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Posted January 25th, 2016

Some Gift Annuity Questions — Part 1

Gift annuities are simple, right? Right, except when certain questions arise. Questions such as:

  1. Is it all right to use a gift annuity transaction to satisfy an enforceable pledge previously made? – The IRS hasn’t said. Caution is warranted. Why? Because the only consideration a charity may furnish to the donor in a gift annuity transaction is the annuity. No gala dinner table in addition, for example. Naming a building or a scholarship fund is OK, however. IRS has said naming has no economic value for tax purposes.
  1. What amount is used to create a gift annuity when the annuity is established with a credit card? – The amount charged to the card (say, $10,000)? Or the amount the donee organization receives net of the fee (say, $9,750)? The IRS hasn’t said. The amount used to create the annuity is important. It determines the donor’s charitable deduction and also how the annuity payments are taxed. It’s possible, by the way, to calculate how much must be charged to the card so that the donee organization receives $10,000 net of the fee. By way of example, if the fee is 2.5% of the amount charged, and the amount charged is X, the equation to find X is:  X – .025X = $10,000, which means X = $10,257, rounded to the next nearest dollar.
  1. Is the tax-free portion of a gift annuity payment tax-free income? – No, which is good. It’s a tax-free return of investment. If it were tax-free income, it could adversely affect the taxation of social security . . . something that would be not good.

More gift annuity questions next time. Meanwhile, if you think your organization’s gift annuity program needs a refresh, contact a Sharpe Group representative.

by Jon Tidd

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