Charitable Gift Annuities
The Scholarship Fund of MOAA can help you augment your income - while you give.
Richard D. Barrett is president of Barrett Planned Giving Inc. in Washington, D.C.

You can further the education of children of all military personnel and receive an income for life at the same time. A charitable gift annuity through the Scholarship Fund of moaa assures you a quarterly income for life in addition to a sizeable charitable income tax deduction.

Charitable gift annuities can be complicated, however. Following is a brief explanation of how they work.

How can a charitable gift annuity work for me?

In return for a gift of cash or securities, the Scholarship Fund of moaa will pay a quarterly amount to you for your lifetime. The amount, a percentage of your donation, will not vary from year to year, even though interest rates or stock values may decline. Payment rates vary with the age of the donor (see chart at left), with the minimum age being 50.

For example, 70-year-old John A. had $20,000 cash from a maturing certificate of deposit (CD). The CD paid 2.5 percent interest, for a total of $500 a year that was fully taxable. With the same money, a new charitable gift annuity with the Scholarship Fund of moaa will provide him with a fixed annual income at the rate of 6.7 percent - a total of $1,340, of which $831 is tax-free for 15.9 years, the actuarial life expectancy of a 70-year-old (more information about this is in the next section).

It also will give him an immediate charitable income tax deduction of $6,793. This deduction can be carried forward for up to five years if he cannot use it all in 2003.

How are my payments taxed?

A portion of each payment is considered a return of principal and is not taxed over the actuarial life expectancy of the donor. When the donor lives past his or her actuarial life expectancy, the entire payment becomes taxable as ordinary income. The payments from a charitable gift annuity funded with $20,000 in cash are shown in the chart below.

How does funding a charitable gift annuity with appreciated stock rather than cash help me?

The capital gains tax is reduced and spread over the annuitant's life expectancy. If John A. had funded the gift with $20,000 in low-dividend stock that had grown in value from $10,000, his capital gains tax would be reduced and spread out over his actuarial life expectancy. The result is that of his $1,340 annual payment, $415 would be tax-free, $415 would be taxable at the capital gains rate, and $509 would be taxable as ordinary income.

Can a charitable gift annuity increase my current spendable income?

Yes. If the payments from the gift annuity exceed dividends from the stock, the donor has increased his or her spendable income. If John A. had donated stock paying a dividend of 1.5 percent of its market value, his income would have increased from a fully taxable $300 ($20,000 × 1.5 percent = $300) to $1,340 ($20,000 × 6.7 percent = $1,340). Of the $1,040 increase, $509 is tax-free, and another $415 is taxed at the capital gains rate.

Can I set up a charitable gift annuity to benefit more than one person?

Yes. Gift annuities are frequently created to provide annuity payments for two people. The most common type is a joint-and-survivor relationship, under which payments are made to both annuitants for their combined lifetime. Upon the death of the first annuitant, the payments are continued for the survivor's lifetime. The adjacent table shows sample rates paid by the Scholarship Fund of moaa for two such beneficiaries.

Please note that if you name a beneficiary other than your spouse or yourself, the payments represent taxable gifts, and you must report them if they exceed certain limits. In 2003, that limit is $11,000.

Is it possible for me to delay the start of payments from a charitable gift annuity until later?

Yes. A deferred gift annuity can help those who may be presently in a higher income situation but who wish to add to retirement income later. You will enjoy a larger charitable tax deduction when the gift is made and a higher rate of return when the payments commence.

For example, if you set up a $20,000 charitable gift annuity at age 60 with payments delayed until age 65, your rate of payment would be 8 percent, your annual payment would be $1,600, and your charitable deduction would be $6,095.

Can I take a charitable income tax deduction at the time a charitable gift annuity is made?

Yes. You can take the deduction because a charitable gift annuity is considered a charitable contribution. The deductions allowed for a charitable gift annuity funded with $20,000 are in the chart above.

If a gift is funded with cash, you can take a charitable deduction of up to 50 percent of your adjusted gross income (AGI). If funded with appreciated stock, 30 percent of your AGI is allowed.

What if my charitable contribution exceeds the tax deduction allowed by the Internal Revenue Service?

To the extent that your charitable contribution exceeds 50 percent of your AGI (for cash) or 30 percent (for appreciated stock), the tax deduction can be carried forward up to five more years.

Establishing a charitable gift annuity offers many benefits. By setting one up, you can help the Scholarship Fund of moaa and the students it assists and help yourself at the same time.