How Does a Charitable Gift Annuity Work: Payments, Taxes, and Risks

A charitable gift annuity works like this: you make an irrevocable donation to a qualifying nonprofit, and in exchange the charity contracts to pay you a fixed dollar amount every year for the rest of your life (or for the lives of you and one other person). Part of what you transfer counts as a charitable gift and generates an income tax deduction the year you make it; the rest funds the lifetime payments, which are split into taxable and tax-free portions on your return each year. When the last annuitant dies, whatever remains stays with the charity.

The Basic Structure

A charitable gift annuity is a contract directly between you and the nonprofit, not a trust. The charity does not wall off your gift in a separate investment account to cover your payments. Instead, the annuity is a general obligation backed by all of the charity’s unencumbered assets.¹ You are a general creditor of the charity for the life of the contract. If the funds originally contributed run out, the charity still has to keep paying you from its other reserves.

The contract is irrevocable once signed. You cannot cancel it, take the principal back, or change the payment terms.¹ If you might need access to the money later, this is not the right vehicle.

For the IRS to allow a deduction, the gift has to be structured so the charity is expected to keep at least 10 percent of the initial contribution’s value after all annuity payments end. That expected residual is calculated using the Section 7520 interest rate for the month of the gift and the IRS actuarial tables.²

Who Can Set One Up and How

The American Council on Gift Annuities (ACGA) recommends a minimum age of 60 for annuitants receiving immediate payments.³ Individual charities can set higher floors, and some require 65 or older. A deferred annuity, where payments start at a future date, can sometimes be set up at a younger age because the delay gives the charity more time to invest the principal before payments begin.

Most charities require a minimum contribution, commonly in the range of $10,000 for a single-life annuity to $25,000 for a two-life annuity. You can fund the gift with cash, a wire transfer, or long-term appreciated securities such as stocks or mutual fund shares.⁴ Some charities will also accept real estate or other noncash assets, but that is less common and involves extra appraisal steps.

To draft the contract, the charity needs your legal name, Social Security number, and verified birth date, plus the same information for any second annuitant.¹ Your birth date drives the payout rate, because the charity is pricing the deal off life expectancy. If you fund with securities, you also need to provide cost-basis information.

What the Payments Look Like

Nearly all charities base their payout rates on the schedule suggested by the ACGA. Younger annuitants get lower rates because they are expected to collect payments for more years; older annuitants get higher rates because the payment period is shorter. Current ACGA single-life and two-life rates for selected ages:⁵

Age 65: 5.7% single life / 5.0% two lives (both 65)
Age 70: 6.3% single life / 5.5% two lives (both 70)
Age 75: 7.0% single life / 6.2% two lives (both 75)
Age 80: 8.1% single life / 6.9% two lives (both 80)
Age 85: 9.1% single life / 8.1% two lives (both 85)
Age 90 and up: capped at 10.1% single life / 9.9% two lives

Two-life rates come in lower because the charity expects to keep paying until the second annuitant dies. You pick your payment frequency (monthly, quarterly, semiannually, or annually) when you sign. Both the dollar amount and the schedule are permanently fixed once the agreement is executed. Nothing about market conditions or the charity’s investment performance changes what you receive.

A deferred annuity pays at a higher rate than an immediate annuity at the same age, because the charity gets to invest the principal during the deferral before distributions start.

The Upfront Charitable Deduction

When you fund the annuity, you are entitled to an immediate federal income tax deduction for the charitable portion of your gift. That charitable portion is the amount you transferred minus the present value of the annuity payments you are expected to receive over your lifetime, computed using Section 7520 interest rates and the IRS mortality tables.⁶

How much of that deduction you can actually use in a single year depends on your adjusted gross income and what you donated. Cash gifts to public charities are deductible up to 60 percent of AGI. Long-term appreciated property is generally capped at 30 percent of AGI.⁷ Anything you cannot use in the year of the gift carries forward for up to five additional tax years.

The deduction only helps you if you itemize. Because the standard deduction remains elevated for 2026, your gift annuity contribution plus your other itemized deductions has to clear the standard deduction before the charitable piece actually reduces your tax.⁸

How Each Payment Is Taxed

Every annuity payment is split into parts under the exclusion ratio in IRC Section 72.⁹ The ratio compares your investment in the contract (the portion of the gift that was not deductible) to the total expected return over your statistical life expectancy. That share of each payment comes back to you tax-free as a return of principal; the rest is taxable.

