is addressed in Chapter 6.

Congress has created three limited windows of time since 1977 to allow exempt ministers to revoke their exemption. The latest was in 1999. A bill was introduced to the House in 2023 but has yet to advance, and no other legislation related to revocation was introduced in Congress in 2024. However, note that in a 1970 ruling, the IRS allowed an exempt minister to revoke an exemption on the ground of mistake. Revenue Ruling 70-197. In addition, section 4.19.6.4.11.3 (02-13-2020) of the IRS Internal Revenue Manual explicitly recognizes that under some conditions, ministers who have exempted themselves from self-employment taxes solely for economic reasons can revoke their exemption. This issue is addressed fully under “Exemption of Ministers from Social Security Coverage,” beginning on page .

An unanswered question is whether a housing allowance (or annual rental value of a parsonage) should be treated as earned income when computing the earned income credit. If so, then earned income will be higher, making it more likely that a minister will not qualify for the earned income credit. In the 2001 tax law (EGTRRA), Congress clarified that the term earned income includes only “amounts includible in gross income for the taxable year.” However, Congress added that earned income also includes “net earnings from self-employment.” The problem is that ministers are always considered self-employed in regard to Social Security with respect to their ministerial services, and so their entire church compensation constitutes “net earnings from self-employment” unless they filed a timely exemption application (Form 4361) that was approved by the IRS. Logically, then, housing allowances should be treated as earned income for those ministers who have not exempted themselves from self-employment taxes by filing Form 4361. On the other hand, ministers who have exempted themselves from self-employment taxes should not treat their housing allowance as earned income in computing the earned income credit.

As illogical as this result may seem, it is exactly what the IRS instructions for Form 1040 require, and for now, the IRS national office is taking the position that there is nothing it can do to change the law as enacted by Congress. As a result, whether a minister’s housing allowance (or annual rental value of a parsonage) is included within the definition of earned income for purposes of the earned income credit depends on whether the minister is exempt or not exempt from paying self-employment taxes.

This issue is addressed in Chapter 7.

Many churches employ retired persons who are receiving Social Security benefits. Persons younger than full retirement age may have their Social Security retirement benefits cut if they earn more than a specified amount. Full retirement age (the age at which you are entitled to full retirement benefits) for persons born in 1943–1954 is 66 years. If you are under full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn above the annual limit. For 2024, that limit was $22,320 ($23,400 in 2025). In the year you reach full retirement age, your monthly benefit payments are reduced by $1 for every $3 you earn above a certain limit. For 2024, that limit was $59,520 ($62,160 in 2025), but only earnings before the month you reach full retirement age are counted.

The 2025 standard mileage reimbursement rates were not available at the time of publication of this guide. You can find them at IRS.gov/tax-professionals/standard-mileage-rates or ChurchLawAndTax.com.

The self-employment tax rate is 15.3 percent for 2025. The 15.3-​percent tax rate consists of two components: (1) a Medicare hospital insurance tax of 2.9 percent and (2) an old-age, survivor, and disability (Social Security) tax of 12.4 percent. There is no maximum amount of self-employment earnings subject to the Medicare tax. The tax is imposed on all net earnings, regardless of amount.

For 2025, the maximum earnings subject to the Social Security portion of self-employment taxes (the 12.4-percent amount) is $176,100. Stated differently, persons who receive compensation in excess of $176,100 in 2025 pay the combined 15.3-percent tax rate for net self-employment earnings up to $176,100 and only the Medicare tax rate of 2.9 percent on earnings above $176,100. These rules directly impact ministers, who are considered self-employed for Social Security purposes with respect to their ministerial services.

The IRS allows taxpayers to substantiate the amount of their business expenses by using per diem (daily) rates. Taxpayers still must have records substantiating the date, place, and business purpose of each expense. Separate rates are set for meals and lodging, with separate rates for high-cost localities and all other communities. See the IRS website for applicable rates.

In some cases, using the per diem rates will simplify the substantiation of meals and lodging expenses incurred while engaged in business travel. However, several restrictions apply, and these are explained under “Other rules for substantiating expenses,” beginning on page .

