Question: Pastor Smith is retiring from a church where he served as minister for the past 30 years. The church presented him with $8,000 a special occasion cash gift for his retirement. Is this taxable to Smith?
Answer: It depends on whether the gift meets Rev. Rul. 55-422’s requirements. If both the church and Smith meet all the following requirements, it will not be taxable to him.
- The minister is not expected to perform any services in return for the gift
- The payment was not made based on any mandatory agreement or past practice
- The minister will no longer provide services to the church
- There is a far closer personal relationship between the minister and the church than a minimal employment relationship; it requires a deeper connection between the minister and the congregation
- The minister has been adequately compensated for his past service and the gift is not connected to any of his early years’ uncompensated work
To show the extended connection between the minister and the parishioners, it is suggested the gift be given informally by the congregation, rather than an official presentation by the church. Depending on if the pastor was paid on a W-2 or 1099 for this gift amount, either the church or the pastor, or both, will ultimately need to make the decision as to whether the gift is taxable. In addition, if the gift amounts are significantly higher than prior compensation, it could still be classified as compensation.
