Charitable giving has long been a popular way to lower personal taxes. Beyond individual donations to charities, charitable gifts can be integrated into your regular financial planning by way of a charitable gift annuity.
Charitable gift annuities provide favorable tax consequences for donors, while also ensuring a steady income stream. The tax treatment of your personal annuity will depend on the particularities of your personal situation.
What Is a Charitable Gift Annuity?
A charitable gift annuity is a form of planned giving that is set up by way of a contract between a donor and a specific charity. Under that contract, the donor gives cash or other property to the charity, and in return, the charity pays a fixed annual income to the annuity’s designated beneficiaries for the rest of their lifetime. The donor also receives a partial tax deduction on the amount of the donation. The annuity can make payments to up to two beneficiaries, one of which is typically, but not always, the donor.
Charitable gift annuities are attractive because they allow you to make donations to the charity of your choice, while also receiving a lifetime fixed income stream for yourself or others. The payment of the income is a legal obligation of the charity and is guaranteed. But like any income, your annuity payments are subject to taxation. However, they also offer attractive tax deductions.
How Taxes Deductions on Charitable Gift Annuities Work
Tax deductions for charitable gift annuities depend on the number of beneficiaries and the age of the beneficiaries at the time contract was signed. Other variables include the amount of the original gift, applicable tax discount rates, and the amount and frequency of the income payments.
Taxpayers who itemize their deductions can see significant tax savings by claiming a charitable deduction for part of the original charitable gift. The amount of the deduction is calculated by subtracting the present value of the lifetime payments that will be made to the beneficiaries from the total amount of the original contribution. Present value is based on IRS actuarial tables that determine life expectancy and assumed earnings by taking into account the donation amount and the applicable gift annuity discount rate.
Generally speaking, the shorter your life expectancy, the higher your deduction will be and vice versa. Likewise, the higher the applicable discount rate is, the higher your deduction will be.
If math isn’t your strong suit, don’t worry. Software is available that can accurately calculate your tax deduction for you. The charity to which you donated can also assist you with the calculations, and many even offer online calculators that will help you determine how a charitable gift annuity might benefit you. And, as with any charitable giving and estate planning issues, consulting an experienced advisor is the best way to ensure that you’re accomplishing your goals.
Charitable Giving Made Easy
The Ledbetter Law Firm, APC knows the ins and outs of all aspects of estate planning and charitable gift giving. We’re dedicated to helping individuals plan for their futures and will help you understand the complexities of charitable gift annuities. Contact The Ledbetter Law Firm, APC today to see if a charitable gift annuity is right for your particular situation.