Question: I am a full-time pastor who is considered dual status for tax purposes. In the past, I have been given a certain amount for salary, of which I give back more than 10 percent in tithes. In the process of this money coming to me from the church and going back to the church again, the money gets taxed. Then I claim it as a charitable contribution. However, is it possible to simply turn down that amount and not be paid it by the church? In other words, if I was told I would be paid $50,000 for 2013, but I told the church to just pay me $45,000 so I wouldn’t have to pay taxes on that $5,000. I simply wouldn’t take it. Is anything wrong with this?
Answer:
Under the “constructive receipt” doctrine of tax law, this arrangement does not reduce taxable income by the amount of the salary that is refused. Here’s why:
- Income is considered “realized” by a taxpayer and is taxable if it is made available and could be received upon request.
- The legal authority to receive the full stated salary makes it taxable, even if the pastor decides to forgo a portion to make a contribution back to the church.
Unless specifically excluded by the tax code, such as in the case of housing allowances or 403(b) contributions, salary reductions remain part of taxable income.
What Is the Constructive Receipt Doctrine?
The constructive receipt doctrine is a key concept in clergy taxes. According to this rule, taxable income includes all income that is credited to a taxpayer’s account, set aside, or otherwise made available without restriction. This applies even if the taxpayer chooses not to take the income.
In your example, the $50,000 salary is taxable because it was legally made available to you, even if you chose not to accept $5,000 of it. This refusal does not eliminate the tax liability for that portion of the salary.
What Are Acceptable Ways to Reduce Taxable Income?
Clergy can reduce taxable income through methods specifically allowed by the tax code. These include:
- Housing Allowance: Excludes the portion of salary designated as a housing allowance, provided it meets IRS requirements.
- 403(b) Contributions: Allows pastors to defer income into a retirement plan, reducing taxable income for the year.
It’s important to work with a tax professional to ensure compliance and maximize eligible tax benefits.
FAQs: Clergy Taxes and Foregoing Salary
1. Can pastors reduce taxable income by refusing salary?
No. Under the constructive receipt doctrine, income is taxable if it is made available, even if not received.
2. Are there legal ways to reduce taxable income?
Yes. Examples include housing allowances and contributions to a 403(b) retirement plan.
3. Does tithing reduce taxable income?
No. Tithes are treated as charitable contributions and can be deducted separately but do not reduce taxable salary directly.
4. Should pastors consult a tax professional?
Yes. A tax professional can ensure compliance and help pastors maximize allowable deductions and exclusions.
Understanding the constructive receipt doctrine and applicable clergy tax rules is essential for pastors. By working with tax professionals and leveraging permitted exclusions, pastors can effectively manage their tax liabilities while supporting their churches.
