The end of the year is a traditional time for donating to charities. As Santa Claus well knows, nonprofits appreciate gifts of stock as much as gifts of cash.
General Planning Strategy For Year-End 2016
With the likelihood of tax reform and lower taxes from 2017 onward under the new president and Congress, the general year-end strategy in 2016 is to defer income and accelerate deductions. Deductions are more valuable for you this year if you predict that tax rates will be lower next year. One popular tax deduction to accelerate into 2016 is charitable giving.
In addition, some of the proposals for tax reform have suggested various ways to limit the total amount of itemized deductions that taxpayers can claim. One proposal is to cap total itemized deductions at $100,000 for individuals and $200,000 for joint filers. Given that potential change in 2017, consider whether making large stock donations at year-end 2016 makes sense.
How To Make Year-End Stock Donations
Below we briefly summarize the basics of making donations of company stock at year-end. For more details about that topic, see the new article Making Gifts And Donations Of Company Stock at myStockOptions.com.
For year-end donations, be sure the stock transfer is completed by December 31 to make it count for the current tax year. For electronic transfers from your brokerage account, the donation is recorded on the day it is received by the charity, donor-advised fund, or foundation (not when you approve the transfer). With increased year-end activity at brokerage firms, you should plan your year-end stock gifts as early as possible and have ongoing communications with your broker to ensure that the transfer takes place.
For a charitable donation of company stock acquired from equity compensation, the tax treatment is the same as it is for donations of any stock to a qualified charity. (The tax treatment of gifting stock to donor-advised funds is similar to that of donating stock to qualified public charities.)
After you have held the company stock for more than one year, at the time of the donation you get a tax deduction equal to the fair market value of the stock (not to your cost basis). For stock acquired from an option exercise or an ESPP purchase, the holding period begins on the day after exercise/purchase, while for restricted stock/RSUs it starts on the day after vesting. If the sale of the appreciated shares would have triggered long-term capital gains, your deduction is up to 30% of your adjusted gross income (20% for family foundations), and you can carry forward higher amounts for five years.
With a charitable gift of appreciated shares held long-term, the donation you make and the deduction you get are greater than they would be if you were to instead sell the shares and donate the cash proceeds. This is because when you donate shares, you avoid paying the capital gains tax.
Suppose you can either (1) donate $100,000 in company stock or (2) sell the stock first and donate the proceeds.
Stock: You donate $100,000 in company stock that you have held for at least one year (10,000 shares trading at $10 per share that you received at $1 per share) to a favorite charity. Your $100,000 tax deduction results in tax savings of $40,000 (assuming a 40% combined federal and state tax rate on your income).
Cash: You sell 10,000 shares, worth $100,000, and donate the cash. On your $90,000 gain ($100,000 minus the cost basis of $10,000) you pay $18,450 in taxes (15% federal capital gains tax plus the 5.5% state tax), resulting in $81,550. This amount will be lower if you trigger the 20% tax rate on capital gains and the 3.8% Medicare surtax. You get a tax deduction for the net amount of cash that you have donated. Your tax savings are $32,620 (40% of $81,550), $7,380 less than the tax savings with a donation of stock.
|Donation of stock||Donation of cash|
|Combined federal and state income taxes||40%||40%|
|Tax rate and amount for selling stock||(Not applicable)||20.5% / $18,450 (0.15 x $90,000)|
|Net amount to donate||$100,000||$81,500|
If the donated shares were acquired from incentive stock options or an employee stock purchase plan, additional tax consequences occur if you donate the shares before you have met the required holding periods. (See also the FAQs on donating shares from a Section 423 ESPP after meeting the holding period, and gifting/donating ISO shares after triggering AMT.) Executives and directors will also want to review the Section 16 and Rule 144 requirements before gifting or donating company stock.
Much More Where This Came From
For other ideas on year-end planning, see the year-end articles and FAQs at myStockOptions.com.