The IRS will no longer issue private letter rulings addressing the question of “whether an individual is a minister of the gospel for federal tax purposes.” This means taxpayers will not be able to obtain clarification from the IRS in a letter ruling on their status as a minister for any one or more of the following matters: (1) eligibility for a parsonage exclusion or housing allowance, (2) eligibility for exemption from self-employment taxes, (3) self-employed status for Social Security, or (4) exemption of wages from income tax withholding. Revenue Procedure 2024-3.

The IRS has announced that it will no longer issue private letter rulings addressing the question of “whether amounts distributed to a retired minister from a pension or annuity plan should be excludible from the minister’s gross income as a parsonage allowance.” Revenue Procedure 2024-3.

The IRS has announced that it will no longer issue private letter rulings addressing the question of “whether a taxpayer who advances funds to a charitable organization and receives therefore a promissory note may deduct as contributions, in one taxable year or in each of several years, amounts forgiven by the taxpayer in each of several years by endorsement on the note.” To illustrate, a church member transfers $5,000 to her church and receives in return a promissory note from the church promising to pay back the note in annual installments over the next five years. Each year, on the due date of the annual installment, the note holder “forgives” the payment. Can the note holder treat the forgiven installment as a charitable contribution deduction? This is a question the IRS will no longer address in private letter rulings. Revenue Procedure 2024-3.

The IRS has announced that it will no longer issue private letter rulings addressing the question of “whether a transfer is a gift within the meaning of section 102” of the tax code. To illustrate, a pastor retires after many years of service to the same church. The church presents him with a check in the amount of $10,000. Is this check taxable compensation or a tax-free gift? This is a question the IRS will no longer address in private letter rulings. Revenue Procedure 2024-3.

The IRS has announced that it will not issue private letter rulings addressing the question of “whether a compensation of property transaction satisfied the rebuttable presumption that the transaction is not an excess benefit transaction as described in § 53.4958-6 of the Excess Benefit Transactions Excise Tax Regulations.” Revenue Procedure 2024-3.

Generally, tax-exempt organizations are required by the tax code to inform the IRS of material changes in their activities or operations. The IRS has announced that it no longer will issue private letter rulings informing exempt organizations if changes in their activities or operations jeopardize their exempt status. Revenue Procedure 2024-3.

A number of tax-favored rules do not apply if there is discrimination in favor of highly compensated employees. These include:

For 2025, a highly compensated employee was one who (1) was a 5-percent owner of the employer at any time during the current or prior year (this definition will not apply to churches) or (2) had compensation for the previous year in excess of $160,000 and, if an employer elects, was in the top 20 percent of employees by compensation.

See Table 1 for a summary of 2025 Social Security changes.

The FICA tax rate (7.65 percent for both employers and employees, or a combined tax of 15.3 percent) does not change in 2025. The 7.65-percent tax rate is comprised of two components: (1) a Medicare hospital insurance (HI) tax of 1.45 percent and (2) a Social Security (old-age, survivor, and disability) tax of 6.2 percent. No maximum amount exists for wages subject to the Medicare hospital insurance (the 1.45-percent HI tax rate). The tax is imposed on all wages, regardless of amount. For 2025, the maximum wage amount subject to the Social Security portion of FICA taxes (the 6.2-percent amount) increases to $176,100. Stated differently, employees who receive wages in excess of $176,100 in 2025 pay the full 7.65-percent tax rate for wages up to $176,100 and the HI tax rate of 1.45 percent on all earnings above $176,100. Employers pay an identical amount.

Ministers and lay church employees who use the actual-expense method of computing their car expenses can claim a deduction for depreciation. The amount of depreciation you can claim in any given year is limited. These limits are known as the “luxury car limits.” The 2024 limits are summarized in Table 2. The 2025 limits were not available at the time of publication of this guide.

The income tax brackets for 2024 are summarized in Table 3.

