How Charitable Gift Annuities Work: Income, Deductions, and Taxes

Here is how charitable gift annuities work: you transfer cash or other assets to a qualified nonprofit under a contract, and in return the organization pays you a fixed income for the rest of your life. Part of what you give qualifies for an immediate income tax deduction, and whatever is left after your final payment belongs to the charity. Current suggested payout rates run from 5.7% at age 65 to 9.1% at age 85 for a single-life contract.¹

How Much Income You’ll Receive

Most charities follow the schedule of suggested maximum rates published by the American Council on Gift Annuities. The rates are calibrated so that roughly half of the original gift remains for the charity after the final payment, based on assumed investment returns, expenses, and mortality.² Your age when payments begin drives the rate. Older annuitants get more because payments are expected to run for fewer years.

Current ACGA suggested maximum rates for a single life, reconfirmed in November 2025:¹

Age 65: 5.7%
Age 70: 6.3%
Age 75: 7.0%
Age 80: 8.1%
Age 85: 9.1%

A joint-and-survivor annuity covers two people and keeps paying until both have died, so the rate is lower. A couple both aged 75 would receive about 6.2%, compared with 7.0% for a single 75-year-old. When the annuitants are different ages, the rate falls between their respective single-life rates, weighted toward the longer expected lifespan of the younger person.

Once payments start, the amount is fixed for life. It doesn’t rise with inflation, and it doesn’t fall if the charity’s investments underperform.

The Charitable Deduction

The IRS treats your contribution as part gift and part purchase of an annuity. Your deduction equals what you gave minus the present value of the lifetime payments you’re expected to receive. Contribute $100,000, and if the present value of your future payments comes to $60,000, you can deduct $40,000.

The present value calculation uses the IRS Section 7520 interest rate, published monthly at 120% of the federal midterm rate, rounded to the nearest two-tenths of a percent. In early 2026, the 7520 rate has ranged from 4.6% to 4.8%.³ A higher 7520 rate lowers the present value of your future payments, which increases the deductible share of the gift. You may use the rate from the month of the gift or either of the two prior months, whichever gives the better result.

One threshold matters: the charitable deduction must exceed 10% of the amount you transfer, or the annuity triggers adverse tax consequences for the charity. The ACGA sets its suggested rates to clear this threshold for donors aged 50 and older when the 7520 rate is at least 3.2%.¹

Your deduction is capped by the standard adjusted gross income limits for charitable giving. Cash gifts can be deducted up to 60% of AGI. Gifts of appreciated property held more than a year are limited to 30% of AGI.⁴ Anything you can’t use in the year of the gift carries forward for up to five additional tax years.⁵

How Your Payments Are Taxed

Each payment is split into up to three tax categories, depending on how you funded the annuity. The split stays the same year after year until you reach your actuarial life expectancy.

If you contributed cash, part of each payment is tax-free return of your original investment and the rest is ordinary income. The tax-free portion continues until you have recovered your full cost basis. If you funded with appreciated securities, a third slice enters the picture: long-term capital gains, taxed at 0%, 15%, or 20% depending on your taxable income.⁶

Once you outlive your actuarial life expectancy, the tax-free and capital gains portions disappear. Every dollar from then on is taxed as ordinary income. Plan for a higher tax bill in later years.

Each January the charity issues Form 1099-R, which breaks out the gross distribution, the taxable amount, and any tax-free return of investment.⁷

Funding Options That Change the Deal

Appreciated Securities

Contributing stock or fund shares held more than a year can be especially efficient. You avoid paying capital gains tax on the full appreciation at the moment of transfer, and your deduction is based on the fair market value at the date of the gift rather than what you originally paid.

The IRS treats the transaction as a bargain sale, so you allocate your cost basis between the gift portion and the annuity portion. Under Section 1011(b), the basis assigned to the annuity portion is proportional to the present value of the payments relative to the property’s total fair market value.⁸ You’ll recognize some capital gain, but it is spread across your expected lifetime through the annual payment split rather than hitting all at once. The charity will need your original purchase price and acquisition date to set up the tax reporting correctly.

If you contribute property other than cash or publicly traded stock and the claimed deduction exceeds $5,000, you’ll need a qualified appraisal and must file Form 8283 with your return.⁹

Deferred Payment

A deferred gift annuity lets you make the contribution now and delay payments to a future date, often at retirement. The longer the deferral, the higher the rate: the charity has more time to invest the gift, and your remaining life expectancy at payout will be shorter. Someone funding at age 55 and deferring payments to age 65 could see a rate near 9.1%, versus 5.7% for an immediate annuity starting at 65. The deduction uses the same Section 7520 framework, and the deferral typically increases it because payments starting years from now have a lower present value.

