One of the most attractive benefits derived from charitable planning is the charitable deduction, which reduces the out-of-pocket cost of your generosity. With some gifts you get a choice of the discount rate used for the deduction—and it can possibly make a difference of thousands of dollars in tax savings to you.
The choice in the discount rate is available with giving plans that have both charitable and noncharitable components. These are known as “split interest” gifts. For example, you could make a gift to us that creates a stream of income for you or other beneficiaries, with the remainder coming to us. Or you could make a gift in which the stream of income comes to us for a period of years and then the gift goes to whomever you choose.
There are special methods for calculating the deductible portion of split-interest gifts that use a factor based on certain prevailing interest rates. This IRS discount rate changes from month to month, which means that a gift of the same amount can generate a different deduction depending on which monthly rate is used in the calculation.
Even small changes in the discount rate can affect the amount of a charitable deduction—and fairly wide swings can have a substantial impact. For instance, the rate increased from 1.6% in November to 1.8% in December and then jumped all the way to 2.4% in January and 2.6% in February. The difference in the resulting charitable deduction could be significant, depending on such factors as the type of gift, the amount of the gift, and the age of the donor.
Let’s say you made a gift to us in January. You were allowed to use the discount rate in effect for the month of the gift or either of the two months immediately preceding the gift to determine the value of the charitable deductible interest. The recent rise in the discount rate creates bigger deductions for life-income gifts but lower deductions for other gifts such as charitable lead trusts. When rates fall, the opposite is true. There actually can be instances when, depending on your personal circumstances and the kind of charitable gift you make, it can be advantageous to choose a rate that generates a lower deduction.
We are pleased to work with you and your tax professional to determine the best rate. Your tax professional will also advise you on the process for formally choosing a rate if you choose not to use the rate in effect for the month of your gift.
Remember, your ability to choose a discount rate only works retrospectively—looking back at the two previous months. If you are contemplating a substantial split-interest gift, you will want to keep an eye on where the discount rate is and where it is likely to go.
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