Tax-Deductible Wharton Gifts — That Pay You Back

In recent conversations I’ve had with Wharton alumni, several have asked if there is a way to support Wharton with a tax-deductible gift and receive a fixed, secure payment for life in return. If it sounds too good to be true, I can assure you that it’s not.

You can make a charitable gift to Wharton, receive a partial charitable income tax deduction and annual fixed payments for life.

In exchange for a gift of cash or stock, a Penn Charitable Gift Annuity (PCGA) provides a fixed annuity rate with guaranteed, partially tax-free, lifetime payments; there is also an immediate charitable income tax deduction for the donor. In fact, there has been a substantial increase in the charitable deduction over the past five months due to an increase in the Discount Rate, a rate set monthly and used to calculate the deduction (technically called the Section 7520 Rate and not to be confused with the Federal Reserve “discount rate”). The rate climbed recently to 3.0%. In December 2010, the discount rate fell to 1.8%, one of the lowest rates historically.

How does this rate change affect the amount of a donor’s charitable income tax deduction? The higher the discount rate, the higher the PCGA charitable deduction. Following is a sample of PCGA illustrations for several ages, based on a gift of $25,000 cash, demonstrating the effect of the discount rate on the amount of the deduction:

There is a further benefit for annuitants, as the table below shows, in that a significant portion of the annual payment is tax free (at the current 3.0% rate):

*After a period of years, the entire annuity becomes ordinary income; for each age listed that period is 24 years, 20 years, and 16 years, respectively.

Notice, too, that unlike the ordinary income portion, the tax-free portion of the annuity increases as the age of the donor increases from the time of the gift.

Additional advantages of a PCGA include that the annuity payments are guaranteed by the assets of the University; gifts of appreciated securities partially avoid capital gains tax; and a donor may designate the gift to ultimately benefit a priority area or program in Wharton. PCGA rates based on two lives (joint and survivor) are also available and, as with single life annuities, are based on the date of birth of the annuitants.

Is it a good time for you to begin a PCGA for the charitable income tax deduction? Yes! The time is right to generate a higher charitable deduction and receive guaranteed payments for life as you support Wharton in a meaningful way.

For further information or a custom illustration based on your age please contact me directly at (215) 746-6962 or grege@upenn.edu, or visit the Wharton gift planning website. On the topic menu on the left side of the page click on “Gift Calculator,” which enables you to run a gift annuity illustration, including the charitable deduction and annuity rate, based on your age(s) and gift amounts.

The article and examples are for information and illustration purposes only and are not intended as legal, financial or tax advice. We encourage you to consult your own advisor.

[Lynn Ierardi, Director, and Beth Delaney, Associate Director, Office of Gift Planning, contributed to this article.]