Are Pooled Income Fund Contributions Tax Deductible?

Pooled Income Funds (PIFs) offer a unique approach to charitable giving. They allow individuals to support a qualified charity while retaining an income stream for themselves or other designated beneficiaries for their lifetime. Contributions from multiple donors are pooled into a single fund managed by the charity. The fund invests these assets, and the generated income is distributed proportionately to beneficiaries. A core benefit of contributing to a PIF is the potential for an immediate income tax deduction. After the income beneficiaries pass, the remaining assets transfer to the designated charity, fulfilling the donor’s philanthropic intent.

Deductibility of Pooled Income Fund Contributions

Contributions to a Pooled Income Fund are generally tax deductible, but not for the full amount of the gift. The deduction is based on the present value of the remainder interest the charity will ultimately receive. This value is calculated using IRS actuarial tables, considering the age of income beneficiaries, the fair market value of contributed property, and an IRS-determined discount rate.

The IRS Section 7520 rate, which is 120% of the applicable federal midterm rate, plays a significant role in this valuation. A higher Section 7520 rate generally increases the charitable deduction for the remainder interest, while a lower rate decreases it. Donors can choose to use the Section 7520 rate for the month of contribution or either of the two preceding months to maximize the deduction.

The charitable contribution deduction is subject to Adjusted Gross Income (AGI) limitations. For cash contributions to public charities, the deduction is typically limited to 60% of the donor’s AGI. Contributions of appreciated property, such as securities, are generally limited to 30% of AGI. If a donor’s contribution exceeds these AGI limits in a given tax year, the unused portion can be carried forward. This carryover period extends for up to five subsequent tax years, allowing the donor to utilize the full deduction. Carryover contributions are subject to the same percentage limits and are deducted after any current year contributions. Donors making noncash charitable donations, such as appreciated securities, must file Form 8283 with their income tax return.

Taxation of Distributions from a Pooled Income Fund

Income distributions received by beneficiaries from a Pooled Income Fund are typically taxable as ordinary income. This is because the fund generally invests in assets that produce income, such as dividends and interest, which flow through to the beneficiaries. The amount of income received by a beneficiary can vary based on the fund’s investment performance and their proportionate share of the fund’s earnings.

A notable aspect of PIFs is how capital gains are treated. Long-term capital gains realized within a Pooled Income Fund are generally not distributed to the income beneficiaries. Instead, these capital gains are retained by the fund and added to its principal for the benefit of the charitable remainder interest. This means income beneficiaries are not taxed on these capital gains, as they are considered part of the charitable gift.

Short-term capital gains, if any, are generally taxable to the fund itself unless allocated to income and distributed. If the fund earns tax-exempt income, such as from municipal bonds, that income can flow through to the beneficiaries as tax-exempt. However, PIFs are typically prohibited from investing in tax-exempt securities. The trustee of the pooled income fund must distribute income currently or within the first 65 days following the close of the taxable year.

Reporting Requirements for Pooled Income Funds

Both the Pooled Income Fund and its beneficiaries have specific tax reporting obligations. The fund, as a split-interest trust, must file Form 5227 annually with the IRS. This form provides detailed information about the fund’s financial activities and compliance with IRS regulations.

In addition to Form 5227, the fund must issue Schedule K-1 (Form 1041) to each income beneficiary. This Schedule K-1 details the beneficiary’s proportionate share of the fund’s ordinary income, such as interest and dividends. The fund typically sends these Schedule K-1s to beneficiaries by March 15th, allowing them time to prepare their personal tax returns.

Beneficiaries then use the information on their Schedule K-1 (Form 1041) to report their distributions on their personal income tax return, Form 1040. For instance, interest and ordinary dividend income reported on Schedule K-1 is typically entered on Schedule B of Form 1040. While the fund files Form 5227 with the IRS, beneficiaries do not typically attach their Schedule K-1 to their personal tax return unless specific conditions are met.