3 Tax Free Gifts For Pastors

By Raul Rivera

A few years ago a church of 300 members wanted to bless their pastor in a way that was meaningful.  He had suffered a few financial setbacks recently and many in the church wanted to do something to bless him.  The church treasurer was assigned the task of discovering what the church could do legally and what was the best way to do it so that the tax impact was minimal.  Not knowing where to start, he called us and I got a chance to speak with him.  He told me what the church was trying to do to bless him.  They were considering a cash offering by the people.  On a specific day, they were going to allow the people in the church to give cash into a basket and without it being counted he would be allowed to take it home.  A moment of silence ensued.  "On purpose, I held my silence, because I knew that the temporary awkwardness of the silence would lead to a question.  "Is that legal?"

Blessing the Pastor with the blessing of God and man

Like this church, many churches that want to bless their pastors often lack the knowledge to do it in a way that is blessed by both God and man.  I firmly believe that the Lord is zealous for a church that honors the laws of the land.  While many say AMEN to that, few take the time to learn those laws and for lack of knowledge much of the legal and financial side of their ministries are not blessed.

Three tax free gifts churches can give their pastors and staff

After some more conversation with the treasurer, I quickly outlined three little known ways a church could bless their pastor.  Keep in mind these are just three ways of many that can be done.  I am focusing on these because though available it seems a that very few churches even know about them.

The section 74 award (gift)

Internal Revenue code provides that the church or ministry can give a gift to an employee, including the pastor so long as it meets the requirements of a qualified employee achievement award set forth in section 74 and 274(j)(B).  The church is allowed to give a gift that is tangible to the employee so long as the following criteria is met. 

1. The program is put in writing and awards are given under conditions and circumstances that do not create a significant likelihood it being disguised compensation.
2. The award is tangible property.  It cannot be travel, vacations, meals, lodging, tickets to theater or sporting events, and stocks, bonds, or other securities.  Good award ideas can be a laptop, computer, office chair or desk etc.
3. The award is for length of service and is given as part of a meaningful presentation or ceremony once every five years, beginning at the end of his/her fifth year of service. 
4. The award cannot surpass $1,600.00 in value so long as the average of all awards to all employees is $400.00 or less

Pay for his/her education

Under Code section 127, the church can give educational assistance to help the pastor get a degree.  Payments may be for, but are not restricted to, courses that are part of a degree program, including a graduate degree program.  Under the law the program can pay for the cost of books, equipment, fees, supplies, and tuition.  The church can pay a maximum of $5,250.00 per year.

Pay for medical bills

Section 105(b) allows the church to create a written program to reimburse all out-of-pocket health expense costs of the pastor and other staff.  The church can either pay the bill directly or pay it as a reimbursement to the pastor or staff member.  This can and ought to be a part of his/her compensation agreement because it is tax free to both the church in terms of payroll taxes and to the pastor/staff in terms of Federal income tax and FICA/SECA.   In the case where the pastor/staff already has health insurance, the medical reimbursement plan can be of significant value, because it can pay for the costs that are not covered by insurance.  These can be:

1. Deductibles;
2. Medical costs not covered by any health insurance such as lasik eye surgeries dental work, lab fees, medical supplies, humidifier, eye glasses, over the counter medication and more.

What the church chose to do

The treasurer was very excited about what I had told him and said he would call me back.  One year later he called me back. The board felt it was too much hassle to change their old ways. In addition, who was the government to interfere with the sovereignty of God's church anyway?  They chose the cash offering.  He is no longer their treasurer.