Get Income for Life & a Tax Write-Off

If tax savings and a lifetime of steady income sound appealing, you might be a candidate for a charitable fixed annuity, also called a gift annuity.

Similar to an insurance company's fixed annuity, a charitable annuity pays you the same amount every year. When you die, the charity receives the remaining principal. These annuities appeal most to donors in their seventies and eighties, who are less concerned than younger people about keeping ahead of inflation.

Don't shop around for the highest rate of return, though, because most large U.S. charities offer yields set annually by the American Council on Gift Annuities in Dallas. This benign collusion among charities, which began casually about 70 years ago, was finally legalized by Congress and President Clinton in July.

A gift annuity's yield varies according to your age (see table). For example, if you were to set up a $10,000 gift annuity at 60, you'd earn $690 a year and could deduct $3,733.50 on your tax return for the year in which you make the donation. The deduction is equal to the gift's value minus the lifetime income that the IRS estimates you'll receive. If you were to make the donation at 80, you'd get $940 a year and a $5,038.40 deduction. (A two-life gift annuity, which pays income to the survivor for life after the donor's death, offers a slightly lower yield.)

The Benefits of Charitable Annuities

Most gift annuities follow yield guidelines set anually by the American Council on Gift Annuities - and rates are the same for men and women. To estimate what your yield and tax deduction would be on $10,000 gift annuity this year, find your age below:

Moreover, since a portion of your income will be considered a return of principal, part of your annual income will be tax-free. How much depends on your age. For instance, if you were to make a donation at 60, the tax-free portion would be 37.7%. If you were to set up a gift annuity at 80, the tax-free amount would be 56.2%.

Donors should keep in mind, however, that returns on gift annuities are less than those paid on commercial annuities. For instance, if a 65-year-old man bought a $20,000 single-life fixed annuity from Presidential Life, he'd receive $1,910 a year, also partly tax-free. If the same man donated $20,000 to his favorite charity as a gift annuity, he'd earn $1,440 a year - however, he'd get an immediate $8,097.60 tax deduction. And, if he donated appreciated stock, he'd avoid capital-gains taxes.

You can start receiving income from a charitable annuity immediately. If you wait, however, your deduction and eventual yield will be considerably higher. For example, if you established a $10,000 gift annuity at age 50 with the Salvation Army and deferred payment for 10 years, you'd get a $5,458.50 deduction and start collecting $1,170 a year at 60. If you donated the same amount at 60 and started payments immediately, you'd get only $690 a year and a deduction of $3,733.50.

Reprinted from Retire With Money, September 1977 Issue.