Some younger folks are providing for the financial assistance of their parents or grandparents.
If they just give money, it does not reduce the income tax for the young giver. They make the gifts from money left after they pay income taxes.
Suppose for example Rose sends $1,000 each month to her mother. If Rose has pretty good income, she might have to earn almost $18,500 a year to make the gifts of $12,000. That assumes Rose is in a 35 percent tax bracket. If Rose’s last bit of income is taxed at 28 percent, she might have to earn about $16,600 to have $12,000 left after taxes to give to her mother.
But Rose could pay to (fund) a charitable gift annuity that pays her mother $12,000 a year.
Rose could fund the charitable gift annuity with a check, but it could be better to transfer the stock she owns that has gone up in value. The increase in value over her cost will not be subject to income tax, but the full value is used to fund the charitable gift annuity.
Also Rose will get a charitable deduction for part of the amount to pay for the charitable gift annuity, based on mother’s age. It might only be 20 percent of the gift, but it would reduce the income tax Rose pays if she is doing (or will do) Itemized Deductions on Schedule A of form 1040.
This is all assuming mother does not have a lot of income and pays little or no income tax herself.
Charitable Gift Annuities should usually only be done with old, large charities that will be around in the future as well as now (Salvation Army etc). However, small charities have ways to purchase the annuity and still get most of the benefits offered by the big charities.
It could be a benefit to Rose (the giver) since she would have fewer dividends to be taxed if the stock with which she funds the charitable gift annuity is paying dividends. Rose would have fewer assets because she gave away some of her stock investments. She should be sure she makes the gift out of excess investments, but she was parting with the gifts to mother plus the taxes to earn enough to make the gifts. Why not let the charity help save income taxes (the charity can sell the stock but as a nonprofit organization, it normally pays no income tax).
Mother can receive the money quarterly or in some cases monthly. The charity gets to keep a portion of the total cost to fund the charitable gift annuity, so Rose also gets to enjoy helping one of her favorite charities.
Did you hear? “Our Constitution is in actual operation; everything appears to promise that it will last; but nothing in this world is certain but death and taxes,” by Benjamin Franklin.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.