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Judy purchased Series EE bonds approximately 25 years ago. Her bonds were five years from the final maturity date. Judy went to her bank to have her bonds transferred to the name of her favorite charity. The bank informed her that she cannot have the bonds re-issued to the charity. Instead, Judy decided to cash in her savings bonds. She was required to report the accumulated interest from the savings bonds on her income tax return. Judy received a charitable deduction for the cash proceeds she donated to her favorite charity. She may use her deduction to offset up to 60% of her adjusted gross income.
Example 2Generally, charitably-minded owners of commercial annuities hope to avoid generating additional taxable income and want to benefit from charitable income tax deductions. The taxability of lifetime transfers of savings bonds and commercial annuities may dissuade some of these donors from making lifetime charitable transfers. The tax treatment of lifetime transfers to charity is not dependent on whether the gift is made outright or through a life income gift, such as a charitable remainder trust or a charitable gift annuity. The charitable income tax deduction resulting from the gift can be used to offset the ordinary income recognized from the transfer. There may be additional options to explore when using savings bonds or commercial annuities to meet a donor's philanthropic goals.
Xavier wanted to make a gift using his commercial annuity contract to his favorite charity. Xavier's insurance company confirmed that he was outside his surrender period. Xavier decided to surrender his commercial annuity to the insurance company in order to make a cash gift to his favorite charity. His annuity was valued at $100,000, with a cash value of $75,000. Xavier's original cost for the annuity was $50,000. He recognizes $25,000 as ordinary income. Xavier's adjusted gross income for the year was $125,000. His charitable deduction was limited to 60% of his adjusted gross income, since this was a cash gift. He was able to use all $75,000 of his charitable deduction in the year of the gift.
Linda was the executor of her mother's estate. Her mother left the residue of her estate to charity in her will. The will provided that IRD assets were to be used to satisfy charitable gifts. Linda used the savings bonds to satisfy the charitable bequest. The estate avoided paying estate tax and the heirs avoided income tax on the savings bonds. The charity did not owe income tax on the savings bond received and was able to use the entire value for its charitable purpose.
Edward listed his favorite charity as the designated beneficiary of his commercial annuity. His annuity contract offered substantial death benefits for his beneficiary. Later in life, Edward created a will. The will stated that his entire estate was to be given to his niece Elizabeth. When Edward passed away, the commercial annuity was distributed according to the beneficiary designation form he completed, not according to his will. Edward's favorite charity received the proceeds from his commercial annuity and Elizabeth received the other assets from her uncle's estate.