Big Income Hit From RSUs Or Stock Options? Use A Donor-Advised Fund (DAF) To Reduce Taxes While Being Charitable

When your restricted stock units vest or you exercise stock options, you may have a sudden big spike in your taxable income for the year. To reduce your taxable income and therefore stay out of a higher tax bracket, one technique tax advisors recommend is to create a donor-advised fund (DAF) and put money into it. A DAF lets you make both smart tax-planning decisions and charitable donations to causes you care about.

The strategy has become popular. DAF gifts (called “grants”) have become a key source of funds for charities and other nonprofits. One wealth advisor recently told us he regards this as “the summer of DAFs.”

The workings of DAFs, their tax benefits for you, and the timing flexibility they provide for financial contributions are discussed extensively elsewhere on the internet. This article looks at the hard part that is often not talked about: how do you decide when it makes better financial sense to donate directly with the DAF rather than by credit card, check, stock, or Venmo?

Huge Growth In DAF Assets

The assets in DAFs have grown substantially. According to a report from the National Philanthropic Trust, DAFs now hold nearly $230 billion in 2 million accounts. The publication The Chronicle of Philanthropy reveals that this growth in DAFs is changing charitable giving in many ways—though not all of them are positive, as discussed in an article from The Boston Globe.

Example Of Major DAF Giving And Growth

The Pan-Mass Challenge (PMC), a cycling event held every summer in Massachusetts since 1980, now raises more money for charity than any other single athletic fundraising event in the world. The PMC bicycle fundraiser for the Dana-Farber Cancer Institute in Boston will reach $1 billion in donations this year with its 2024 event, to be held the first weekend in August. With a 25% increase in DAF gifts as of May 31, 2024, over 60% of the PMC’s fundraising growth this year has come from DAF giving, according to Michele Sommer, the CFO of the PMC.

Disclosure: This summer, myStockOptions editor-in-chief Bruce Brumberg will raise funds for and ride in the PMC for his 36th straight year, and this will be his wife’s 33rd year of doing so.

New tools have been developed to make grants from DAFs faster and simpler than ever. These include DAFpay, which can be embedded in online donation forms. It allows donors to select from a list of DAF sponsors to make contributions. We tested DAFpay with a donation to the upcoming 1st PMC ride by the son of Editor-in-Chief Bruce Brumberg. It required fewer keystrokes than entering in credit-card information and was as easy as using PayPal.

Quick Tax Review Of DAFs

When you make a donation to a DAF, that amount is eligible for the charitable deduction on your tax return without the need at that point (or perhaps ever) to pick the nonprofits receiving the funds. When you’re making a very large cash donation to a DAF (or to any charity directly), understand that the tax deduction is limited to 60% of your adjusted gross income (AGI) per year, and you can carry forward what’s not used on that year’s tax return for five years.

A DAF donation reduces your taxable income for the year. Depending on your tax bracket, the DAF donation can therefore lower your taxes, assuming the total of your itemized deductions on Schedule A of your Form 1040 tax return (includes charitable donations) is higher than the year’s standard deduction that everyone gets. (In 2024, the standard deduction is $14,600 for single filers and married couples filing separately, and it is $29,200 for married joint filers.)

Related strategies that financial advisors suggest include using a DAF to consolidate or bunch donations into one year to maximize your itemized deductions. DAF donations are also an effective strategy for tax planning in years when you have a big income increase that would otherwise push you into a higher tax bracket. Common sources of an income spike include a vesting of restricted stock units (RSUs) from your employer, an exercise of nonqualified stock options, a Roth IRA conversion, or a sale of your company.

Basic DAF Gifting Rules

Donations to DAFs are irrevocable. While the money invested in your DAF account accumulates free of tax, you may not extract any funds from the DAF for personal use.

However, having a DAF does not impose any legal pressure on you to make grants from it. Unlike private foundations, which under IRS rules must distribute 5% of their net asset value per year, you have no legal requirement to make gifts from a DAF. Private foundations can also count DAF contributions towards the 5% of net assets they must annually distribute, and they can convert to a DAF under a legal process—one reason for the huge growth in DAF assets.

This lack of a rule for minimum DAF payouts has its critics. However, the IRS and Congress have shown little desire to require mandatory grants from DAFs.

While the law does not require you to make grants from your DAF, some DAF providers or sponsors—such as Fidelity Charitable, Vanguard Charitable, Schwab Charitable (now DAFgiving360), and National Philanthropic Trust—do have minimal mandates for regular grants.

For example, under the rules of a DAF at Fidelity Charitable (a former client of myStockOptions), you need to make a grant at least once every two years. Otherwise, Fidelity Charitable will make a donation from your Giving Account equal to 5% of the assets in it. After the first year of inactivity, Fidelity Charitable contacts the account holder to encourage grant recommendations.

