What are the considerations in choosing an IRS discount rate when performing gift annuity calculations?
Conventional wisdom says that it is always best to use the highest discount rate available when calculating a life income gift deduction, since this maximizes the donor's deduction. However, using the highest discount rate also minimizes the tax-free portion of a gift annuity's payments. Regardless of which benefit your donor wishes to maximize, the effects of changing the discount rate are modest, since the spread between available rates is usually less than 1%. For example, the differences for a donor, aged 75, who funds a gift annuity with $10,000 cash that will pay him $820 per year are:
Discount Rate |
Deduction |
Tax-Free Portion |
6% |
$4,068 |
$494 |
7% |
$4,410 |
$466 |
8% |
$4,717 |
$440 |
