International Encyclopedia of Public Policy and Administration - Vol. 2

By Jay M. Shafritz | Go to book overview
chase of the annuity. As is the case with charitable remainder trusts and pooled income funds, the amount of the deduction is the present value of the amount that is projected to be paid to the charity, in light of market interest rates at the time of the contribution.
Determining the Amount of Annuity Payments
Nearly 90 percent of the charities that issue gift annuities follow the guidelines that are recommended by the American Council on Gift Annuities (formerly the Committee on Gift Annuities). That organization meets every three years to reexamine annuity tables in light of changing mortality rates and interest rates. Its general practice has been to compute annuity payouts so that a charity can expect to receive half of the original contribution upon a donor's death.Although a charity can choose to either accept or reject the guidelines of the American Council on Gift Annuities, it must follow certain tax laws or there could be complications. First, an annuity should qualify as a charitable gift annuity in order to protect the charity from an argument that it is selling taxable commercial insurance. Of greater significance to most charities, a contribution in exchange for an annuity could produce unrelated debtfinanced income that could cause a charity to be liable for income tax. Consequently most charities follow the requirements of Section 514(c)(5) to avoid paying that tax.The statute requires that:
The value of the annuity must be less than 90 percent of the value of the property contributed by the donor;
The annuity must be paid over one life or a maximum of two lives;
The contract cannot guarantee a minimum or maximum amount of payments; and
The contract cannot change the amount of payments based on the income produced by the property contributed by the donor, or based on any other variable.

Taxation of Beneficiaries

Distributions from a charitable gift annuity are taxed in the same manner as a commercial annuity. Thus, most payments are treated as ordinary income except for the portion that is a return of the donor's contribution. If a donor contributed cash, then the portion of each payment that represents a return of the contribution is tax-free. If the annuity was acquired with a lifetime gift of appreciated capital gain property (such as stock), then each annuity installment will have three tax consequences: part ordinary income, part capital gain, and part tax-fee return of capital.

Example of a cash contribution: Ms. Donor is 60 years old and has a remaining life expectancy of 24 years. she contributed $100,000 cash to acquire a charitable gift annuity that will pay her $7,000 each year for the rest of her life.

If the value of the annuity is $60,000, based on the interest rates in effect in the month of the contribution, then she can claim an immediate charitable income tax deduction for the charitable component of $40,000. As she receives her payment of $7,000, she will have taxable annuity income of $4,500 (64.4 percent of each payment) and the remaining $2,500 (35.6 percent) of each payment is a taxfree return of her original $60,000 contribution.

CHRISTOPHER HOYT


BIBLIOGRAPHY

The Chronicle of Philanthropy, 1993. "Many Donors Make Bequests Without Telling Charities, Study Finds". (August 10) 32.

-----, 1995. "Battling a Lawsuit, National Organization Won't Recommend Annuity Payout Rates". Report on the 1994 Survey of Charitable Gift Annuities, 1995, by the American Council on Gift Annuities (May 18).

Tax Notes Today, 1991. "Transcript for July 24 Ways and Means Committee Hearing on Tax Simplification". (July 29) 141-158.

DEFICIT. Results when spending is greater than what is received in revenues for a fiscal year; a surplus results when revenues exceed spending. When spending and revenues are equal, the budget is said to be in balance or balanced.

In government, a deficit results when revenues do not equal expenditures at the end of the fiscal year. This is called an operating budget deficit. This deficit must be financed somehow; otherwise suppliers, employees, and others who depend on the commitment of government resources could not be cared for or paid. Usually governments issue debt instruments to pay for the deficit (see debt, national). Some jurisdiction have rainy day funds to provide for emergencies where more revenue is needed than provided by the current year's taxes (see rainy day fund). States and local governments are often prohibited by law from going into debt for operating budget expenses, but for the U.S. federal government operating budget deficits have been a fact of life since the Great Depression of the 1930s and World War II; the U.S. federal budget has been in a deficit position since 1969, and has been in a surplus position only eight times since 1930. For their part, even though guided by statutes forbidding deficits on operating budgets, state and local governments do not find it easy to come out even at the end of the fiscal year; often they must take draconian actions to cut down expenditures and sometimes they still run short-term deficits which are paid for out of the next year's funds; when their resources are not up to the burdens that political choices have imposed on them they may face various conditions of fiscal stress (see financial emergency, municipal bonds) and their ability to finance capital improvements by selling bonds may be impaired as their credit rating falls (see credit rating, municipal bonds, policy and strategy).

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International Encyclopedia of Public Policy and Administration - Vol. 2
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