A church purchased property adjacent to its sanctuary. Following the purchase, the church chose to continue an existing lease of the property to an automotive window–tinting business that produced revenue of $5,400 annually. The church used the property for various purposes, such as scouting, a food pantry, and clothing donations. A men’s Bible study group met there approximately once a month until the COVID-19 pandemic in 2020. The building houses the office of one of the church’s elders, and the church has used the building to conduct a Sunday school for children. The senior pastor characterized several of the activities conducted in the building as within the scope of what he considers to be worship.

A local court ruled that the property was not entitled to exemption. It concluded that state law limited exemptions of church property to property that is used exclusively for worship, and this requirement cannot be met for property that a church owns but leases out. The church appealed.

An appeals court began its opinion by noting that the Virginia constitution exempts from property taxation church-owned property that is exclusively used for religious worship. But, like the trial court, the appeals court concluded that the church property in question did not qualify for exemption because it was not used exclusively for religious worship. The court observed that the church failed to satisfy the exclusivity test since the property was leased to a commercial business.

Many churches rent their premises. This may be on a long-term basis, as in this case. But it more often is on a short-term basis. A common example is the rental of a church sanctuary for a wedding. A question that arises in such cases is the application of “public accommodation” laws. Such laws, which have been enacted by most states, prohibit places of public accommodation (as defined by state law) from discriminating against persons on the basis of several grounds, including gender, race, national origin, disability, age, and in some cases sexual orientation and gender identity. To illustrate, if a church is a place of public accommodation, can it incur liability for refusing to rent its facility for the celebration of a same-sex wedding in violation of the church’s religious beliefs?

Churches should obtain legal counsel before entering into a lease agreement to assess its potential impact. Emmanuel Worship Center v. City of Petersburg 897 S.E.2d 265 (Va. App. 2024).

Congress has imposed special limitations, found in section 7611 of the tax code, on how and when the IRS may conduct civil tax inquiries and examinations of churches. The IRS may only initiate a church tax inquiry if an appropriate high-level Treasury Department official reasonably believes, based on written evidence, that the organization

Restrictions on church inquiries and examinations apply only to churches (including organizations claiming to be churches if such status has not been recognized by the IRS) and conventions or associations of churches. They don’t apply to related persons or organizations. Thus, for example, the rules don’t apply to schools that, although operated by a church, are organized as separate legal entities. Similarly, the rules don’t apply to integrated auxiliaries of a church.

Restrictions on church inquiries and examinations do not apply to all church tax inquiries initiated by the IRS. The most common exception relates to routine requests for information. For example, IRS requests for information from churches about the filing of returns, compliance with income or Social Security and Medicare tax withholding requirements, supplemental information needed to process returns or applications, and other similar inquiries are not covered by the special church audit rules.

Restrictions on church inquiries and examinations don’t apply to criminal investigations or to investigations of the tax liability of any person connected with the church, such as a contributor or minister.

Audit process

The sequence of the audit process is as follows:

If at any time during the inquiry process the church supplies information sufficient to alleviate the concerns of the IRS, the matter will be closed without examination of the church’s books and records. There are additional safeguards for the protection of churches under tax code section 7611. For example, the IRS can’t begin a subsequent examination of a church for a five-year period unless the previous examination resulted in a revocation, notice of deficiency or assessment, or a request for a significant change in church operations, including a significant change in accounting practices.

A recent case

God’s Storehouse Church (GSH) was founded in 2009. The following year, it was incorporated as a Kansas not-for-profit corporation. GSH did not apply to the IRS for recognition of tax-exempt status. Instead, it declared itself a “church” pursuant to section 508(c)(1)(A) of the Internal Revenue Code.

GSH operates a thrift store with a small space inside that serves as a coffee shop. GSH’s thrift store sells donated items to the public. The coffee shop sells coffee to the thrift store’s patrons at cost. GSH paid gross wages to the pastor and his wife in 2019 and 2020. GSH’s tax forms demonstrate that, during that two-year period, it withheld employment taxes from the wages of other employees but did not withhold any taxes from the gross wages of the pastor and his wife.

