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Gift Annuity Offsets Taxes

Periodically, I get a call from someone who sold some stock or property and they ask what they can do to offset the large tax bill created by the sale.  While planning before the sale provides a lot more options, there is still a way to save tax after the sale with a gift annuity.

A gift annuity results by making a gift to a qualified charity but you get income from the gift for life.  And you get an immediate large tax deduction that can be used to shelter the tax from your real estate or stock sale.  Let's look at an example: 

Suppose Mr. Jones, age 60, sells a property for $100,000 that has been fully depreciated.  Let's simplify and assume a tax due of $20,000.  Can he shelter this tax?  Yes.

He can set up a gift annuity.  He contributes the $100,000 of his proceeds and receives a $6700 annual income for life (of which 43% is considered tax-free return of principal and not taxed until the gift is recovered).  In addition, he receives a tax deduction of $29,703 right away.  Look what he has accomplished:

·           He has offset part of his capital gains tax with a tax deduction of $29,703

·           He generates a lifetime income of $6700 annually, partially tax free

·           He benefits his favorite charity

It gets even better if Mr. Jones does not need the income today.  He can defer it.  If he defers the income for 10 years, his income will increase to $12,400 per year and the tax deduction increases to $55,221.

This same technique can be used to shelter taxes from an IRA or retirement plan distributions while still providing an annual income.  Since the annual income from a gift annuity is based on age, the older the contributor, the larger the income.

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