Mrs. Smith, a 73-year-old widow, owns stock that has appreciated to $300,000. Her cost basis is $25,000. She receives dividend income from the stock of $7,500 per year, about a 2.5% return. After tax, her net income is $5,400 a year. If she sells the stock, she will incur almost $41,250 in capital gains taxes.
Mrs. Smith decides to give the stock to her favorite charity through a Charitable Gift Annuity. As a result, she partially bypasses the capital gains taxes, saving about $20,464. She also receives an income-tax deduction of $111,623. Her actual tax savings is $31,254—additional money to invest, spend, or save. Plus, her income increases to $23,400 per year.
Further, Mrs. Smith’s annuity payments are taxed much more favorably than her stock dividends. About half of the income, $11,466, is taxed at ordinary income rates (25%), or $2,867. Another portion, $10,943, is taxed at the federal capital gains rate of 15%, or about $1,640. The remaining $990 is not taxed at all.
Because of the various tax advantages, the actual effective pretax rate of Mrs. Smith’s payments from the Charitable Gift Annuity is 9.5%. Compare that to the 2.5% return from her stocks!
Her Charitable Gift Annuity not only provides much-needed funding for Mrs. Smith’s charity after her death, it also provides substantial extra income and tax benefits for her as long as she lives.