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Many charities will give you annuity payments if you make a donation.
Your rewards from charitable giving need not be limited to a good feeling and a tax deduction.
You can get cash back, too.
Many charities offer charitable gift annuities. With a CGA, you give assets to a charity or nonprofit organization in return for a stream of cash flow.
Charities invest your assets and use the earnings to fund operations and pay your annuity.
Payments typically continue for the rest of your life. You can also arrange for the annuity to cover your spouse's life. If you name someone besides yourself or your spouse to receive the annuity payments, you may have to deal with the gift tax.
Payments from a CGA are fixed. In some states, regulations cap payouts.
The payments probably will be lower than you would get with an annuity from an insurance company. But you will get tax benefits, as explained below. And you can support a favorite cause or institution.
Each charity offering a CGA can set its own rate of payout as a percentage of assets. Many use a table from the American Council on Gift Annuities to set rates.
ACGA's current rate, posted at acga-web.org, are in effect through 2010. The older you are, the larger your payments will be as a percentage of your gift.
Say your nearest birthday is your 60th when you make a donation. You would get 5.0% on the ACGA table. On a $500,000 gift, you'd get $25,000 a year for life.
At age 70, a $500,000 gift would yield a 5.7% payout: $28,500 a year.
A joint annuity would get a lower payout than a single-donor annuity.
With some charities, you can arrange a smaller payout. Why? To boost the value of your donation, increasing your deduction.
Income you receive from a CGA is taxed like many other annuities. A portion is a tax-free return of your contribution. Another portion is taxable ordinary income.
If you donate appreciated assets held longer than 12 months, part of the payout will be taxed at long-term capital gains rates.
That rate could be a lot lower than the ordinary income rate. So if you can afford to donate either, you might be better off gifting appreciatied assets vs. cash.
You'll also get an upfront income tax deduction for a charitable gift. But this deduction will not be for the full value of the donated assets.
Instead, a present value is put on the expected annuity payments. That value is based on life expectancy and current interest rates.
This present value of what you'll receive is subtracted fromt he value of the assets given away. If you donate appreciated assets held more than a year, their current value will be used. Otherwise, the amount you paid is the value.
The difference between the present value of what you'll get and the value of what you're giving is the amount you can deduct.
Say you and your spouse are each 75 years old. You offer a charity a $500,000 CGA. You'd receive $28,000 a year. Based on current interest rates and your joint life expectancy, the present value of that annuity is about $300,000. You donated assets worth $500,000, so your charitable tax deduction would be around $200,000.
Tax rules might bar you from deducting this all at once. For gifts of appreciated assets, charitable deductions are capped at 30% of adjusted gross income. That's in the year of donation.
Donations you can't deduct right away can be carried forward up to five years. Each year you could deduct up to 30% of joint AGI, until the deductible amount is used up.
What if your deduction would be so big that you couldn't use it up in six years? Stagger your donations. Arrange a smaller gift annuity now and get a deduction you'll be able to use up in six years.
After six years, fund another gift annuity for a new round of deductions. Repeat that as many times as needed.
Charities rarely issue immediate gift annuities for recipients under 60. Most are established by people over 70.
Charities want to limit the risk thta donors will live unusually long. Charities also want to cut the risk of investment underperformance,. Even if its payments top your gift, a charity must keep paying.
If you're relatively young, you may be able to get a deferred gift annuity. You'd contribute now and get an annuity later, perhaps in retirement. You can lock in a payout that reflects the principal's investment growth in the years until you retire.
Say you're 50 years old and you agree to fund a gift annuity offered by a local museum that will start when you're 65. Waiting 15 years might double your payout.
A CGA is backed by assets of the sponsoring charity. Your future income stream is secure if your CGA is financially strong. You can check charities' finances at a site like charitynavigator.org.
CGA's don't make sense for people who will need all of their money for retirement expenses. Also, anyone with a long remaining life expectancy chouldn't put too much into fixed-return annuities, because they provide no inflation protection.$
Artice Source: http://www.articlesphere.com
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