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Taxation of Charitable Gift Annuities
 

Taxation of Charitable Gift Annuities

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These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com

These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com

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    Taxation of Charitable Gift Annuities Taxation of Charitable Gift Annuities Presentation Transcript

    • Taxation of Charitable Gift Annuities
    • All slides are taken from this book which includes detailed explanations of all concepts. Available from Amazon.com Full color version available at www.createspace.com/4707238
    • Charitable Deduction Ordinary Income TaxFree Returnof Investment Capital Gain Gift Taxes $4,000 Annuity
    • Charitable deduction is the value of what you give less the value of what you get back
    • $100,000 Cash ─ Value of Annuity Charitable Deduction Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife $4,000 Annuity $100,000 Cash
    • What is the value of an annuity?
    • Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self- Employed/Section-7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 http://www.irs.gov/Retirement-Plans/Actuarial-Tables Value of annuity
    • Find the §7520 rate http://www.irs.gov/Businesses/Small-Businesses-&-Self- Employed/Section-7520-Interest-Rates I can choose current or one of last two month’s rate $4,000/year age55donor on10/31/13 Aug 2.0% Sept 2.0% Oct 2.4%
    • Value of fixed annuity
    • Find the §7520 rate 2.4%http://www.irs.gov/Businesses/Small-Businesses-&-Self- Employed/Section-7520-Interest-Rates $4,000/year age55donor on10/31/13 For the lowest annuity valuation [highest charitable deduction] select Oct. 2.4%
    • Section 1 Table S - Based on Life Table 2000CM Interest at 2.4 Percent Life Life Age Annuity Estate Remainder Age Annuity Estate Remainder 0 34.2376 0.82170 0.17830 55 18.1993 0.43678 0.56322 1 34.3011 0.82323 0.17677 56 17.7570 0.42617 0.57383 2 34.1418 0.81940 0.18060 57 17.3129 0.41551 0.58449 3 33.9727 0.81534 0.18466 58 16.8678 0.40483 0.59517 4 33.7967 0.81112 0.18888 59 16.4213 0.39411 0.60589 Find the §7520 rate 2.4%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section- 7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 $4,000 X 18.1993www.irs.gov/Retirement-Plans/Actuarial-Tables $4,000/yearage55 donoron10/31/13
    • Find the §7520 rate 2.4%www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section- 7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 $4,000 X 18.1993www.irs.gov/Retirement-Plans/Actuarial-Tables Value of annuity $72,797 If annuity pays more than annually, add adjustment factor from Table K $4,000/yearage55 donoron10/31/13
    • $100,000 Cash Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife $4,000 Annuity $100,000 Cash ─ $72,797 Annuity $27,203 Deduction
    • 2011 2012 2013 2014 2015 … Death … 2010 IRS requires annuity value <90% of transfer If charitable deduction is not >10% of transfer, it doesn’t qualify
    • Find the §7520 rate www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section- 7520-Interest-Rates Multiply annual payment by annuity factor in IRS Pub. 1457 www.irs.gov/Retirement-Plans/Actuarial-Tables Value of annuity For two lives use Table R Annuity factor is (1-remainder) §7520 rate
    • Charitable deduction is the value of what you give less the value of what you get back
    • Charitable Deduction Ordinary Income TaxFree Returnof Investment Capital Gain Gift Taxes $4,000 Annuity
    • Part of each annuity check just gives you back some of the money you paid Initial Gift Annual Payments Charity $100,000 10/31/2014 Donor $4,000 10/31/2015 10/31/2016 10/31/2017 + Return of InvestmentEarnings
    • Initial Gift Annual Payments Charity $100,000 10/31/2014 Donor $4,000 10/31/2015 10/31/2016 10/31/2017 + Return of InvestmentEarnings The rest is earnings (taxable)
    • Initial Gift Annual Payments Charity $100,000 10/31/2014 Donor $4,000 10/31/2015 10/31/2016 10/31/2017 + Return of InvestmentEarnings There is NO tax on getting back your own money
    • Initial Gift Annual Payments Charity $100,000 10/31/2014 Donor $4,000 10/31/2015 10/31/2016 10/31/2017 + Return of InvestmentEarnings There IS a tax on getting earnings on your money
    • Suppose you put some money in the bank
    • Each year you withdraw all of the interest and some of what you originally put in
    • Do you pay taxes when you withdraw the money you originally put in?
    • Do you pay taxes when you withdraw the money you originally put in? No.
    • That is like getting your own money back that you buried in the ground
    • That is like getting your own money back that you buried in the ground
    • Do you pay taxes when you withdraw the money you originally put in? No.
    • Do you pay taxes on the interest earned?
    • Do you pay taxes on the interest earned? Yes.
    • Do you pay taxes on the interest earned? Yes. That is new money you didn’t have before
    • The idea of taking all of the interest and some of the principal each year is similar to an annuity
