That is Applicable Federal Rate for the month of May 2021, recently announced by the IRS. 1.2% is the result of a monthly survey, conducted by the IRS, that compares the interest rates of various financial institutions, and then publishes the rate that is applicable for charitable deduction calculations.
What does 1.2% mean for you? Simply, this historically low AFR drastically affects your charitable deductions and taxation.
When calculating the tax deduction for a charitable gift, the IRS allows use of the Applicable Federal Rate for the current month or one of the two prior months. For charitable gifts where a payout is retained for a noncharitable beneficiary and the charity receives the remainder interest, a higher AFR produces a higher deduction. However, for reversionary gifts like Charitable Lead Trusts (CLTs), where the charity receives income payouts but the remainder passes back to the donor or to family members, the lower the AFR, the higher the charitable deduction.
With the APR at 1.2%, now may be the time to set up your Charitable Trust and take advantage of the new Federal rates. To give you an example of the effect AFR has on charitable giving, consider Sally and Harry. They thought about establishing a $1,000,000 CLT in August of 1990 when the AFR for the month was 10.4%. Assuming an annual 3% lead trust payout to charity, 6% trust return and a term of 20 years, the charitable deduction for the couple would have been over $200,000.
Sally and Harry ultimately decided against funding the CLT at that time and instead created a different charitable gift plan. However, their assets have grown over the years and their tax advisor recently spoke with the couple about the benefits of funding a CLT in a low interest rate climate. With the current AFR of 1.2% and the same assumptions as before, their tax advisor explained that the couple could generate a charitable deduction of over $500,000.
You can take advantage of the historically low AFR by maximizing your charitable deductions. Talk to Christian Foundation of America to learn how. Email us at [email protected]. Or call us at (805) 523-9087