In November 2020, the pastor was elected to the Kansas State Senate. During his run, his campaign purchased yard signs that included the words “Founder of God’s Storehouse” below his name. The State of Kansas Governmental Ethics Commission vetted and preapproved those signs. According to the pastor, GSH did not “create, purchase, display, distribute, or in any way contribute to any yard signs associated with” his campaign and did not “intervene in or support [his] campaign for Kansas Senate.”

In February 2021, the IRS assigned an agent to investigate whether it should initiate a church tax inquiry into GSH for the 2019 and 2020 tax years. In June, the agent issued a Notice of Church Tax Inquiry (“Inquiry Notice”) to GSH after he secured approval from the IRS Commissioner of Exempt Organizations. The Inquiry Notice informed GSH of four concerns:

The IRS issued a summons to GSH’s bank, seeking various records pertaining to GSG’s accounts to assist with addressing its concerns. GSH claimed the summons was invalid because, before its issuance, the IRS failed to satisfy requirements applicable to church tax inquiries and examinations. In particular, the Tax Exempt and Government Entities Commissioner (TE/GE Commissioner), the IRS official that signed off on the GSH inquiry, is not an “appropriate high-level Treasury official” for the purposes of church inquiries and examinations.

The district court denied GSH’s petition, concluding that (1) the tax code protections pertaining to church tax inquiries and examinations do not apply to third-party summonses and that (2) even if these protections did apply to third-party summonses, the IRS complied with them. GSH appealed to a federal appeals court. The appeals court concluded that the tax code “makes clear it does not apply to third-party summonses. Accordingly, it is unnecessary to decide whether the TE/GE Commissioner is an appropriate high-level Treasury official.” The court added that

the problem for GSH is that the plain language of [the tax code] makes clear that a third-party summons cannot be a church tax inquiry because it is not an inquiry directed to a church. . . . ​The IRS’s summons . . . ​sought the bank’s records, not GSH’s records. In any event [section 7611(h)(4)(B)(i)] of the tax code] makes clear that records obtained pursuant to a . . . ​third party summons are not included within the definition of church records.

The court concluded that as with any statute, tax code provisions pertaining to examinations of church finances reflect

a legislative balance—here, between allowing [the IRS] to effectively perform its statutorily mandated investigative duties, while providing heightened protections to churches in light of their unique social and constitutional status. As the plain text of the tax code makes clear, Congress struck this balance by placing certain restrictions on [the IRS’s] ability to make an inquiry to a church and examine the church’s records and religious activities, while specifically exempting from those restrictions summonses made to third-party recordkeepers. . . . ​[The] argument that this arrangement allows [the IRS] to essentially bypass . . . ​safeguards afforded to churches under §7611 is one to be taken up in the halls of Congress, not a courtroom.

This case is important for three reasons.

First, it contains a helpful review of the “audit process” followed by the IRS in church tax inquiries and examinations (formerly referred to generally as “audits”).

Second, contrary to the assumption of many church leaders, the tax code protections for churches in responding to tax inquiries and examinations do not apply to a church’s accounts and other documents in the possession of a bank or other financial institution.

Third, the court noted that the church claimed that the basis for its exemption from tax was not section 501(c)(3) of the tax code but rather section 508(c)(1)(A). While the court mentioned the church’s alleged basis for its exempt status, it did not address it further, since doing so was not necessary to its ruling.

Some church tax “experts” are claiming that churches can avoid any taxes, regulation, or liability by reclassifying themselves as “section 508(c)(1)(A)” churches. This is a flawed interpretation of federal tax law. The fact is that churches are automatically 501(c)(3) organizations. There is nothing they need to do to acquire this status. Therefore, it is not clear how they could renounce their 501(c)(3) status. A church theoretically could become a for-profit entity, but this would have several deleterious consequences, including the loss of any charitable contribution deduction for donations made by church members to the church.

Clearly, any activity that jeopardizes a church’s exemption from federal income taxation is something that must be taken seriously. Churches should not pursue the dubious “section 508(c)(1)(A)” church status, which one federal court labeled “frivolous,” without the counsel of an experienced tax attorney or CPA.