    • Each annuity check has some earnings and some return of original investment earnings returnof original investment
    • How much of each annuity check is return of the money you put in originally? earnings returnof original investment
    • $ used to buy annuity Original life expectancy earnings returnof original investment Annual return of investment= NOT the deductible gift part of the transaction
    • $100,000 Cash $4,000 Annuity Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife
    • Charity paysage 55donor $4,000per yearforlife $100,000 Cash $4,000 Annuity Donor gives $100,000 $usedforannuitypart Originallife expectancy
    • Charity paysage 55donor $4,000per yearforlife $100,000 Cash $4,000 Annuity Donor gives $100,000 *Original life expectancy is a euphemism for “Expected Return Multiple”. The table is found in Code of Federal Regulations 26§1.72-9. Adjustment for payment timing is in CFR 26§1.72-5(a)(2)(i) $72,797annuity portioncost 21.7 years* $usedforannuitypart Originallife expectancy
    • Charity paysage 55donor $4,000per yearforlife $100,000 Cash $4,000 Annuity Donor gives $100,000 $72,797 21.7 $72,797annuity portioncost 21.7 years =$3,355
    • 2014 2015 2016 2017 2018 Life Expectancy 2013 Taxfree returnof investment is divided among each expected payment Original Investment …
    • 2014 2015 2016 2017 2018 Life Expectancy 2013 Annuity payments after life expectancy are 100%taxable because alloriginal investment has beenreturned …
    • 2014 2015 2016 … 2025 Life Expectancy Death 2013 … $4,000 Ordinary income $4,000 Ordinary income $3,355 Taxfree return ofinvest- ment $645 Ordinary income $3,355 Taxfree return ofinvest- ment $645 Ordinary income $3,355 Taxfree return ofinvest- ment $645 Ordinary income $3,355 Taxfree return ofinvest- ment $645 Ordinary income
    • 2011 2012 2013 … Death… 2022 Life Expectancy 2010 $3,355 Taxfree return ofinvest- ment $645 Ordinary income If early death, donor’s last tax return deducts original investment not yet given back $3,355 Taxfree return ofinvest- ment $645 Ordinary income $3,355 Taxfree return ofinvest- ment $645 Ordinary income
    • Compare a cash charitable gift annuity vs. splitting the gift amount between a commercial annuity and an immediate gift vs. $4,000 $4,000 Charity Donor Insurance Company Donor Charity
    • vs. $4,000 $4,000 Charity Donor Insurance Company Donor Charity OriginalAmount – AnnuityPrice DeductibleGift OriginalAmount – AnnuityIRSValue DeductibleGift
    • vs. $4,000 $4,000 Charity Donor Insurance Company Donor Charity Where the charity does not or cannot issue gift annuities in the donor’s state, consider this option for cash purchases
    • Charitable Deduction Ordinary Income TaxFree Returnof Investment Capital Gain Gift Taxes $4,000 Annuity
    • I paid for it I sell it for fair market value of I have a capital gain of Normal Capital Gain Rules
    • I paid for it I sell it for fair market value of I have a capital gain of Normal Capital Gain Rules
    • 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
    • % of the property value used for annuity % of cost basis allocated to annuity =
    • Step 1: Divide property value Original cost $500,000 Value $1,000,000 Gave to charity for $800,000 annuity $800,000 Annuity Part 80%
    • $800,000 of value to donor Original cost $500,000 Value $1,000,000 Gave to charity for $800,000 annuity $800,000 Annuity Part 80%
    • Step 2: Divide cost basis Original cost $500,000 Value $1,000,000 Gave to charity for $800,000 annuity $400,000 Annuity Part of Cost Basis 80%
    • 20%gift part of cost basis $100,000 Annuity part of cost basis Original cost $500,000 Value $1,000,000 Gave to charity for $800,000 annuity $400,000 Annuity Part of Cost Basis 80%
    • Annuity part $800,000 value to donor ─$400,000 annuity part of basis Gain:Annuityvaluelessannuitypartofbasis Original cost $500,000 Value $1,000,000 Gave to charity for $800,000 annuity
    • Original cost $500,000 Value $1,000,000 Gave to charity for $800,000 annuity Gain:Annuityvaluelessannuitypartofbasis Annuity part $800,000 value to donor ─$400,000 annuity part of basis $400,000 Gain
    • If donor purchases annuity for another person with appreciated property, tax on capital gain is paid immediately
    • If donor is annuitant (or if jointly purchased annuity for donor and spouse), tax on capital gain is paid over life expectancy
    • Part of each year’s payment is capital gain Four Thousand and no/100 $4,000Donor Charity
    • 2014 2015 2016 2017 2018 Life Expectancy 2013 Totalcapital gainis divided among each expected payment Capital Gain …
    • 2014 2015 2016 2017 2018 Life Expectancy 2013 5yearlife expectancy and$10,000 gain  $2,000 ofeachcheck for5yearsis capital gain $10,000 Capital Gain $2,000 $2,000 $2,000 $2,000 $2,000 …
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Totalcapitalgain Originallife expectancy
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Totalcapitalgain Originallife expectancy 21.7 years (previous slides) How much is this?
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Value ofannuity -Basisusedforsalepart Total capital gain
