Interested in making a sizable gift to charity but at the same time setting up a lifetime income for the remainder of your retirement years? That's what Charitable Annuities are all about. And the American Council on Gift Annuities (ACGA) has been helping donors find charities for since 1927. Let's get charitable annuities explained.
First, a charitable annuity is a contract under which a charity, in return for a transfer of cash, marketable securities or other assets from you, agrees to pay a fixed annuity to one or two individuals for their lifetime.
Your Tax Deduction on charitable annuities explained
But clearly, if you're making a gift and expect an income tax deduction for it, you need to give more to the charity than they give back to you in the form of an payments. That's handled by the charity offering annuity rates that are lower than those offered by insurance companies to purchasers of commercial annuities. That difference leaves a significant portion of your contribution available for charitable purposes, i.e the amount you are actually gifting.
The actual deduction for charitable annuities is equal to the amount of the contribution less the present value of the payments that will be made to the donor during his life. The annuity present value is determined using IRS tables regarding life expectancy, assumed earnings, the amount contributed, and the gift annuity rate published by the ACGA.
The charitable annuities rates recommended by the ACGA are in full compliance with the IRS and computed to produce an average gift to the organization at the expiration of the agreement of approximately 50% of the amount originally donated under the agreement.
Taxation of payments from charitable annuities explained
If the gift annuity is funded with cash, part of the payments will be taxed as ordinary income and part will be tax-free. If funded with appreciated securities or real estate owned more than one year, part of the payments will be taxed as ordinary income, part as capital gain, and part may be tax-free. The charity issues you a Form 1099-R specifying how much is taxed.
The size of your charitable annuity payments are based on:
• The gift annuity rate offered by the charity
• The value of the contribution.
• The number of annuitants.
• The age(s) of the annuitant(s).
Most charities follow rates recommended by the American Council on Gift Annuities.
Now that you have gift annuities explained, if you can afford to make a charitable donation and would like to count on fixed annuity payments for the life of you and perhaps a surviving spouse, your next step is to find a charity you'd like to donate to.