According to Revenue Ruling 55-422 payment(s) to a retired pastor may be considered non-taxable gifts because of the close personal relationship that exists between a minister and his congregation.  This is a unique provision which is not available in any other careers.  Payment(s) which are made out of gratitude and appreciation to a pastor who received appropriate compensation while employed can be considered non-taxable.  In order for the payment(s) to the retired pastor to be considered non-taxable gifts it is important that the following conditions are true.

• The pastor is not expected to perform any services in exchange for the payment(s). (This does not mean the pastor cannot voluntarily teach or serve as any other member would.)
• The payment(s) are not part of a plan or agreement entered into before retirement.
• The payments are based on the pastor’s need and the church’s ability to pay.

It is important that the church does not enter into a binding agreement or contract with the pastor because the payments must be based on the church’s ability pay. A contract would need to be honored regardless of the church’s financial ability.