To be sure, the tax code contains a section 508(c)(1)(A), but it has nothing to do with the exemption of churches. Rather, it exempts churches and certain other religious bodies from the necessity of applying for recognition of their exempt status under section 501(c)(3). As one court noted, “Nothing in [the tax code] suggests that a bank’s financial records concerning the financial activity of a religious organization are exempt from investigation.” The court concluded: “The IRS has broad investigative authority, including the authority to examine records or witnesses in order to determine whether tax liability exists or to make a return where none has been made. In short, [the ministry’s] arguments have no basis in law, and are frivolous.” God’s Storehouse v. United States, 98 F.4th 990 (10th Cir. 2024).

Two persons claiming to be members of a church and its board of deacons (the “plaintiffs”) sued the church, claiming that from 1990 through January 2021, the church made material misrepresentations and false assurances that their donations to the church would be used to support the church’s charitable and religious purposes. The misrepresentations allegedly were made on the church’s website and at church services through the use of offering envelopes.

The church admitted that it solicited donations through offering envelopes or through an online portal, but it noted that the offering envelopes and online portal stated that “the Pastor reserves the right to direct all funds to the area of ministry most needed.”

The plaintiffs’ request for access to church records to look for evidence of wrongdoing was denied. The court noted that California law specifies that the accounting books, records, and minutes of proceedings of the members and the board “shall be open to inspection upon the written demand on the corporation of any member” except as otherwise provided in the articles or bylaws. A “member” may also inspect and copy the record of all the members’ names, addresses, and voting rights upon written demand “except as otherwise provided in the articles or bylaws.”

A “member” means “any person who, pursuant to a specific provision of a corporation’s articles or bylaws, has the right to vote for a director, or disposition of all or substantially all of the corporation’s assets.” “Member” also means any person “designated in the articles or bylaws as a member and, pursuant to a specific provision of a corporation’s articles or bylaws, has the right to vote on changes to the articles or bylaws.”

The court noted that a corporation may refer to persons associated with it as “members” although not members within the meaning of state nonprofit corporation law. And, in the absence of any provision in a corporation’s articles or bylaws providing for members, “a corporation shall have no members.” The court concluded that nothing in the church’s governing documents mentioned members, and so the church had none as a matter of law.

The court concluded that since the church had no members under California law, no one had a legal right to inspect corporate documents, even in cases where wronging is suspected.

Note two points. First, the church in this case placed a notice on all designated offerings informing donors that “the Pastor reserves the right to direct all funds to the area of ministry most needed.” Many churches place a notice on donors’ giving statements, giving envelopes, church bulletins and newsletters, and other documentary evidence of charitable contributions informing donors that all donor designations are mere recommendations subject to the final authority of the church board.

Second, most state nonprofit corporation laws give members the legal right to inspect specified corporate records for a proper purpose. However, this right of inspection only applies to members of the corporation. The church in this case did not have members, and therefore no one had the legal authority to inspect church records, even to look for evidence of financial impropriety. The court cautioned that persons who were called “members” due to long association with the church were not legal members, even though most persons thought them to be so. The inability of non-members to inspect church records is one of several consequences of the non-member form of church governance. Church leaders should carefully consider the legal and tax consequences of the non-membership form of governance before adopting it. Buck v. Peace Apostolic Church, 2023 Cal. Super. LEXIS 94316 (Cal. App. 2023). See also Buck v. Peace Apostolic Church, 2023 Cal. Super. LEXIS 94316 (Cal. App. 2023), and Buck v. Peace Apostolic Church, 2024 Cal. Super. LEXIS 12760 (Cal. App. 2024).

