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23 February 2010

How to Increase Your Income, Lower Your Taxes and Help Your Favorite Charity

Given that most seniors are interested in a fixed income, reducing risk and lowering taxes, here is a planning technique to consider if you are trying to increase your income.

Maybe you have a CD coming up for renewal and you discover the rate will be lower. You may have some stocks or mutual funds that were invested for growth and are thinking of selling some and re-invest in something that will pay you an income. The only reason you did not sell them is that you do not want to pay capital gains.

We suggest including a charitable gift annuity in your list of options.

A charitable gift annuity is a combination of a gift to charity and an annuity. For older people, can annuity rates to 8%, 9% or even higher. As a part of the annuity payment is tax free return of principal, the gift annuity can give you a substantial income. The combination of partly tax-free income, and the initial charitable deduction makes this planning device attractive.

While this arrangement has its own unique advantages, the yield is less than if you had bought a commercial immediate annuity. Therefore, your decision to use a gift annuity should include a desire to eventually leave money to a qualified charitable organization that you have an interest in, such as a church, school, hospital etc.

Gift annuities are simple to configure. You simply transfer property to charity and the charity promises to pay a certain amount monthly, quarterly, half yearly or annually to you, so long as you live. Alternatively, you can choose to have payments made to you and another person as long as you both live. Or you can choose to have payments made to you for the rest of your life and then to the other person for the rest of their lives. But the maximum number of persons per gift annuity is two.

Gift annuity rates are set by the American Council on Gift Annuities. Charities do not need to use these rates, but most do. So you do not need to go shopping for the best rate. Make your choice based on the charity that you'd like to support.

There are two tax issues you should consider when comparing a gift annuity to your other alternatives.

The first is that if you fund the gift annuity with cash, a portion of the payment you receive is taxed (as ordinary income) and part of it is not taxed as it is treated as a return of principal. If you fund it with appreciated property, and is the recipient of the income will be taxed a part as capital gain, partly as ordinary income, and some can be treated as a return of principal and not taxed. But if you live past your life expectancy, all later annuity payments will be ordinary income.

The second tax issue is that when you give charity your asset in exchange for a life income, you get a large income tax deduction. For most people, this income tax credit so large it can not take a year. So there are provisions for extending the deduction beyond the year of your donation and five more. Your accountant can tell you if this will eliminate income taxes for the next 6 years or not. The chances are good that it will.

Please note that we only give general guidelines on taxation. Before you create a gift annuity, you should familiarize yourself with your tax advisor to determine the precise tax consequences for your situation.

There are a number of charitable gift annuity options and applications. This brief overview has given you some of the basics. If this seems like it will fit, you can contact the charity of your choice and get a proposal. Then sit down with your accountant and financial planner and have them help you compare a gift annuity with your other options.

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