Thursday April 25, 2024
|
|
|
|
|
6.3.1 Current Gift Annuity
|
Current Gift Annuity
Charitable Income Tax Deduction: The fair market value of the contributed property, the corresponding payout rate, the applicable federal rate (AFR), the beneficiary's age and the payment frequency are all needed to perform the deduction calculation.
Taxation of Annuity Payments: One of the major benefits of a charitable gift annuity is partly tax-free income.
|
When a donor contributes an asset to a charity in exchange for a gift annuity, a portion of the asset value is treated as a gift to the charity and the other portion of the asset value is considered an exchange for a gift annuity. In a situation such as this, when a donor makes a gift to a charity and some value is returned to the donor, the Treasury describes the gift as a bargain sale. In effect, the donor has made a gift of part of the property and purchased an annuity contract with the balance. Reg. 1.1011-2(c). The donor receives a deduction for only part of the transfer, since the charity has promised to pay an annuity to the donor. Therefore, only the portion of the amount transferred as a gift to the charity qualifies for a charitable deduction.
Charitable Income Tax Deduction
The fair market value of the contributed property, the corresponding payout rate, the applicable federal rate (AFR), the beneficiary's age and the payment frequency are all needed to perform the deduction calculation.
To illustrate how the deduction is calculated, consider Jane Donor who creates a charitable gift annuity on June 1, 2017 to begin paying June 30, 2017. Jane is 80 years old. The annuity is funded with $100,000 cash. Jane's annuity has a payout rate of 6.8%. The AFR for the month of June is 2.4% and Jane has selected quarterly payments. Using this information and IRS Pub. 1457, the charity's gift planner creates the following charitable deduction worksheet.
| |
|
|
|
|
|
| Gift Annuity for One Life |
| Donor: |
Jane Donor |
Gift Amount: |
$100,000.00 |
Gift Date: |
06/01/2017 |
 |
| 1st Person: |
Jane Donor |
Birth Date: |
06/01/1937 |
Age*: |
80 |
|
| Cost Basis: $100,000.00 |
|
Date of First Ann. Payment |
06/30/2017 |
 |
| Payment Freq.: Quarterly (Payments at End of Selected Period) |
 |
|
| |
|
|
| Annuity Percentage: |
6.8% |
|
 |
| (A) Annual Payout: |
$6,800.00 |
(A) |
|
| AFR: June 2.4% |
|
|
| (B) Factor: |
7.2575 |
(B) |
|
| Age: 80
|
|
|
| (IRS Pub. 1457, Table S) |
|
|
| (C) Adjustment for Time of Payment: |
1.0090 |
(C) |
|
| (IRS Pub. 1457, Table K) |
|
|
| End of
Period |
| 1 |
Annual |
1.0000 |
| 2 |
Semi-Annual |
1.0060 |
| 3 |
Quarterly |
1.0090 |
| 4 |
Monthly |
1.0110 |
|
|
|
|
| (D) Adjusted Factor: |
7.3228 |
(D) |
|
| Line(B) x Line(C) |
|
|
| (E) Present Value of Annuity: |
$49,795.04 |
(E) |
|
| Line(D) x Line(A) |
|
|
| (F) Amount Transferred: |
$100,000.00 |
(F) |
|
| (G) CHARITABLE GIFT VALUE |
$50,204.96 |
(G) |
|
| Line (F) less Line (E) |
|
|
|
| Gift Annuity for One Life |
|
| (H) Unadjusted Expected Return Multiple |
9.5 |
(H) |
|
| (Reg. Sec. 1.72-9, Table V) |
| (I) Adjustment if Not Monthly |
-0.1 |
(I) |
|
| (Reg. Sec. 1.72-5(a)(2)) |
| (J) Adjusted Expected Return Multiple |
9.4 |
(J) |
|
| Line (H) Plus Line (I) |
| (K) Expected Return |
$63,920.00 |
(K) |
|
| Line (J) Times Line (A) |
| (L) Exclusion Ratio |
77.9% |
(L) |
|
| Line (E) Divided By Line (K) |
| (M) Amt. Excluded From Ordinary Taxation |
$5,297.20 |
(M) |
|
| Exclusion Ratio Times Annuity |
