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A Tax Break With Steady Income for Retirees

Last update on: Oct 17 2017
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The old tax shelter industry promised something it couldn’t deliver: Tax breaks followed by a stream of income. Those limited partnerships never seemed to deliver the income, and some of the tax breaks were disallowed. But there is a strategy that will deliver current tax breaks with lifetime income, and it is tailor-made for retirees.

The strategy is known as the charitable gift annuity. It is simple and well-established. You’ll want to consider it if you have a charity you want to benefit in addition to your goal of a steady, fixed stream of lifetime income.

Here’s how it works.

You give money or property to a charity. In return, the charity promises to pay you a fixed rate of income for the rest of your life (or a period of years if you negotiate that). It is called a “gift annuity” because the annuity payment you receive will be less than you could get from an insurance company. You are making a gift to the charity by taking a lower lifetime income.

You get to take the tax deduction for your gift in the year you purchase the annuity. The deduction is equal to the amount of income the IRS estimates that you give up by using the charitable annuity instead of the commercial annuity. In addition, part of each annuity payment you receive will be considered a tax-free return of your principal and part will be taxable interest income, until all of your principal has been return.

Most established charities routinely use charitable gift annuities and have all the forms and details ready for you. There’s not much point in looking for a charity that will be you the highest income. The charities have a trade group that annually “suggests” the interest rates for gift annuities, and most charities use that rate. A couple of years ago an antitrust suit was filed against the group, but that caused Congress to pass a law saying that the charities could collude on the interest rate without violating antitrust laws.

The older you are, the more sense a charitable gift annuity makes, for several reasons. One reason is that your tax deduction increases as you get older. Also, the income you’ll receive from the annuity will be higher. And finally, the older you are the less worry you have that inflation will eat away at the purchasing power of your income.

The table shows the benefits of charitable gift annuities for taxpayers at different ages. The second table shows the payout rate used on charitable gift annuities. The rates are determined annually by The American Council on Gift Annuities (2401 Cedar Springs Road, Dallas, TX, 75201-1427; (214) 720-4774).

Charitable Annuity Benefits

Charitable Gift Annuity Benefits
Age Annual Income Charitable Deduction
60 $6,900 $39,172
65 7,200 42,232
70 7,700 45,098
75 8,400 48,226
80 9,400 51,838

* Figures are for $100,000 annuity purchase. Results change each month.

Payout Rates

On Charitable

Gift Annuities

Age Rate
61 7.0%
62 7.0%
63 7.1%
64 7.2%
65 7.2%
66 7.3%
67 7.4%
68 7.5%
69 7.6%
70 7.7%
71 7.8%
72 7.9%
73 8.1%
74 8.2%
75 8.4%
76 8.6%
77 8.8%
78 9.0%
79 9.2%
80 9.4%

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