Boston - The stale federal discount rates still in effect through the end of the year offer charitably inclined investors a rare opportunity to take advantage of still-low interest rates before they reset higher next year.
A charitable pooled income fund (PIF) offers a lifetime income stream for you and your beneficiaries, along with a partial tax deduction that's especially favorable in this environment. The current low discount rate means that the value of income tax deductions for 2022 contributions remain proportionately high relative to where they will be for those who choose to wait.
It is important to understand how the Federal Section 7520 Interest Rate impacts your PIF contribution. The lower the interest rate, the lower the presumed payout rate (regardless of the actual size of distributions), which allows for a larger tax deduction. The mandated valuation rate for gifts to funds with less than three taxable years of experience is 1.6% in 2022, and is likely to spike to 2.2% in 2023, assuming the Section 7520 Interest Rate in December 2022 is within a range of 3.4% to 5.6%.
The ages and number of income beneficiaries will also impact the size of your tax deduction when contributing to a PIF. For example, a 60-year-old couple taking advantage of the 1.6% rate before the year ends receives a deduction of 65.5% of the contribution value, compared with 56.2% if contributing in 2023 at a 2.2% rate. As rates rise, deductions decrease in size because the amount forecast to be left to the charity is lower.
Investing in a PIF provides a gift to a charitable trust, income back to the donor and their beneficiaries and the potential for the size of the gift to grow. A PIF also offers several advantages over a charitable remainder trust (CRT).
Charitable giving in the United States soared to new highs during the pandemic, signaling the importance of philanthropy amid global turmoil. Americans gave $485 billion to U.S. charities in 2021, a 4% increase from 2020, according to the Giving USA 2021 Annual Report. Like any investment decision, donating money to charitable causes requires a strategic approach that can help you navigate the complexities of taxes and legacy planning as part of your wealth management goals.
Bottom line: The current low mandated valuation rate for gifts to pooled income funds presents an especially attractive opportunity for philanthropic investors.