| Line (L) Times Line (A) |
|
|
| (I.R.C. Sec. 72(b)(3)) |
| (N) Basis Allocated to Annuity |
$49,795.04 |
(N) |
|
| Basis Times Line (E)/GIFT |
| (O) Gain Allocated to Annuity |
$0.00 |
(O) |
|
| Line (E) Less Line (N) |
| (P) Gain Each Year |
$0.00 |
(P) |
|
| Line (O) Divided By Line (J) |
| (Not to Exceed Line (M);) |
| (Reg. Sec. 1.1011-2(a)(4)) |
|
| |
|
|
|
|
| SUMMARY OF ANNUITY |
| |
CHARITABLE DEDUCTION |
$50,204.96 |
|
|
| |
EXCLUSION RATIO UNTIL 2025 |
77.9% |
|
|
| INCOME TAX |
PRO RATA 1ST PAYMENT |
EACH PAYMENT |
ANNUAL |
|
 |
| Ord. Income |
$123.43 |
$375.70 |
$1,502.80 |
|
| Cap. Gain |
$0.00 |
$0.00 |
$0.00 |
|
| Tax-Free |
$435.09 |
$1324.30 |
$5,297.20 |
|
 |
| Ann. Amt. |
$558.52 |
$1,700.00 |
$6,800.00 |
|
|
The upper section lists the annuitant's name, birth date, gift amount, gift date, date of first annuity payment, cost basis in the property and payment frequency.
Lines (A) through (G) are used to determine the charitable deduction.
(A) To calculate the amount the annuity will pay Jane, the gift annuity value is multiplied by the annuity payout percentage. The annuity payout percentage of 6.8% is multiplied by the $100,000 gift, which produces an annuity payout of $6,800. This means that Jane will receive $6,800 annually, or quarterly payments of $1,700 each year. The annuity payout amount is rounded up to the nearest two, four or 12 cents (depending on the type of payment chosen: semiannually, quarterly or monthly) in order to ensure that all payments are the same to the exact cent, thus simplifying administration. In Jane's case, no rounding is necessary because the payments divide equally. The AFR for the month of the gift or for either of the two prior months may be used to determine the charitable deduction under Sec. 7520. With an annuity, if the annuitant desires greater tax-free payments, the lowest AFR is preferable. Therefore, Jane's gift planner selects a 2.4% AFR.
(B) The next step is to calculate the annuity factor. The annuity factor for a single life is determined using Pub. 1457, Table S. The appropriate chart in Table S is the one corresponding to the 2.4% AFR. Jane's age at the date of the first payment (80) must be found on the left side of the appropriate chart. The result is the unadjusted annuity factor. For Jane, the unadjusted annuity factor is 7.2575. In contrast, to find the annuity factor for a two-life annuity trust, Pub. 1457, Table R(2) is used. The appropriate chart in Table R(2) is the one corresponding to the chosen AFR. The beneficiaries' ages at the date of the first payment must be found on the left side of the appropriate chart. The result is the unadjusted annuity factor. Once the factor is found, subtract it from 1 and divide the result by the selected AFR. The product of the formula is the unadjusted annuity factor for two lives.
(C) The next step is to determine the time adjustment factor. Because Jane selected quarterly payments, the time adjustment factor must be found in Pub. 1457, Table K. Locate the appropriate AFR (2.4%) at the left side of the table and the corresponding payment frequency (quarterly) along the top. Here, the time adjustment factor is 1.0090.
(D) The time adjustment factor is multiplied by the annuity factor to calculate the adjusted annuity factor. In the worksheet above, Line (B) is multiplied by Line (C). Jane's time adjustment factor of 1.0090 is multiplied by the annuity factor of 7.2575 to produce the adjusted annuity factor of 7.3228.
