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Saturday, April 27, 2024
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Case Studies |
Electing the 50% AGI Limitation for Gifts of Appreciated Stock
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Case:
Barry Lokken, 60, was a retired architect. He spent his leisure days playing golf and the stock market. Barry's success in the stock market during the past five years has been very rewarding. In fact, most of his stock holdings actually doubled in value; however, because most of his stocks paid no dividends, his annual income did not likewise increase. Unfortunately, due to the tax liability associated with selling his highly appreciated stocks, Barry hesitated to sell his investments. Barry, therefore, was interested in tax saving strategies that would allow him to diversify (without paying a lot of capital gains tax) and increase his income.
During a financial seminar he attended about a year ago, Barry learned about charitable remainder trusts. He discovered that he could receive a charitable tax deduction, bypass capital gains taxes, and increase his income if he created one of these charitable trusts. Barry decided that a CRT would be an excellent vehicle for him, but wanted to wait "a little while." Like most investors, Barry hoped to squeeze out some more appreciation from his holdings. Barry knew this extra growth would provide him with a larger tax deduction and more income down the road. However, the stock market decreased sharply soon thereafter, and Barry lost almost all of his growth. He continued to hold the stocks for a year hoping for a rebound, but realized it was unlikely to happen in the near future.
Despite the loss in value of his holdings, Barry still desired to create a CRT for the tax deduction and increased income benefits. He planned on transferring $200,000 of stock with a basis of $190,000 to his CRT. He heard that the deductibility of gifts of appreciated stock is subject to a 30% Adjusted Gross Income (AGI) limitation. However, due to the liquidation of some other investments, Barry had a large tax liability this year. He was unhappy with the 30% limit and wished to take as large a tax deduction as possible now.
Question:
How can Barry raise his 30% AGI limitation to the more favorable 50% AGI limitation? What is the downside to this election?
Solution:
Under Sec. 170(b)(1)(C)(iii), a taxpayer may elect to have his or her charitable contribution reduced to the basis in the contributed asset. This normally undesirable result is offset with the removal of the 30% AGI limitation. Thus, the 50% AGI limitation will apply.
As a result, Barry's charitable contribution would be based upon $190,000, not the $200,000 fair market value. However, Barry may now report a charitable deduction up to 50% of his AGI, which was his goal. This election works best when there is little appreciation in the contributed property and the donor desires the largest deduction possible in the current year. Thus, the slight loss in the value of gift versus the larger tax deduction this year was an acceptable tradeoff to Barry. As a result, Barry happily funded his CRT and elected to have Sec. 170(b)(1)(C)(iii) apply to his gift.
Editor's Note: It is important to note that if a donor makes this election, it will apply to all contributions of capital gain property made during the year and all carry forwards from prior years.
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