As the end-of-year approaches, you might be thinking about ways you can make charitable contributions and earn the tax deduction that comes with them. Keep in mind, charitable donations will only affect your tax refund if you itemize deductions.
In 2023, charitable deductions plus any other deductions must exceed $13,850 for single people, $27,700 for those who are married, filing jointly, and $20,800 for anyone who files as head of household, according to the IRS. You can donate up to 60% of your annual gross income (AGI) based on current tax laws.
If you have faced tax debt or high tax bills in the past, a charitable gift annuity can help alleviate that burden. Plus, it feels good to give back to causes we care about.
Set Up a Charitable Gift Annuity to Earn Money for Life
If you itemize deductions, a Charitable Gift Annuity (CGA) represents an income tax charitable deduction. It provides a substantial tax benefit along with income for life.
A CGA allows you to donate money, assets, or securities to a qualified 501(c) organization, which the organization then invests. You’ll receive a fixed monthly or quarterly payment for life.
If you are younger, you’re likely to collect payments longer, but if you’re older, those payments will be larger. Payment is determined based on average life expectancy.
“[G]enerally speaking, the older the annuitant, the higher the rate,” according to an article by the American Council on Gift Annuities.
Many charities base their charitable gift annuity rates on ACGA standards. The ACGA establishes rates based on a number of factors. The organization seeks to balance an attractive income stream with a generous donation.
When you die, the balance of the annuity goes to the charity. If you are married, you can set up the CGA so your spouse inherits it. A CGA can help avoid probate or inheritance taxes; the income stream from the CGA continues seamlessly to your spouse. When your spouse dies, the charitable organization receives the full value of the asset.
Is a CGA Right For You?
CGA rates are often lower than what you might find with a commercial annuity. But if gifts for charitable purposes are important to you, a CGA provides a nice balance between giving back and earning cash for retirement, especially if you expect to be on a fixed income later on.
Plus, the charitable contribution tax deduction may substantially lower your tax bill now and in retirement. If you have stock, mutual funds, or even real estate that you want to sell but don’t want to pay capital gains tax on your entire earnings, you can roll those investments into a CGA.
A CGA can also be a good idea if you have a CD or fixed investment that isn’t generating much income, even in today’s high interest rate environment. Use that money to make your charitable gift annuity payments.
Understanding Taxes on CGA Income
Keep in mind, some income from CGAs is considered taxable. The tax rate depends on how the annuity was funded, according to the ACGA.
For instance, if you fund the account with appreciated securities, like stocks or with real estate you owned for longer than one year, it may be taxed partly as ordinary income and part as capital gains tax. Part may also be tax-free.
You will also receive a tax deduction for a portion of your gift annuity contract.
It sounds complicated to figure out, but don’t worry. The charity will send a Form 1099-R in January that indicates how you should report your earnings when you file your taxes.
How to Open a CGA
Some charitable organizations will advertise the availability of CGAs on their website. If you can’t find any information, contact the giving office or fundraising office of that charity.
Make sure to review the payment amount for your age, tax consequences, and the amount of charitable contribution the annuity will generate for the organization. The ACGA also publishes a guide to member organizations that offer charitable gift annuities here. You can search for an organization by name or look for one in your area.
Alleviate Tax Can Help Reduce Your Tax Liability
If you have problems with high tax bills or need tax debt relief, Alleviate Tax professionals are standing by to help. Reach out now to reduce your tax bill in April or get help with past-due taxes.
