How to Claim the Charitable Gift Annuity Tax Deduction

A charitable gift annuity (CGA) is an agreement where a donor makes an irrevocable gift of assets to a qualified charitable organization. In return, the charity agrees to pay the donor a fixed stream of income for life. A primary advantage of a CGA is the availability of an immediate partial income tax deduction for the year the gift is made.

Calculating the Charitable Deduction

The income tax deduction for a charitable gift annuity is not for the full value of the assets. The deduction is calculated as the fair market value of the gift minus the present value of the expected future annuity payments. The size of the deduction depends on the donor’s age, the gift amount, the annuity payout rate, and a specific IRS interest rate.

An element in this calculation is the Section 7520 rate, or IRS discount rate, which changes monthly. This rate is used to determine the present value of the annuity payments. A higher Section 7520 rate results in a larger charitable deduction because it reduces the present value of your future income stream. Donors can use the rate for the month of the gift or the rate from either of the two preceding months to select the most favorable deduction.

For example, a 75-year-old donor makes a $100,000 cash gift for a CGA. If the charity offers a 6.0% annuity rate ($6,000 per year) and the applicable Section 7520 rate is 5.2%, the present value of the lifetime payments is calculated using IRS life expectancy tables. If the present value of those payments is $55,000, the donor can claim an immediate charitable deduction of $45,000 ($100,000 – $55,000).

The deduction is subject to Adjusted Gross Income (AGI) limitations. For cash gifts, the deduction is limited to 60% of the donor’s AGI. For gifts of long-term appreciated property, such as stocks held for more than one year, the limit is 30% of AGI. If the deduction exceeds these limits, the unused portion can be carried forward and deducted for up to five years, subject to the same annual AGI limits.

Tax Treatment of Annuity Payments

The fixed payments from a CGA are taxed separately from the initial deduction. Each payment is divided into portions with different tax treatments, depending on whether the annuity was funded with cash or appreciated assets. The issuing charity details this allocation annually on Form 1099-R, which specifies how to report the income.

Part of each payment is a tax-free return of principal, representing the return of your original investment. This amount is calculated based on your life expectancy when the annuity is established. This tax-free treatment continues until you have received an amount equal to your initial investment, after which the entire payment becomes taxable.

Another portion of the payment is taxed as ordinary income at your regular federal and state income tax rates. For a CGA funded with cash, the payments are split between this ordinary income portion and the tax-free return of principal.

If the CGA was funded with appreciated property held for over a year, a third component is capital gains income. A part of each payment is taxed at the long-term capital gains rate. This structure allows the donor to spread the recognition of the capital gain over their life expectancy.

For instance, a $6,000 annual payment might consist of $3,000 of tax-free return of principal, $2,000 of ordinary income, and $1,000 of capital gains income. Each portion is reported differently on the donor’s tax return.

A Special Funding Option: The IRA Charitable Gift Annuity

A provision allows individuals aged 70½ and older to make a one-time, tax-free transfer directly from their Individual Retirement Account (IRA) to fund one or more charitable gift annuities. For 2025, this qualified charitable distribution is capped at $54,000.

With this funding method, the amount transferred from the IRA is not included in the donor’s taxable income and can satisfy their Required Minimum Distribution (RMD). However, the donor cannot claim a charitable income tax deduction. Additionally, all subsequent annuity payments received from a CGA funded this way are taxed entirely as ordinary income.

Information and Documentation for Claiming the Deduction

To draft the gift annuity agreement, the charity will need the full legal name, date of birth, and Social Security number for the donor and any other annuitant. You must also provide details about the asset being donated, such as cash, securities, or other property.

For noncash gifts, IRS Form 8283, “Noncash Charitable Contributions,” is required if your total noncash gift deduction for the year exceeds $500. You must attach the completed Form 8283 to your federal income tax return for the year of the gift.

When completing Form 8283, you will use information from your CGA agreement. This includes the charity’s name and address, a description of the property, the contribution date, and the property’s fair market value. You will also need to report your cost basis in the property, which is what you originally paid for it.

If the value of the donated property, other than publicly traded securities, is more than $5,000, you must obtain a qualified appraisal. The appraiser must complete and sign Part B of Form 8283. An authorized official from the charity must also sign the form to acknowledge receipt of the property.

The Process of Establishing a CGA

The first step in establishing a CGA is to execute the formal gift annuity agreement with your chosen charity. This legal contract outlines all terms, including the gift amount, payout rate, and payment schedule, and must be signed by you and the organization.

After signing the agreement, you will transfer the assets to the charity. This may involve wiring funds for cash donations or instructing your broker to transfer shares for securities. The transfer must be complete for the annuity to be established.

Once the assets are received, the charity provides a confirmation and a detailed disclosure statement. This document reiterates the annuity’s terms and often includes the calculation of your charitable deduction for your tax records.

The final step is to claim the deduction on Schedule A of your Form 1040 when filing your annual income taxes. Remember to attach any required documentation, such as Form 8283 for noncash gifts. Each year, you will use the Form 1099-R provided by the charity to report your annuity income.