IRS Discount Rates

IRC Section 7520 dictates the discount rate used for calculating the charitable deduction for all "split interest" charitable gifts. The 7520 rate is also known as the Applicable Federal Rate, AFR, or simply the "Discount Rate". Another way to describe the "Discount Rate" is to think of it as the "IRS earnings assumption". More specifically, the "Discount Rate" is equal to 120% of the Federal Mid-term rate, rounded to the nearest 2/10ths of 1%, as determined monthly from the auctions of U.S. Treasury securities.

The current "Discount Rate" is determined monthly; however under IRC Sec. 7520(a), a taxpayer is allowed to choose the rate applicable during the month the gift was completed, or may use the rate that applied during either of the two months preceding the completed gift.

For transfers to CRTs, charitable gift annuities and pooled income funds, a higher discount rate is advantageous because a higher discount rate will produce a bigger income, gift, or estate tax charitable deduction. Alternatively, for charitable gift annuities, a lower discount rate is advantageous if the donor is interested in a larger tax-free payout for the annuitant and a lower charitable deduction for the donor. For CLTs, a lower discount rate is advantageous because a lower discount rate will produce a bigger charitable deduction.