How To Beat The Tax Man And Low Interest Rates

The stock market is lousy. So are interest rates. What should you do? How and where should you invest your dollars so that they will be safe but also get a decent rate of return?

Many of our clients—mostly readers of this column—have looked to commercial annuities, CDs or U.S. Treasuries as an answer to this question. These are safe, but they do not provide the sought-after decent rate of return.

How can you get both? The answer is a charitable gifts annuity (CGA).

Let’s take a look at two examples of common situations that show how a CGA might help you.

Example #1: Joe, who is 68, has $100,000 (it could be more or less) to invest (or it is already invested) in a CD. Joe is currently in a 27 percent income tax bracket. He needs the income to maintain his lifestyle. The schedule below compares a CD to a CGA for Joe.

Not only does Joe increase his after-tax income from $1,824 to $6,240 per year with the CGA, but he also gets an income tax deduction of $27,540.

Example #2: Mary, who is 50, has $100,000, but she does not want the income now (because she is currently in the highest income tax bracket). She would like to defer the income to some future date when she retires. To that end, Mary invests in a Flexible Deferred Charitable Gift Annuity. The chart on page 40 shows the income Mary would receive based on the age at which she finally decides to start collecting her annuity.

There are two added bonuses, courtesy of the tax law: 1. Twenty percent of the income is tax free; and 2. Mary receives an immediate income tax deduction of $40,892.

There are a few more things you should know:

1. Any kind of property that is easy to value can be used to start a CGA (either an immediate one like Joe’s, or a deferred one like Mary’s). Appreciated property, such as real estate or stocks, works well. So do bonds, CDs and commercial annuities.

2. Early withdrawal penalties can be provided for if you are stuck in a low-rate CD or commercial annuity.

Even if you don’t have a charitable bone in your body, you and your family can make a profit by investing in a CGA. And if you are charitably inclined, a CGA puts you on the road to tax heaven.

I have made arrangements with a national charitable foundation to do free illustrations of this option for readers of this column. Just fax a list of assets (at current fair market value) that might work best for you, along with your age (and your spouse’s age, if you are married) to (847) 674-5299. If you have questions, call me at the number listed.