The monthly IRS discount rate has hovered around 1.0 - 2.4% since October of 2013. These rates set an all time low. With the Federal Reserve Board doing everything it can to stimulate the economy, including setting extremely low benchmark interest rates, we expect the IRS discount rate to persist at this previously unheard-of level for months to come.
Deductions and the IRS Discount Rate
Deductions for planned gifts that make fixed payments each year are far more affected by changes in the IRS discount rate than deductions for planned gifts whose payments can vary. As a result, deductions for charitable gift annuities (CGAs) and charitable remainder annuity trusts (CRATs) have decreased far more than deductions charitable remainder unitrusts (CRUTs). Deductions for pooled income fund gifts are not affected by changes in the IRS discount rate.
For charities that follow the annuity rates suggested by the American Council on Gift Annuities (ACGA), the decrease in CGA deductions will be mitigated somewhat by the decrease in ACGA rates that become effective January 1, 2012.
Although retained life estates (RLEs) don't fit neatly into either category, their deductions have also been affected greatly. Unlike the gifts mentioned above, however, RLE deductions are at historic highs rather than historic lows.
The table below compares deductions for a $100,000 gift for a 70 year-old, based on the September 2008 rate of 4.2% and the September 2012 rate of 2.0%.
| Gift Type and Payout Rate | Deduction at 4.2% |
Deduction at 2.0% |
| 5.7% CGA | $42,672 | $31,833 |
| 5% CRAT | $49,713 | $0* |
| 5% CRUT | $52,698 | $52,288 |
| RLE | $50,676 | $65,151 |
* A 5% CRAT for a 70 year-old fails the 5% probability of exhaustion test and therefore would not qualify as a CRAT, despite a computed deduction value of $40,916.
These already significant deduction changes are amplified for younger beneficiaries and higher CGA and CRAT payout rates.
