Many people want to make charitable gifts, but they worry about whether they'll need the money later in life. A charitable gift annuity addresses both concerns. This method of charitable giving allows you to claim an upfront tax deduction for the value of the gift to charity, while naming yourself or another beneficiary to receive monthly payments for the rest of your lifetime. In some cases, you can name another beneficiary to receive payments as well. Below, we'll look more closely at the charitable gift annuity strategy and what the requirements are to take advantage of it.
A permanent gift with benefits for you
A charitable gift annuity involves both you and your charity taking on certain obligations. You agree to make an upfront gift, whether of cash, stock, or other assets. In return, the charity agrees to make regular payments back to you or to your named beneficiary. In some cases, the stream of income will start immediately. Other gift annuities provide for deferred payments, with monthly income starting to flow once the annuitant reaches a certain key age such as 75 or 85.
Once you make the charitable gift, it becomes permanent. That's the case whether or not you ever receive any income from the gift annuity. Especially with deferred gift annuities that don't start paying income until a later date, there's always a chance that you'll receive nothing from the gift annuity, leaving the entire donation in the charity's coffers.
However, the gift itself gives rise to a charitable deduction. In order to calculate the amount of the deduction, you have to first figure out the present value of the gift annuity you received in exchange for your gift. Whatever the difference is between the value of your gift and the value of the annuity is what you're allowed to deduct. For instance, if you make a $50,000 gift and the value of the annuity you get back is $30,000, then you can take the $20,000 difference as a charitable deduction.
Complexities of charitable gift annuities
Where things get difficult is in the actual calculations of the value of the annuity. The gift annuity's value depends on a number of different variables, including the amount of the payments under the annuity, the prevailing interest rate in the current market environment as defined by the IRS, the frequency with which you receive payments, and whether the annuity is a joint and survivor annuity with multiple beneficiaries or just a single-life annuity with one beneficiary.
Fortunately, there are resources you can use to help you get the information you need. The American Council on Gift Annuities provides guidance on how much a charity should be willing to pay in interest on a gift annuity, and it also gives references to software providers that can help you calculate the appropriate tax deduction for your gift annuity.
How gift annuity payments get taxed
Finally, it's important to understand that the payments you receive from a charitable gift annuity have tax consequences. In general, a portion of each payment will be treated as a return of capital, while the rest will be ordinary income that you must include on your tax return. That treatment is similar to what any immediate annuity would provide, but it's still something you need to take into account as you look at the long-term impact of using a gift annuity in your planning.
Charitable gift annuities are more complicated than you might think when it comes to calculating key numbers, but the ideas behind them are relatively simple. By using a gift annuity rather than making an outright gift, you can get money to the causes you believe in while also making provisions to ensure your own financial security for the rest of your life. If that's important to you, then a charitable gift annuity could be the right move for you.