The Catholic Charities Bureau (CCB) and four of its sub-entities sought an exemption from having to pay unemployment tax to cover their employees. They assert that they are exempt from coverage under Wisconsin’s Unemployment Compensation Act because they are operated primarily for religious purposes, i.e., fulfillment of the command of Jesus Christ himself “to serve others.” The State of Wisconsin ruled that CCB was not entitled to an exemption, since its activities are not “religious in nature.” CCB appealed, claiming that it is operated primarily for religious purposes because its charitable works “are carried out to operationalize Catholic principles.” The Wisconsin Supreme Court ruled that CCB was not entitled to the exemption. Catholic Charities Bureau v. State Labor and Industrial Review Commission, 3 N.W.3d 666 (Wisc. 2024).

A Virginia court ruled that property owned by a church was not eligible for exemption from tax because it was rented to a commercial organization and therefore was not used exclusively for exempt purposes. The court acknowledged that the property was used occasionally for exempt purposes, such as Sunday school and youth outreach. Even so, the church “failed to satisfy the exclusivity test. For it is undisputed that the church has leased much if not most of the property to [a for-profit entity] that operates its commercial business there . . . ​unrelated to the church’s religious mission.” Emmanuel Worship Center v. City of Petersburg, 897 S.E.2d 265 (Va. App. 2024).

For 2024, the adjusted gross income limitations on 403(b) retirement accounts have increased from $73,000 to $76,500 for those filing as married filing jointly; from $54,750 to $57,375 for those filing as head of household; and from $36,500 to $38,250 for those filing as single, married filing separately, or qualifying surviving spouse with dependent child.

For 2024, the limit on elective deferrals to 403(b) retirement accounts has increased from $22,500 to $23,000.

For 2024, the limit on annual additions to 403(b) retirement accounts increased from $66,000 to $69,000.

For distributions made after December 31, 2023, an emergency personal expense distribution may be made from a 403(b) plan and is not subject to the 10-percent additional tax on early distributions. An emergency personal expense distribution is a distribution made from your 403(b) plan (or other applicable eligible retirement plan) that is used for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. There are certain limits that apply for emergency personal expense distributions (i.e., one per calendar year, dollar limits of generally not more than $1,000, and limits on subsequent distributions). You may repay an emergency personal expense distribution at any time during the three-year period beginning on the day after the date on which you received the distribution.

A woman contributed to her church for many years, making gifts that represented a substantial portion of her relatively modest income.

The donor filed a federal income tax return for 2017, reporting a charitable contribution deduction of $36,549 for gifts to the church. The IRS selected her 2017 return for examination and requested substantiation of the claimed deduction amount. In response, the donor supplied receipts (“written acknowledgements”) from the church indicating that she contributed $17,957 by check in 2017. The church provided these acknowledgments pursuant to section 170(f)(8), which provides that no deduction shall be allowed for a charitable gift in excess of $250 unless the donee provides “a contemporaneous written acknowledgement of the contribution.” The donor later supplied bank records to the IRS, confirming that she had made the $17,957 of contributions that the church had acknowledged.

The IRS timely issued to the donor a notice of deficiency, allowing a charitable contribution deduction of $19,482 for 2017 but disallowing the $17,067 remainder of the deduction she had reported. The Tax Court began its opinion by noting:

[Section 170(a)(1) of the tax code] allows a deduction for any charitable contribution made within the taxable year to a [tax-exempt] donee organization. . . . ​This deduction is subject to . . . ​substantiation requirements. The specific substantiation requirements depend on the type and size of the contribution. For monetary gifts, the taxpayer must maintain “a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.” If the amount of any gift is greater than $250, the deduction must be substantiated by a contemporaneous written acknowledgment from the donee organization. The acknowledgment must include the amount of cash contributed, whether the donee provided goods or services in exchange for the contributions, and, if the donee provided only intangible religious benefits, a statement to that effect.

When the case was called for trial on April 15, 2024, the donor agreed that she had made some mistakes in calculating her deduction and that her bank records did not in fact support a deduction larger than the IRS had allowed. She confirmed her agreement that the amount allowed by the IRS was correct and that she had no evidence to substantiate a larger deduction.

The court concluded that the donor was entitled to a charitable contribution deduction of $19,482 for her gifts to the church, rather than to a deduction of $36,549 as reported on her tax return. The remaining cash contributions of $17,067 were not deductible because the donor did not produce a written acknowledgment from the church substantiating them.