(E) Once the adjusted annuity factor is calculated, the present value of the annuity must be determined. The fair market value of the property transferred to the annuity is multiplied by the adjusted annuity factor. Line (D) is multiplied by Line (A). The adjusted annuity factor of 7.3228 is multiplied by the annual payout of $6,800 to produce a present value of $49,795.04.
(F) The amount transferred is the amount of cash or the fair market value of the property used to fund the annuity. Here, Jane contributed $100,000.
(G) Finally, the $49,795.04 present value of the annuity is subtracted from the $100,000 transferred to produce the charitable gift value. Here, $100,000 less $49,795.04 produces a $50,204.96 charitable gift value.
Taxation of Annuity Payments
One of the major benefits of a charitable gift annuity is partly tax-free income. Lines (H) through (P) on the charitable deduction worksheet provide the method for determining the taxation of the annuity payments.
(H) The unadjusted expected return multiple is the next item calculated and is found in Reg. 1.72-9, Table V. Jane's age at the date of creation (80) must be found on the left side of the chart. The multiple is shown on the same row. Jane's unadjusted expected return multiple is 9.5.
(I) If the annuity payments are to be made annually, semiannually or quarterly, an additional adjustment must be made. This adjustment can be found in Reg. 1.72-5(a)(2). Locate the number of whole months from the annuity starting date (one full payment period prior to the first payment date) to the first payment date, and follow that column down to the row that shows the frequency under which payments are to be made (quarterly for Jane,) to find that the adjustment is -0.1.
(J) The adjusted expected return multiple must be calculated in accordance with Sec. 72. The unadjusted expected return multiple (9.5) is added to the frequency adjustment (-0.1) to produce an adjusted expected return multiple of 9.4.
(K) The expected return is calculated by multiplying the adjusted expected return multiple of 9.4 by the annual payout of $6,800. Thus, the expected return, or the amount that Jane can expect to receive over her lifetime, is $63,920.
(L) The exclusion ratio demonstrates the amount of each annuity payment received that will not be taxed as ordinary income. To determine the exclusion ratio, the $49,795.04 present value of the annuity shown in Line (E) is divided by the $63,920.00 expected return shown in Line (K). Jane's exclusion ratio is therefore 77.9%. This means that 77.9% of each annuity payment Jane receives will be tax-free.
(M) Line (M) applies the exclusion ratio to the annuity payment to give the exact amount of each payment that will be excluded from ordinary taxation. The calculation is performed by multiplying the exclusion ratio of 77.9% by the annual payment of $6,800 to produce $5,297.20. This means that $5,297.20 of the $6,800.00 per year in payments Jane receives will be tax-free.
(N) Another component of each annuity payment is the tax-free return of basis, or principal. This is calculated by allocating the basis to the annuity payments. Jane's basis in the contributed property is $100,000 because she made a gift of $100,000 cash. The basis of $100,000 is multiplied by the present value of the annuity shown in Line (E), or $49,795.04, then divided by the amount of the gift, or $100,000. This formula produces a result of $49,795.04, which will be the amount of the $100,000 basis that will be allocated to the annuity payouts. In other words, $49,795.04 of the total payments that Jane expects to receive will be tax-free return of basis.
(O) The third potential component of each payment is gain. The gain allocated to the annuity is calculated by subtracting the basis allocated to the annuity (Line (N)) from the present value of the annuity (Line (E)). Jane's gain allocated to annuity is the present value of the annuity of $49,795.04 less her basis allocated to the annuity of $49,795.04. In other words, Jane has no gain to allocate to the annuity because she made a cash gift in return for the annuity. If Jane had given appreciated property in return for the annuity, she would have gain that could be allocated to the annuity.
(P) The gain each year can be computed by dividing the gain allocated to the annuity (Line (O)) by the adjusted expected return multiple (Line (J)). In Jane's case, this formula would be 0 divided by 9.4, giving Jane a gain each year of 0. This amount should never exceed the amount excluded from ordinary income taxation shown in Line (P).
|
|
|
|
|
|
|
|
|
© Copyright 1999-2024 Crescendo Interactive, Inc.
|
|