IRA Funding Through a QCD

The SECURE 2.0 Act created a one-time opportunity for IRA owners aged 70½ or older to use a qualified charitable distribution to fund a charitable gift annuity. For 2026, the inflation-adjusted maximum transfer is $55,000, and it counts toward your annual QCD limit of $111,000. The rules differ sharply from a standard gift annuity:

The annuity must be funded entirely with the QCD. You can’t combine IRA and non-IRA money in the same contract.
Only you or your spouse can receive payments.
Every payment is taxed as ordinary income. There is no tax-free return of basis and no capital gains treatment.
You get no additional charitable deduction, because the QCD itself already excluded the amount from taxable income.
The payout rate must be at least 5%.
You can spread smaller transfers across a single tax year up to $55,000, but once that year ends, no future QCD-to-annuity transfers are allowed even if you didn’t use the full amount.

This route suits retirees who don’t itemize but want to convert IRA assets into lifetime income while eventually benefiting a charity.

Who Can Offer One and Who Can Buy One

The issuing organization must be tax-exempt under Section 501(c)(3) of the Internal Revenue Code. Federal law specifically defines a charitable gift annuity as one where a portion of the amount paid qualifies for a charitable deduction under Section 170.¹⁰ State regulation adds another layer. About a dozen states require charities to obtain a permit or certificate of authority before issuing gift annuities, others require written notification, and some impose no specific requirements at all. Several states also require the charity to maintain a segregated reserve fund dedicated to annuity obligations.¹¹

Age minimums for donors vary. Some charities begin payments as early as age 55, others require you to be 60 or 65 before payments start. Minimum contributions typically begin around $5,000 and can run as high as $25,000. Cash and publicly traded securities are the usual funding sources because they’re easy to value and liquidate.

What You’re Giving Up in Exchange

Gift annuity payments are not guaranteed the way a bank deposit or a commercial insurance annuity is. The ACGA explicitly advises charities not to describe payments as “guaranteed income.”¹² Payments are backed by the issuing charity’s general assets. If the organization becomes insolvent, annuitants stand in line as general creditors, behind any secured lenders. Unlike commercial annuities, there is no state guaranty fund to step in if the issuer fails.

Several structural protections reduce this risk without eliminating it. The ACGA rate structure targets a 50% residuum, giving the charity a built-in cushion to absorb investment losses.² States that require permits also impose minimum asset thresholds and, in some cases, segregated reserve funds.¹¹ The practical risk is small at established universities, hospitals, and national nonprofits with deep asset bases and long track records. It matters more with smaller or newer organizations. Ask about total assets, the size of the gift annuity pool, and whether the charity maintains a segregated reserve.

You’re also giving up the money itself. When the last annuitant dies, the agreement terminates and whatever remains, the residuum, belongs to the charity.¹² If you designated a specific use for those funds when you set up the annuity, the charity must honor that designation. Nothing passes to your heirs.

Setting Up the Agreement

To open a gift annuity you’ll provide full legal names and birthdates for all annuitants (verified by government-issued ID), Social Security numbers for tax reporting, and details about the assets you’re contributing. For securities, that includes original cost basis and acquisition date. You choose payment frequency: monthly, quarterly, semiannual, or annual.

Cash typically transfers by wire or certified check. Securities move through your brokerage, which re-registers the shares in the charity’s name. After the charity confirms receipt, both parties sign the contract, and you get a fully executed copy along with a tax receipt showing the contribution’s value and the estimated deductible portion. First payments usually begin within a few months of funding, and a Form 1099-R follows each January covering the prior year’s payments.⁷

1
American Council on Gift Annuities. Current Gift Annuity Rates
2
American Council on Gift Annuities. Gift Annuity Rates FAQs
3
Internal Revenue Service. Section 7520 Interest Rates
4
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc, Contributions and Gifts
5
Internal Revenue Service. Publication 526, Charitable Contributions
6
Internal Revenue Service. Topic No 409, Capital Gains and Losses
7
Internal Revenue Service. Instructions for Forms 1099-R and 5498
8
Office of the Law Revision Counsel. 26 USC 1011 – Adjusted Basis for Determining Gain or Loss
9
Internal Revenue Service. Instructions for Form 8283
10
Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc
11
American Council on Gift Annuities. State Regulations
12
American Council on Gift Annuities. Recommended Charitable Gift Annuity Standards of Conduct