Most pastors know that they can deduct certain unreimbursed expenses from their federal income tax liability. These include church-related travel and transportation expenses, some church-related entertainment, and home office expenses used for church business.
However, few pastors are aware that there are other expenses that are generally deductible.
Pastors can deduct up to $25 per individual for business gifts to any number of individuals per year, if the gifts are related to the church, activities of the church, or the ministry of the church. Incidental costs, such as engraving, gift wrapping, postage, and insurance do not have to be included in the $25 limit.
Contributions to a religious organization
Charitable contributions made by the pastor to the church are deductible as charitable contributions on Schedule A. However, some denominations require their credential holders to tithe or at least to contribute to the national and/or state denominational organization. If this is required, the amount contributed by the pastor is usually deductible as fees and membership dues on Schedule A.
The unreminbursed costs of special clothing required to perform the pastoral duties of the church are deductible if they are not suitable as normal wearing apparel. For example, a regular suit worn in the pulpit cannot be deducted, but the cost of vestments and robes can be deducted.
The pastor can deduct the unreminbursed cost of educational expenses if the education meets the requirements of the church to keep a present position or maintains and improves the skills of the pastor.
The education costs are not deductible if the education is required to meet the minimum educational requirements for a pastor in the denomination or church. In addition, education necessary for the pastor to qualify to change occupations is not deductible.
Meal and entertainment expenses are deductible if they are ordinary and necessary and are either directly related to or associated with the pastor's ministerial responsibilities. This means that if a pastor and spouse take a guest out for dinner, 50 percent of the guest's meal is deductible and 50 percent of the amount that is over what they would normally spend on dinner for the pastor and spouse's meal is deductible. So, if the pastor and spouse normally spend $25 on dinner and their dinner cost $45, the pastor can deduct 50 percent of the $20 over what is normal for them.
Mortgage interest, points, fees, closing costs, appraisal costs, and legal fees are all deductible in the year they were incurred.
Nonreimbursed moving expenses are deductible. Certain moving expenses reimbursed by the church can be excluded from the pastor's gross taxable income. See IRS Publication 517 for information concerning allowable moving expense deductions.
Personal computers owned by the pastor and used more than 50 percent on behalf of the church can be depreciated as five-year recovery property or deducted under Section 179 up to the annual limit of $24,000 (for 2002 tax year—increases to $25,000 for 2003 tax year). This deduction is relative only to the part that is used for church business. As an example, if the computer is used 50 percent of the time for church business, 50 percent of the value of the computer can be depreciated.
Subscriptions and books
Subscriptions to ministry-related periodicals are deductible. Books related to the ministry with a useful life of one year or less can also be deducted.
A pastor cannot deduct any basic local telephone charges as a business expense. However, church related long-distance calls, a second line, special equipment, and services such as call waiting and call forwarding can be deductible.
Cell phones, like personal computers, can be depreciated as five-year recovery property if the phone is used more than 50 percent for church-related business.
Although most of the above expenses can be deductible expenses for pastors, to ensure the most accurate information, we recommend that the pastor consult with a trusted tax attorney, CPA, contact the local IRS representative, or go online at www.irs.gov.