Let’s look at seven reasons to use your DAF to make grants to charities and other nonprofits.

1. Dedication To Charitable Giving

Presumably, you set up your DAF mostly because you are generous and charitably inclined, not just for tax reasons, so you now need to hold yourself accountable to thoughtful use of the funds. After you have contributed money to the DAF, you will want to focus on how much to grant from it and to which nonprofits.

“You’ve already made your personal budgeting and tax decision on how much to put into your DAF,” explains Mitch Stein, Head of Strategy at Chariot, the company behind DAFpay. “Now’s the time to experience the joy of giving and focus on how you want to allocate the funds in your DAF to causes or organizations you believe in.”

“When giving from your DAF, you are able to support the organizations you love with money already set aside for philanthropic giving, with zero impact on your cash or credit-card payments,” emphasizes Karyn DeMartini, VP of Principal & Planned Giving at the March of Dimes.

The large amount of ungranted funds sitting in DAFs can be frustrating for nonprofits that need funding. The 2024 National Study On Donor-Advised Funds found that 22% of DAF accounts did not make any grants during the prior three years. In an average year during that period, 37% made no grants, and the median payout for all DAF accounts was 9% (15% after removing inactive accounts).

To encourage you to make DAF grants, an organization called #HalfMyDAF offers matching funds to donors who commit to spending down at least half of their DAF accounts each year. Its website has the details on the process and the deadlines for matching donations.

Jennifer Risher (author, speaker, and former Microsoft product manager) and her husband David Risher (the current CEO of Lyft) founded the #HalfMyDAF matching program. “We created the #HalfMyDAF matching program to inspire donors to put their money to work now, when it can do the most good,” says Ms. Risher. “Along with our partners, we have moved over $58 million from DAFs to nonprofits over the past four years.”

2. Better Organization And Tracking

When you make numerous donations in any year, whether small or large, it can be challenging to keep track of all the recipients and avoid duplication. To help you organize your gifting, most DAF providers have a website dashboard that lets you see in one place all the grants you have made.

3. No Credit-Card Fees

When you give with a DAF instead of a credit card, you’re saving the nonprofit anywhere from 3% to 5% in total fees charged by its credit-card processor (unless you gross up your donation). Venmo too has fees, though they are lower.

4. Maxed Out On Tax-Deductible Donations

Donations coming from your DAF do not give you a tax deduction, as would a direct donation to a charity by credit card, check, or Venmo. You already received the tax deduction when you contributed to the DAF.

If you know already that you’re going to hit your goal for the year in tax-deductible donations—perhaps via putting more money into your DAF, by some other big direct donation to a charity, or through setting up a charitable-type trust—then use the DAF to make the donation.

5. Smoother For Stock Or Complex Assets

DAFs can quickly handle and liquidate stocks and other assets more efficiently than many nonprofits can. Let’s say you have low-tax-basis stock in Nvidia, Apple, Alphabet (i.e. Google), or Tesla that you bought years ago and has since rocketed upward in value. You may want to donate the shares, as selling them would trigger significant capital gains tax.

You can donate the stock to the DAF for the tax deduction at its current share price and then use the funds in the DAF to make the donation. For donations of appreciated stock you have held long-term, the tax deduction is limited to 30% of your adjusted gross income (AGI) per year, but you can carry forward the unused portion on your tax return for five years.

6. Attention And Preferential Treatment…

When you use a DAF and the charity is aware of the donor behind it, the grant sends a signal that you’re a valuable philanthropist who enjoys giving to the organization’s cause. That can result in special invitations and attention.

7. …Or Total Anonymity

Grants from your DAF can go to any qualified charity in the US or abroad. You can set up the DAF with any name and title, and you can usually change those whenever you want by simply submitting a form. Grants from the DAF can therefore be anonymous or at least not associated with you personally.

If you are concerned that the charity you are giving to could be perceived by some people or your employer as controversial, using the DAF can mask your identity. It’s also a way to prevent the charity from sharing your personal contact information with other charities. The lack of transparency with DAFs is another area of potential legal change, though that is unlikely in the near future.

Equity Comp Masterclass: Special Three-Part Webinar Series

At the myStockOptions Webinar Channel, our Equity Comp Masterclass series of three webinars in May and June proved to be one of our most popular offerings yet. You can now watch the full series on demand. Each webinar includes the detailed slide deck, checklists, and handouts via the webinar player.