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Value ofannuity -Basisusedforsalepart Total capital gain $72,797 (previousslides) $60,000basis X ($72,797/$100,000)
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife $72,797 (Annuity) -$43,678 (Basis used) Total capital gain $72,797 (previousslides) $60,000basis X ($72,797/$100,000)
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife $72,797 (Annuity) -$43,678 (Basis used) $29,119 CapitalGain
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Totalcapitalgain Originallife expectancy 21.7 years (previous slides) $29,119 Capital Gain
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife $29,119 21.7 21 years (previous slides) $29,119 Capital Gain =$1,342
    • Four Thousand and no/100 $1,342 is capital gain How much is tax free return of investment? $4,000Donor Charity
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Basisusedforannuity Originallife expectancy
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife Basisusedforannuity Originallife expectancy $60,000basis X ($72,797/$100,000) 21.7 years (previous slides)
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife $60,000basis X ($72,797/$100,000) 21.7 years (previous slides) $43,678 21.7 =$2,013
    • $4,000 Annuity Donor gives $100,000 stock (cost$60,000) Charity paysage 55donor $4,000 peryear forlife $2,013 Returnof Basis $645Ordinary Income $4,000Check $1,342 Capital Gain
    • 2014 2015 2016 … 2025 Life Expectancy Death 2013 … $4,000 Ordinary income $4,000 Ordinary income $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis
    • 2014 2015 2016 … Death… 2022 Life Expectancy 2013 If early death, donor’s last tax return deducts allocated basis not yet given back $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis $645 Ordinary income $1,342 CapGain $2,013 Return ofBasis
    • Charitable Deduction Ordinary Income TaxFree Returnof Investment Capital Gain Gift Taxes $4,000 Annuity
    • If donor names a different annuitant, the donor has made a gift to that person 1/1/2018 1/1/2017 1/1/2016 1/1/2015 1/1/2014 3rd Person 4,000 FiveThousandandno/100 Charity Donor 3rd Person Charity
    • This gift (to a non-spouse) may reduce the remaining gift tax exclusion 1/1/2018 1/1/2017 1/1/2016 1/1/2015 1/1/2014 3rd Person 4,000 FiveThousandandno/100 Charity Donor 3rd Person Charity
    • 1/1/2018 1/1/2017 1/1/2016 1/1/2015 1/1/2014 3rd Person 4,000 FiveThousandandno/100 Charity Donor 3rd Person Charity The gift tax value of an immediate annuity can be reduced by the annual present interest exclusion for gifts
    • Charitable Deduction Ordinary Income TaxFree Returnof Investment Capital Gain Gift Taxes $4,000 Annuity
    • Some tricky examples…
    • Long term capital gains for collectibles (art, antiques, stamps, coins, jewelry) are taxed at a higher rate (31.8%) than other capital gains
    • I give $100,000 in collectible items in exchange for a gift annuity. What is my tax rate for the capital gain portion of the payment? $100,000 ($60,000basis) Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife $4,000 Annuity
    • $100,000 ($60,000basis) Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife $4,000 Annuity $2,100 ReturnofBasis $558 OrdinaryIncome $4,000Check $1,342 Collectibles CapitalGain (31.8%rate)
    • The nature of the capital gain income doesn’t change, it is simply deferred. We don’t know in advance what tax rate will apply at that time. 0% rate if ordinary income tax rate is 15%? 15%rateifordinary income taxrateis 25%? 3.8%Medicaretaxif purchasedafter 1/1/13? 20%rateifordinary income taxrateis 39.6%? 28%rateon collectiblescapital gain?
    • Donor gives $100,000 of unrelated use tangible personal property with $60,000 basis. What is the deduction? $100,000 Art Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife $4,000 Annuity
    • What is the deduction? Remember: A charitable gift of unrelated use personal property is deducted at lower of basis or FMV $100,000 Art Donor gives $100,000 Charity paysage 55donor $4,000per yearforlife $4,000 Annuity
    • % of the property value used for annuity % of cost basis allocated to annuity =
    • Step 1: Divide property value Original cost $60,000 Value $100,000 Gave to charity for $72,797 annuity $72,797 Annuity Part 72.8%
    • 27.2% of value to charity Original cost $60,000 Value $100,000 Gave to charity for $72,797 annuity $72,797 Annuity Part 72.8%
    • Step 2: Divide cost basis Original cost $60,000 Value $100,000 Gave to charity for $72,797 annuity $43,678 Annuity Part of Cost Basis 72.8%
    • Gift Part of Cost Basis Original cost $60,000 Value $100,000 Gave to charity for $72,797 annuity $43,678 Annuity Part of Cost Basis 72.8%
    • Because I can deduct only cost basis for unrelated use tangible personal property my deduction is $16,322 Original cost $60,000 Value $100,000 Gave to charity for $72,797 annuity $43,678 Annuity Part of Cost Basis 72.8%
    • Taxation of Charitable Gift Annuities
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    • This slide set is from the curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning. To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/ Graduate Studies in Charitable Financial Planning at Texas Tech University