It's no wonder the charitable gift annuity (CGA) is so popular—it is loaded with benefits. But with the standard deduction increasing for 2026 plus an additional deduction for many taxpayers age 65 and older, roughly 90% of taxpayers don't itemize. That means that the charitable deduction that comes with establishing a CGA may not be as compelling as it once was. The good news? A CGA offers another tax advantage that may be even more appealing: a portion of each payment may be tax-free.

This creates an opportunity that is often overlooked. 

A CGA allows a donor to make a gift to charity and receive fixed payouts for life. If funded with assets like cash or appreciated stock, a portion of those payouts are tax free during their life expectancy. 

What some fundraisers may not know is that donors can often choose from these two options:

1. A higher income tax deduction
2. A greater portion of their annuity payouts treated as tax-free income

This choice may resonate with donors focused on retirement income.

Both options are influenced by the IRS discount rate, commonly referred to as the Section 7520 rate or charitable midterm federal rate (CMFR). This rate is announced monthly by the IRS. 

When the CMFR is higher, the charitable deduction is generally higher, but the portion of each annuity payout that is received tax-free during the annuitant’s life expectancy is lower. When the CMFR is lower, the charitable deduction is generally lower, but the portion of each annuity payout received tax-free during the annuitant’s life expectancy is higher. 

A donor can select from the current CMFR or either of the two months prior, whichever works best for the donor. So when helping your donor select the best CMFR for their financial situation, it is important to evaluate the entire package of benefits rather than focusing solely on the charitable deduction.

Consider this example:

Mary, 79, establishes a CGA with a $20,000 cash gift. She will receive a payout rate of 7.8%, which means that she will receive $1,560 each year for the remainder of her life.

The payout amount remains the same, regardless of the CMFR selected, but the charitable deduction and taxation of the payouts vary. 

By choosing the lower 4.6% CMFR, Mary exchanges a $362 reduction in her tax deduction (which she won’t use anyway if she takes the standard deduction) for an extra $38 of tax-free income every single year throughout her life expectancy.

Education is key to unlocking the full potential of a CGA. Fundraisers and gift planning professionals should understand not only how to calculate the charitable deduction, but also how the CMFR affects the taxation of the annuity payouts. This knowledge will allow staff to have more meaningful conversations with donors about the benefits that matter most to them.