For an annuity funded with cash, each payment has two parts:

A tax-free return of principal, in the amount set by the exclusion ratio, continuing until you have recovered your full investment in the contract.
Ordinary income, taxed at your regular rate, making up the remainder of each payment.

If you funded with long-term appreciated securities, a third slice appears: part of each payment is treated as long-term capital gain, spread ratably across your actuarial life expectancy rather than taxed all at once. Once you outlive that life expectancy, you have fully recovered your investment in the contract, and every payment after that point is taxed entirely as ordinary income.

Each January, the charity sends you IRS Form 1099-R reporting the taxable and nontaxable portions of the prior year’s payments, using distribution code F in Box 7 to identify the source as a charitable gift annuity.¹⁰

Funding With Appreciated Stock

Using long-term appreciated stock or mutual fund shares to fund the annuity adds a tax advantage on top of the charitable deduction. Selling the securities yourself would trigger capital gains tax on the full appreciation in the year of sale. Transferring them directly to the charity for a gift annuity spreads capital gain recognition over your actuarial life expectancy, and the appreciation allocated to the charitable portion of the gift escapes capital gains tax altogether.

To move the shares, you give your broker the charity’s brokerage account information and Depository Trust Company (DTC) number, and the shares transfer electronically. You also give the charity your original cost basis and acquisition date so it can compute the taxable pieces of your future payments. For noncash contributions over $500, you file IRS Form 8283 with your return.¹¹

Using an IRA Qualified Charitable Distribution

Under SECURE 2.0, if you are 70½ or older you can make a one-time qualified charitable distribution (QCD) directly from your traditional IRA to fund a charitable gift annuity. For 2026 the maximum for this one-time election is $55,000, separate from the general annual QCD limit of $111,000 for outright charitable gifts from an IRA.¹²

The trade-off is different from a standard gift annuity. The transfer from the IRA is not taxable income, because it goes straight to the charity. But the annuity payments coming back to you are fully taxable as ordinary income. There is no tax-free return-of-principal component and no upfront charitable deduction. What you get in exchange is the ability to convert pre-tax IRA dollars into a lifetime income stream without paying tax on the withdrawal, and the QCD can count toward your required minimum distribution for the year.

When the Annuitant Dies

When the last surviving annuitant dies, everything left in the annuity stays with the charity to support its work. Nothing passes to your estate or your heirs. If the annuity covers two lives, payments continue at the same fixed rate to the surviving annuitant until that person also dies.

If you die before recovering your full investment in the contract, meaning the tax-free return-of-principal portion has not yet run out, you or your estate can claim a deduction for the unrecovered investment on your final return.⁹

Risks Worth Weighing

Because you are a general creditor of the charity, your payments depend on the organization’s ongoing financial health. Charitable gift annuities are not backed by any federal or state guaranty fund the way bank deposits or commercial insurance annuities are. If the charity becomes insolvent, you could lose part or all of your future payments. Before you sign, look at the charity’s audited financial statements, endowment size, and track record of meeting its annuity obligations.

Most states require charities to register with a state insurance or securities regulator before issuing gift annuities, and many require annual filings. Those rules add oversight but do not guarantee payment. The charity should be able to confirm it is registered in your state.

The payment is fixed for life, so inflation will erode its purchasing power. An amount that meaningfully supports you at 70 may feel considerably smaller at 85. If gift annuity income is going to be a real piece of your retirement budget, plan around that loss of buying power rather than assuming the dollar figure alone tells you what you will have.

1
American Council on Gift Annuities. Recommended Charitable Gift Annuity Standards of Conduct
2
Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables
3
American Council on Gift Annuities. The Fundamentals of a Successful Charitable Gift Annuity Program
4
American Council on Gift Annuities. About Gift Annuities
5
American Council on Gift Annuities. Current Gift Annuity Rates
6
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
7
Internal Revenue Service. Publication 526 (2025), Charitable Contributions
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
9
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
10
Internal Revenue Service. Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.
11
Internal Revenue Service. Charitable Organizations – Substantiating Noncash Contributions
12
American Council on Gift Annuities. SECURE ACT 2.0 – Closing Gifts With IRA QCDs