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Income Tax Deduction and gifts taxes

by Abbey

Charitable Income Tax Deduction

   The charitable income tax deduction is used in the year the gift is made, not in the year you begin receiving the income. The charitable income tax deduction is typically quite high, averaging about 50 to 70 percent of the gift. The charity will calculate the charitable income tax deduction for you. For example, a 55-year-old donor who makes a $10,000 deferred gift annuity to a charity and begins receiving payments at age 65 obtains approximately $6,033 as a charitable income tax deduction.

The charitable income tax deduction is based on your age, current discount rate, and frequency and timing of payments. More frequent payments will reduce your charitable income tax deduction, as will receiving a payment at the beginning of the payment period rather than at the end of the payment period.

Gift Taxes

   Currently, under present tax laws, it is unclear whether a donor is assessed a gift tax when creating a deferred gift annuity to benefit a person other than a spouse. The annual exclusion, allows you to give up to $10,000 to any number of beneficiaries each year free of gift tax. However, the annual exclusion does not protect gifts of a future interest, which may include the deferred gift annuity because payments to a beneficiary do not begin immediately. If you make a deferred gift annuity to benefit someone other than your spouse, remember that you may be required to pay a gift tax. If you make a deferred gift annuity and benefit a spouse, no gift tax is due because of the unlimited marital deduction. The vast majority of gift annuities are made by single donors on their own lives or by married couples where they are the sole annuitants. In these cases there is no gift tax issue.

Income Taxes

   Like a charitable gift annuity, a portion of the income from a deferred gift annuity is treated as both a return of your investment and taxable income from an investment. Therefore, you generally receive some tax-free income because part of the income is considered a return of the initial principal, which was already taxed. The charity’s software computes the tax consequences for such a gift. Call and ask for “the numbers.” The part considered investment income is taxed as ordinary income and as capital gain income if appreciated property is used to fund the deferred gift annuity.

Capital Gains Taxes

   By making a gift to a pooled income fund, you can completely avoid capital gains taxes on your gift. This is a significant incentive to make a gift to a pooled income fund, especially for donors who own highly appreciated securities. If the investment assets were sold, the donors would incur a capital gains tax rate of 20 percent. Example: If you sell securities for $10,000 that you purchased years ago for $1,000, you would be taxed at a maximum rate of 20 percent on the gain of $9,000 for a total capital gains tax of $1,800. If you instead made a gift of the appreciated securities to a charity, you avoid capital gains tax and preserve the principal for charity.

Gift Taxes

   If you make a gift to a pooled income fund and either you or your spouse is the beneficiary of the income stream, no taxable gift is made. If the income interest is given to your spouse, it may qualify for the gift tax marital deduction, if you make a QTIP election. The assets are included in the donee spouse’s estate, but the donee spouse will receive a charitable income tax deduction for the amount going to the charity. If, however, you make a gift to a pooled income fund for the benefit of a third party other than you or your spouse, you make a taxable gift. The rate of the gift tax charged is the same as the estate tax, and all gifts made during lifetime or at death are ultimately aggregated. The gift/estate tax increases progressively from 37 to 55 percent. If the third party has the right to receive income currently from the pooled income fund, the gift may qualify for the $10,000 annual gift tax exclusion.

Income Tax to Beneficiary

   The income distributed by the pooled income fund is taxed to the beneficiary (whether the donor, the spouse, or a third party) as ordinary income. If the donor is the first beneficiary, the income is taxable to the donor, while alive, and the value of any interest passing to a survivor beneficiary is included in the donor’s taxable estate at its value at that time. Alternatively, a donor who does not want to be taxed on the income may make a taxable gift of the income interest to the designated beneficiary during his or her lifetime and not reserve the right to revoke the beneficiary’s income interest.

Charitable Income Tax Deduction

   A donor who makes a gift to a pooled income fund obtains a charitable income tax deduction in the year the gift is made. The charity’s planned giving software calculates the charitable income tax deduction by determining the value of the income stream over the life expectancy of the income beneficiary under IRS actuarial tables. The deduction is based on the highest return earned by the fund in the three preceding years. If the pooled income fund is less than three years old, the IRS preselects a rate based on current Treasury bill rates.

Estate Taxes

   Once you make a gift to the pooled income fund, the value of the gift passes outside your estate for estate tax purposes except for the value of any life interest passing to a beneficiary other than your spouse at your death. Additionally, the asset used to fund the pooled income fund is removed from probate.


Income Tax Deduction and gifts taxes
What you need to know about DEFERRED GIFT ANNUITIES and Charitable Income Tax Deduction
Everything You Need To Know About Charitable gift annuities
About life income gift

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