What’s the Difference Between the Gift Annuity Rate and the Discount Rate?

We get this question from time to time. The gift annuity payout rate is used to determine the annuity payment amounts. The annuity payout rate is typically a suggested rate by the American Council on Gift Annuities (ACGA), and the annuity payout rate is based on the life expectancy of the annuitant. An older annuitant would receive a higher annuity payout rate than a younger annuitant because the older annuitant has a shorter life expectancy. This means that the charity would pay more each year to an older annuitant with the thought that it would be for a fewer number of years.

For example, a charitable gift annuity with $10,000 for a 70-year-old annuitant would have an annuity payout rate of 6.3% as of March 2025. The annuitant would receive $630 per year. A charitable gift annuity with $10,000 for an 80-year-old annuitant would have an annuity payout rate of 8.1%, and the annuitant would receive $810 per year. The donor can choose to divide the annual annuity payment into semi-annual, quarterly, or monthly payments.

The IRS discount rate is used to calculate the donor’s charitable deduction. The IRS discount rate is published monthly, and it is based on the average interest rate for medium-term United States Treasury Bonds. The higher the discount rate, the larger the charitable deduction. A larger charitable deduction for the donor at the creation of the charitable gift annuity will result in a lower tax-free portion of the annuity payments to the annuitant.

The donor can choose the discount rate for the month of the gift or the two prior months. For example, a charitable gift annuity for $10,000 with an IRS discount rate of 5.2% (January 2025) for a 70-year-old annuitant would have a charitable deduction of about $3,700. A charitable gift annuity for $10,000 with an IRS discount rate of 4.4% (November 2024) for a 70-year-old annuitant would have a charitable deduction of about $3,400.

Until the passage of the Tax Act of 2017, donors establishing life income gifts would typically prefer the highest discount rate available to allow for the largest possible charitable deduction. Starting in 2018, the number of Americans filing tax returns with itemized deductions declined because the standard deduction amounts were increased significantly. The charitable deduction for life income gifts became less relevant. Choosing a lower discount rate or receiving a higher payout rate decreases the charitable deduction at the time of the gift. Decreasing the charitable deduction also increases the tax-free portion of the annuity payments. As long as the standard deduction amounts remain at historically high levels, gift planning professionals should ask charitable gift annuity donors if they prefer the highest possible charitable deduction or the largest amount of tax-free income.