Printable Version

Boost Income, Save on Taxes, and Help a Worthy Cause

By: Irving L. Blackman

Charitable Gift Annuities

With interest rates near historic lows, it?s hard for many people to safely secure enough investment income to meet their living needs.

But there is a way to do it?while saving taxes and helping a charity.

How: Invest in a ?charitable gift annuity? (CGA) sponsored by a nationally recognized charity, such as The Salvation Army or UJA-Federation of New York.
With a CGA, you donate an asset to charity and in exchange receive an annuity for life. At the end of the CGA?s term, the charity retains the value of the asset. Four advantages?
You avoid ever paying capital gains tax on the asset you donate to charity.
You?ll receive more income than from a CD or a bond.
A portion of the income will be tax free.
You get an income tax deduction up-front for the present value of the interest the charity will get at the end of the CGA?s term.

Example: An individual age 66 and in the 33% tax bracket owns stock now worth $100,000 for which he paid $50,000. He wishes to swap the stock shares for a safe, income-producing investment.

Selling the stock to reinvest the proceeds will result in $7,500 of capital gains tax ($100,000 ? $50,000 x 15%) leaving $92,500 to invest. If reinvested in 10-year US bonds, the interest rate will be only about 4%?paying less than $4,000 annually. Riskier high-grade corporate bonds yield only about 5%, to provide less than $5,000 annually, all of which will be taxable.

Contrast: By donating the stock to a CGA, the individual first saves the $7,500 capital gains tax.

Then, using numbers from the CGA calculator provided by the American Heart Association, the annual payout would be?
$6,100 cash, or 6.1%, and
$1,732 of this would be tax free, making the payout equivalent to 8.4% taxable, plus
A one-time tax deduction of $35,204 in the year you gift to the CGA.
Unlike with a bond, principal is not returned. But if you are expecting to consume these funds during your retirement years anyway, that doesn?t matter.

Options: A CGA can last the length of both lives of a married couple, and deferred CGAs can be bought when you are young, say in your 30s or 40s, to provide income later in life?while you obtain an up-front tax deduction.

Details of the amount and tax treatment of annuities vary with the facts of each case.

To find out how a CGA might work in your situation, use the calculator provided by the American Heart Association and Gift Legacy. Go to www.americanheart.org and in the search box enter ?planned giving,? then click on ?For Planned Giving Donors,? then ?Planned Giving Calculator.?

CGAs are offered by many other leading charities, so investigate their terms as well.