Our church pays the college tuition and fees for our pastor’s daughter by writing checks directly to the university. The gifts are restricted by a church member for the educational expenses of the pastor’s daughter. We provide charitable gift receipts to the donor. We have been told these payments are tax-free to the pastor since he does not receive the funds directly. Are we handling these funds correctly?
No. There is no charitable tax deduction for a gift to a church which is restricted (or designated) for the educational expenses of a staff member’s dependent. If the church uses the funds to pay the tuition of a staff member’s dependent, even if the funds are paid directly to the educational institution, the amount is taxable and subject to payroll tax treatment and reporting for the pastor.
Dan Busby is a certified public accountant, president of the Evangelical Council for Financial Accountability (ECFA), and the author of the Zondervan Clergy Tax & Financial Guide.