The court accordingly sustained the disallowance of a deduction of $17,067 for lack of proper substantiation. Martin v. Commissioner, 2024 U.S. Tax Ct. LEXIS 1323 (T.C., May 23, 2024).

The IRS informed a taxpayer (the “petitioner”) that she received compensation of nearly $50,000 in 2018 from two employers that she failed to report on her tax return. In response, the petitioner sent the IRS a letter demanding that it turn over specified records by May 30, 2020. The petitioner later informed the IRS that this deadline had elapsed and that “to date I have been served absolutely nothing which could be considered as a good faith and diligent attempt by you to respond to affiant’s lawful and reasonable request within the stated deadline.” The petitioner insisted that the failure by the IRS to respond to her by the deadline set forth in her correspondence meant that the IRS was precluded from any further efforts to assess taxes and penalties against her. The Tax Court referred to the petitioner’s communications as “tax protestor gibberish.” It explained:

There is no legal basis to send a letter to the IRS imposing a deadline of your own choosing to get the IRS to do something and then claim the IRS can’t do anything to you, much less exempt yourself from taxes for 202 years because the IRS doesn’t adhere to the deadline that you tried to impose upon it. I also have no jurisdiction whatsoever to enjoin the IRS from collection of taxes. Larkin v. Commissioner, 2024 U.S. Tax LEXIS 9 (2024).

For estates of any decedent passing away in calendar year 2024, the basic exclusion amount is $13,610,000. See Table 4.

Explanation of Terms

A few legal terms are used occasionally in this book. They are listed below, along with definitions to assist you in understanding the text.

Internal Revenue Code (the “tax code,” “Code,” or “IRC”)

The federal tax law enacted by Congress. It covers several subjects, including federal income taxes, Social Security taxes, and withholding and estimated tax procedures. It is important to recognize that Congress, not the IRS, enacts federal tax laws. The IRS is an administrative agency established by Congress to assist in the administration of the tax laws enacted by Congress.

Regulations (“Treasury regulations” or “Treas. Reg.”)

Regulations are interpretations of the Internal Revenue Code issued by the Treasury Department. They provide taxpayers with guidance as to the meaning and application of the Code. They are inferior to and may never contradict the Code itself.

Internal Revenue Service (IRS)

An administrative agency that is part of the Treasury Department. It was created by Congress and exists to administer and enforce federal tax laws. It is subordinate to Congress and has no authority to make law.

Revenue rulings (“Rev. Rul.”) and Revenue procedures (“Rev. Proc.”)

Official pronouncements of the national office of the IRS. Like regulations, they are designed to provide guidance on tax issues. Usually they pertain to a specific issue. They are inferior in authority to both the Code and regulations.

IRS Private Letter Rulings (“IRS Letter Rulings”)

IRS responses to individual tax questions submitted by taxpayers. These letters can be relied upon only by the taxpayers to whom they are specifically directed. They cannot be cited or used as precedent by other taxpayers in similar circumstances.

AGI

Adjusted gross income.

Court decisions

A number of federal court decisions are referred to in the text. The initials S. Ct. or U.S. refer to a United States Supreme Court decision. The initials F.2d or F.3d refer to a federal appeals court decision. The initials F. Supp. refer to a federal district court decision. The initials T.C. or T.C.M. refer to a decision of the United States Tax Court. However, note that the initials T.C. refer to a ruling by all 19 judges comprising the full United States Tax Court, while the initials T.C.M. refer to a “memorandum” decision by only one Tax Court judge. Tax Court decisions rendered by all 19 judges (T.C.) have much more precedential value than memorandum decisions. United States Supreme Court rulings are binding in all state and federal courts. Federal appeals court rulings are binding in all federal courts in the respective federal circuit (there are 11 geographical circuits). Federal district court and tax court decisions ordinarily are not binding on any other court. Any federal court has the authority to interpret contested provisions of the tax code.

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