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Taxation of Charitable Gift Annuities. Russell James, J.D., Ph.D., CFP® Associate Professor Director of Graduate Studies in Charitable Planning Texas Tech University. Ordinary Income. Tax Free Return of Investment. Charitable Deduction. Capital Gain. Annuity. Gift Taxes. $5,000.

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Taxation of Charitable Gift Annuities


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    1. Taxation of Charitable Gift Annuities Russell James, J.D., Ph.D., CFP® Associate Professor Director of Graduate Studies in Charitable Planning Texas Tech University

    2. Ordinary Income Tax Free Return of Investment Charitable Deduction Capital Gain Annuity Gift Taxes $5,000

    3. Charitable deduction is the value of what you give less the value of what you get back Gift Annuity

    4. Donor gives $100,000 $100,000 Cash ─Value of Annuity Charitable Deduction $100,000 Cash Charity pays age 55 donor $5,000 per year for life Annuity $5,000

    5. What is the value of an annuity?

    6. $5,000/year age 55 donor on 9/2/10 I can choose current or one of last two month’s rate July 2.8% Aug 2.6% Sept 2.4%

    7. Value of fixed annuity Interest Rates

    8. $5,000/year age 55 donor on 9/2/10 I want the lowest annuity valuation [highest charitable deduction] so I select July 2.8%

    9. $5,000/year age 55 donor on 9/2/10

    10. $5,000/year age 55 donor on 9/2/10 If annuity pays more than annually, add adjustment factor from Table K

    11. $100,000 Cash ─$86,466 Annuity $13,534 Deduction Donor gives $100,000 $100,000 Cash Charity pays age 55 donor $5,000 per year for life Annuity $5,000

    12. If charitable deduction is not >10% of transfer, it doesn’t qualify IRS requires present value of charitable share >10% Charity 2010 … 2011 2012 2013 2014 2015 … Death

    13. How do I value an annuity for two lives?

    14. For two lives use Table R Annuity factor is (1-remainder) §7520 rate

    15. Charitable deduction is the value of what you give less the value of what you get back Gift Annuity

    16. Ordinary Income Tax Free Return of Investment Charitable Deduction Capital Gain Annuity Gift Taxes $5,000

    17. Part of each annuity check just gives you back some of the money you paid Initial Gift 1/1/2013 1/1/2010 1/1/2012 Charity $100,000 Donor 1/1/2011 $5,000 Earnings + Return of Investment Annual Payments

    18. The rest is earnings (taxable) Initial Gift 1/1/2013 1/1/2010 1/1/2012 Charity $100,000 Donor 1/1/2011 $5,000 Earnings + Return of Investment Annual Payments

    19. There is NO tax on getting back your own money Initial Gift 1/1/2013 1/1/2010 1/1/2012 Charity $100,000 Donor 1/1/2011 $5,000 Earnings + Return of Investment Annual Payments

    20. There IS a tax on getting earnings on your money Initial Gift 1/1/2013 1/1/2010 1/1/2012 Charity $100,000 Donor 1/1/2011 $5,000 Earnings + Return of Investment Annual Payments

    21. Suppose you put some money in the bank

    22. Each year you withdraw all of the interest and some of what you originally put in

    23. Do you pay taxes when you withdraw the money you originally put in?

    24. Do you pay taxes when you withdraw the money you originally put in?No.

    25. That is like getting your own money back that you buried in the ground

    26. That is like getting your own money back that you buried in the ground No Taxes

    27. Do you pay taxes when you withdraw the money you originally put in?No.

    28. Do you pay taxes on the interest earned?

    29. Do you pay taxes on the interest earned?Yes.

    30. Do you pay taxes on the interest earned?Yes.That is new money you didn’t have before

    31. The idea of taking all of the interest and some of the principal each year is similar to an annuity

    32. Each annuity check has some earnings and some return of original investment earnings return of original investment

    33. How much of each annuity check is return of the money you put in originally? earnings return of original investment

    34. $ used to buy annuityOriginal life expectancy earnings return of original investment Annual return of investment =

    35. Tax free return of investment is divided among each expected payment Original Investment Charity 2010 … 2011 2012 2013 2014 2015 Life Expectancy

    36. Annuity payments after life expectancy are 100% taxable because all original investment has been returned Charity 2010 … 2011 2012 2013 2014 2015 Life Expectancy

    37. Donor gives $100,000 How much of each $5,000 annuity payment is tax free return of investment? $100,000 Cash Charity pays age 55 donor $5,000 per year for life Annuity $5,000

    38. Donor gives $100,000 How much of each $5,000 annuity payment is tax free return of investment? $100,000 Cash $ used for annuity Original life expectancy Charity pays age 55 donor $5,000 per year for life Annuity $5,000

    39. Donor gives $100,000 How much of each $5,000 annuity payment is tax free return of investment? $100,000 Cash $86,466 annuity portion cost $ used for annuity Original life expectancy Charity pays age 55 donor $5,000 per year for life Annuity 21 years* $5,000 *Life expectancies from Reg 1.72-9 [http://goo.gl/kR5k] Adjustment for payment timing Reg. 1.72-5(a)(2)(i) [http://goo.gl/so26]

    40. Donor gives $100,000 How much of each $5,000 annuity payment is tax free return of investment? $100,000 Cash $86,466 annuity portion cost $86,466 21 = $4,118 Charity pays age 55 donor $5,000 per year for life Annuity 21 years* $5,000 *Life expectancies from Reg 1.72-9 [http://goo.gl/kR5k] Adjustment for payment timing Reg. 1.72-5(a)(2)(i) [http://goo.gl/so26]

    41. Charity $4,118 Tax free return of invest-ment $882 Ordinary income $4,118 Tax free return of invest-ment $882 Ordinary income $4,118 Tax free return of invest-ment $882 Ordinary income $4,118 Tax free return of invest-ment $882 Ordinary income $5,000 Ordinary income $5,000 Ordinary income 2010 … 2011 2012 2013 … 2022 Life Expectancy Death

    42. Charity If early death, donor’s last tax return deducts original investment not yet given back $4,118 Tax free return of invest-ment $882 Ordinary income $4,118 Tax free return of invest-ment $882 Ordinary income $4,118 Tax free return of invest-ment $882 Ordinary income 2010 2011 2012 2013 … Death… 2022 Life Expectancy

    43. Compare a cash charitable gift annuity vs. splitting the gift amount between a commercial annuity and an immediate gift Donor Charity Insurance Company vs. $5,000 $5,000 Donor Charity

    44. Original Amount – Annuity IRS Value DeductibleGift Original Amount – Annuity Price Deductible Gift Donor Charity Insurance Company vs. $5,000 $5,000 Donor Charity

    45. Where the charity does not or cannot issue gift annuities in the donor’s state, suggest this option Donor Charity Insurance Company vs. $5,000 $5,000 Donor Charity

    46. Ordinary Income Tax Free Return of Investment Charitable Deduction Capital Gain Annuity Gift Taxes $5,000

    47. Normal Capital Gain Rules $500,000 $1,000,000 $500,000 I paid for it I sell it for fair market value of I have a capital gain of

    48. Normal Capital Gain Rules $500,000 $500,000 $0 I paid for it I sell it for fair market value of I have a capital gain of

    49. $500,000 $800,000 $1,000,000 ??? I paid for it I give it to charity for an annuity worth It has a fair market value of I have a capital gain of