Donations Of Company Stock: Generous Charitable Giving And Sound Year-End Tax Planning

Charitable giving at any level is a very worthwhile use of accumulated wealth, such as holdings of company stock. In fact, nonprofits appreciate gifts of shares as much as gifts of cash.

As tax-reform legislation increases the standard deduction ($24,000 for joint filers and $12,000 for single filers), donations this year could have more after-tax value for you while you're still itemizing your deductions. At myStockOptions we have an entire section on the topic of gifts and donations involving stock acquired from equity compensation. The commentary below summarizes some of that section's guidance on how to make stock donations as part of your year-end financial and tax planning.

Timing

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/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 donations of a private company's stock, the process can take longer, so you will want to start it earlier.

Tax Rules

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.

Benefits

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.

Donation Example

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 (0.205 x $90,000)
Net amount to donate	$100,000	$81,550
Tax savings	$40,000	$32,620

Special Issues

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 our 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. Our section about estate planning also has content related to the theme of gifts and donations.

Charitable Donations Of Company Shares: Initiative By Facebook Founder Mark Zuckerberg Puts Stock Donations In The Spotlight

As Santa Claus would tell you, the end of the year is a traditional time for donating to charities. Mark Zuckerberg, the founder of Facebook, has surely made Santa's permanent nice list. As reported last week by The New York Times and many other media sources, Mr. Zuckerberg and his wife, Priscilla Chan, have declared their intention to donate 99% of their Facebook stock wealth to charitable causes during the course of their lives. The New York Times adds that their move is the most prominent manifestation yet of "a growing interest in philanthropy among Silicon Valley's young billionaires."

While few of us become billionaires, for many people charitable giving at any level is a very worthwhile use of accumulated wealth, such as holdings of company stock. In fact, nonprofits appreciate gifts of shares as much as gifts of cash.

At myStockOptions.com we have an entire section on the topic of gifts and donations involving stock acquired from equity compensation. This blog commentary summarizes some of that section's guidance on how to make stock donations at year-end. For details, see our articles and FAQs on this topic. Be sure also to see our separate section with many general ideas for your year-end financial planning.

Timing

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/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.

Tax Rules

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.

Benefits

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.

Donation Example

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
Tax savings	$40,000	$32,620

Special Issues

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. Our section about estate planning also has content related to the theme of gifts and donations.

Making Year-End Donations Of Company Stock To Your Favorite Charities

The end of the year is the traditional time for donating to charities. As Santa Claus well knows, nonprofits appreciate gifts of stock as much as gifts of cash.

Timing

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/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.

Tax Rules

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.

Benefits

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.

Donation Example

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
Tax savings	$40,000	$32,620

Special Issues

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.

Rates Of Passage

It seems we will probably have to wait until after the November elections before Congress will make any decisions about post-2010 tax rates for ordinary income, capital gains, dividends, or the estate tax, or about the AMT income exemption amounts for 2010. (For a detailed summary of the issues in play, see a recent memo from Deloitte.) If Republicans regain control of the House and pick up more Senate seats, the result could be either no change in current tax rates or a continuing stalemate. Whatever happens, the last few months of 2010 in Congress promise to be exciting, whether you're a tax professional or merely a taxpayer. We will continue to follow related developments closely.

Our July tax alert considered the changes in some of the tax rates that will occur if the Bush tax cuts simply expire (or "sunset") without further action by Congress or, alternatively, if President Obama's proposals are enacted. While Mr. Obama has declared that he will not seek to extend the Bush tax cuts, there is some support for extending them until the economy recovers (see, for example, this article in Bloomberg BusinessWeek).

For a number of years, we have foreseen the uncertainty about post-2010 tax rates that is now flooding the headlines, and we have considered the prospects of a tax increase after 2010. Alongside our insightful articles on financial-planning strategies for possible higher tax rates in 2011 and beyond, our tools can help you with the calculations. All of our tools allow you to easily edit for changes in tax rates and stock price. In most of the situations analyzed by our authors and other experts, tax increases alone should not be the sole basis of your decision to exercise options or sell stock in 2010.