By AnnaMarie Mock, CFP®
As we’re in the throes of tax season, you may be surprised by the potential tax liability you face. In the realm of tax planning, savvy investors are always on the lookout for strategies to minimize their tax burden while maximizing their charitable contributions. One such strategy gaining traction is donating appreciated stock, funds, and equity compensation. By strategically leveraging these assets for charitable giving, individuals can support causes they care about and reduce their tax liability meaningfully. In this article, we'll explore the benefits of donating appreciated stock and equity compensation to minimize taxes, providing insights into how this strategy can be a win-win for donors and charitable organizations.
Advantages to Donating Appreciated Stock
Donating equity compensation can offer tax advantages as donors can deduct the fair market value of the donated stock without incurring capital gains tax.
Tax Advantages:
Donating appreciated stock, funds, and equity compensation can offer significant tax benefits. When individuals donate appreciated assets, such as stock held for more than one year, they can deduct the total fair market value of the donated stock on their tax returns up to certain limits. This allows donors to avoid paying capital gains tax on the appreciated value of the stock, maximizing the impact of their donation while reducing their taxable income.
Managing Concentrated Stock Positions:
Donating helps manage exposure to a single stock by diversifying the portfolio without triggering capital gains taxes and maximizing tax benefits. This strategy allows donors to support charitable causes while mitigating risks associated with holding a significant portion of their wealth in one concentrated stock.
Enhanced Giving Capacity:
Donating leverages assets for charitable purposes without impacting cash flow and preserves liquidity for other financial needs. This enhanced giving capacity enables donors to make more substantial contributions than they might have been able to with cash alone, empowering them to support causes they care about on a larger scale.
Long-Term Impact for Charities:
This type of charitable gifting can have a lasting impact on organizations, unlike one-time cash donations. The assets grow over time, providing ongoing support for charitable initiatives and long-term sustainability for years to come.
Simplified Giving Process:
This is often a straightforward process done through a financial institution. Donors can usually transfer shares electronically to the designated charitable organization, making it easier to support the causes.
Types of Stock Eligible to Donate
Understanding the types of stocks eligible for donation is vital because it determines whether individuals can receive tax benefits for their charitable contributions. Donors must ensure that the stock they intend to donate is publicly traded and held in their name to qualify for tax deductions.
Publicly Traded Stock or Fund:
Any publicly traded stock, including common stock, preferred stock, and stock options, is typically eligible for donation to qualified charitable organizations.
Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs):
Any shares that have vested and been held for at least one year are eligible. The total fair market value (FMV) of the stock donated can be deducted from taxable income while avoiding capital gains tax on the difference between the FMV at vesting and the FMV on the gifting date.
There is no tax advantage for vested shares held for less than one year versus just selling the stock and donating the after-tax proceeds. The deduction is limited to the lesser of your cost basis (market value when it vested) or the FMV.
Non-qualified Stocks Options (NSOs):
NQSOs held at least one year after exercising can also be donated. The capital gain recognition on the difference between the FMV at exercise and FMV on the date donated will be eliminated.
Incentive Stock Options (ISOs):
ISOs can be donated to charity; however, the benefits are less advantageous than other types. The shares must be held one year after exercise and two years after the grant to get the income tax deduction and avoid capital gain recognition. However, there are potential Alternative Minimum Tax (AMT) implications to consider.
Additional Things to Know:
The donation must be made directly to a qualified charity, and the tax deduction is subject to certain limitations based on the donor's income and the type of organization receiving the donation.
There is a cap on the tax deduction from donating appreciated stock. Generally, the deduction is limited to 30% of the donor's adjusted gross income (AGI) in the donation year, with any excess carried forward for up to five years. It's advisable to consult with a tax advisor for accurate information tailored to individual circumstances.
A Donor Advised Fund (DAF) can help facilitate and streamline stock donation, including equity compensation, rather than directly donating to the charity. Deductions for donations to a DAF are generally limited to 50% of your AGI.
Vested or exercised awards held over one year are donated to the DAF. You get a tax deduction when the contribution to the DAF account is made.
You can recommend grants to 501(c)(3) charities of your choice at any time in the same year as your DAF contribution or in future years.
Utilizing a DAF can be an excellent strategy to offset an unusually high-income tax year by pre-funding the DAF with multiple years of charitable contributions. You would contribute to the DAF and claim the tax deduction in the high tax year but would be able to spread the grants to charities over time.
Selecting highly appreciated stock offers significant tax savings over stock with a smaller gain. Additionally, choosing stocks with strong performance prospects can ensure charitable organizations receive assets that have the potential to grow and generate a more significant impact over time. Also, the donor will be removing the future gains from their portfolio as well.
Conclusion
Donating equity compensation for charitable gifting offers numerous benefits for individuals seeking to make a meaningful impact on their communities and beyond. This strategy empowers donors to support causes they care about while maximizing the value of their charitable contributions and deductions. By leveraging company stock or options for philanthropic purposes, individuals can create positive change and leave a lasting legacy far beyond financial markets.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.