You’ve done it! You’ve fought the good fight, run the race with perseverance, and now the time has come to retire from your post. You did a good job and your church loves you. They want to bless you in this new season of life, so they write you a big check. While you’re thrilled and grateful, there’s one important question you need to answer before you start spending it: Do you have to pay taxes on your retirement gift? 

Most Gifts To Pastors Are Taxable

Usually, gifts to pastors are considered taxable income. The IRS is pretty strict about that and tax court cases have been decided that lay out their criteria and reasoning. While your congregation might not realize it, pretty much anything they do for you that’s related to the fact that you’re their pastor constitutes taxable income for you. 

A $50 thank-you after a baptism? Taxable income. 

A cash birthday gift? Taxable income. (I guess the IRS doesn’t think they’d like you enough to give it to you if you weren’t their pastor.)

Gift certificate for a night at a hotel from the congregation for your anniversary? Taxable income. 

A big check from a love offering at your retirement party? You might actually get to avoid taxes on that one!

When Gifts To Retired Pastors Are Tax-Free

Yes, it’s true. Certain gifts to retired ministers are not considered compensation and are therefore tax-free gifts. There are some strict criteria that must be met in order for a gift to avoid taxes, given by the IRS in Revenue Ruling 55-422.

For your retirement gift to be non-taxable, the following must be true:

1. You aren’t expected to perform any services in exchange for the gift. 
   
   
2. The gift is not based on any enforceable agreement or past practice. The church is under no obligation to do it for you.
   
   
3. You will no longer be working for the church or rendering services in any formal capacity. 
   
   
4. You had a deeper relationship than simply employee/employer with the church. The gift cannot be for just any employee but rather someone like a senior or executive pastor.
   
   
5. You must have received adequate compensation for your past services. The gift cannot be to make up for what the church wishes they could have paid you previously. How things are worded when the gift is presented can violate this requirement if not thought through carefully. 
   
   

If even one of the above criteria does not apply, then the gift is considered compensation for services rendered and is thus taxable. 

When planning for such a gift, it is important that the church asks, Could this in any way appear to be compensation for past, present, or future services? If the church cannot answer that question with a clear negative, then the IRS may not either.

When you’re unsure if a gift that your church has given you qualifies to be tax-free, discuss it with your church and find out the reasoning and logic behind the gift. If they cannot give you any definitive answers, then consult a tax professional that is experienced in clergy matters. (Beware, though, because most standard tax preparers do not know or understand all of the special tax considerations that you, as a pastor, face.)