Final answer:
The charitable deduction for a remainder interest in a residence where the donor retains a life estate is calculated using the present value of the interest that the charity will receive, based on the donor's age, the property's value, and the applicable federal rate.
Step-by-step explanation:
When an individual donates the underlying ownership interest of their personal residence to a charity but retains a life estate (the right to live in the residence for the rest of their life), the charitable deduction is calculated based on the present value of the remainder interest that the charity is expected to receive in the future. The donor's age at the time of the gift, the value of the property, and the applicable federal rate (AFR) for determining the value of future interests are all taken into account. The IRS provides tables and calculations that help determine the value of the remainder interest, which will be the amount of the charitable deduction. The donor must also ensure that all requirements are met for the deduction to be allowable, including substantiation requirements.