Register for the full masterclass series of three webinars at a special package price ($395) or for any of the individual webinars, listed below:

Part 1: Stock Options ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs ($149)
1.0 CE credit for CFP, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors ($189)
2.0 CE credits for CFP, CPWA/CIMA, and CEP/ECA

Parts 1 and 2 cover essential topics (including taxation) and feature plentiful examples. These two 60-minute webinars are presented by Bruce Brumberg (JD), the editor-in-chief and co-founder of myStockOptions.com and a Forbes.com contributor. Bruce is a highly respected expert who explains these topics in a practical, memorable, and engaging way.

Part 3 brings together all the fundamentals and taxation. The webinar features leading financial advisors actively working with clients who have equity compensation. They provide their top tips and real-world case studies. Panelists:

• Megan Gorman (JD), Founder, Chequers Financial Management
• Chloé Moore (CFP®), Founder, Financial Staples
• Danika Waddell (CFP®, RLP®, CSLP®), Founder, Xena Financial Planning
• Daniel Zajac (CFP®, EA), Managing Partner, Zajac Group
• Bruce Brumberg (JD), Editor-in-Chief and Co-Founder, myStockOptions (moderator)

Whether you are new to stock comp or want to sharpen your knowledge, these webinars will provide practical info and insights to maximize your success.

Year-End Donations Of Stock: 7 Ways To Make The Most Of Your Charitable Giving & Tax Deduction

Despite the worsening pandemic and widespread economic uncertainty, the stock market is hitting new highs. For the financially fortunate among us, there has never been a better time to support the less fortunate.

Donating stock instead of cash to charities and other nonprofit organizations can not only provide crucial assistance for them but also boost the tax deduction you receive for your generosity. This is true whether you have greatly appreciated shares acquired long ago in one of the most valuable stocks of 2020 (e.g. Amazon, Apple, Etsy, FedEx); stock from being an early-stage investor in an upcoming hot IPO company (Airbnb, DoorDash); or company shares acquired from the exercise of stock options, the vesting of restricted stock/RSUs, or an employee stock purchase plan.

1. Core Tax Rules For Stock Donations

After you have held stock for more than one year and its price has risen, at the time of the donation you get a tax deduction equal to the fair market value of the stock (i.e. not your lower purchase price, technically known as the cost basis). For stock not held for one year, the deduction is the cost basis or the current fair market value, whichever is lower.

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. When the sale of the shares would have produced ordinary income or short-term capital gain, the deduction is limited to 50% of your adjusted gross income (30% for family foundations) with five-year carry-forwards. Shares gifted to donor-advised funds receive the same tax treatment.

2. How Stock Donations Are Valued For Tax Deductions

For public companies with an active market in their stock, the fair market value for the donation is the average between the high and the low stock selling prices on the delivery date. For the stock of pre-IPO companies, you need a valuation by appraisal or some other reasonable valuation method. You, with your tax and financial advisors, want to review various sources, including IRS Revenue Ruling 59-60. It lists valuation factors and explains that no general formula fits all private-company situations.

3. Donation With Stock Can Be Bigger Than With Cash

With a charitable gift of appreciated securities held long-term, the donation you make and the deduction you get are greater than they would be if you were to sell the shares and donate the cash proceeds instead. That is because when you donate shares, you avoid paying the capital gains tax.

Donation Example

Suppose you can either (1) donate $50,000 in stock held more than one year or (2) sell the stock first and donate the proceeds. The stock has a cost basis of $10,000. You have a 40% combined federal and state tax rate on your income and a combined 20% tax rate on capital gains.

4. Company Stock Can Help Bunch Donations

The advice from many experts is to bunch donations so that your itemized deductions go beyond the Tax Cuts & Jobs Act standard deduction amounts in 2020 of $12,400 for individuals and $24,800 for joint filers (adjusted annually for inflation). If you do not routinely exceed the standard deduction, you can get over it by bunching in a given year donations of stock to charities or a donor-advised fund.

Alert: The CARES Act, adopted in response to the Covid-19 pandemic and related economic crisis, does have provisions on charitable contributions, but they do not involve stock donations. Taxpayers who use the standard deductions instead of itemizing deductions can claim up to a $300 deduction for a cash donation to a charity directly off adjusted gross income (i.e. an “above the line” deduction on Line 10b of the IRS draft 2020 Form 1040). For the 2020 tax year, the legislation also increases the deduction percentage limitation for cash charitable contributions (not stock) from 60% to 100% of adjusted gross income.

5. Extra Time May Be Needed To Process Stock Donations

To obtain a deduction for the current tax year, the stock transfer must be completed by December 31. For electronic transfers from your brokerage account, the donation is recorded on the day it is received (not when you approve the transfer). Plan your year-end stock gifts as early as possible, know the process the charity or nonprofit requires, and have ongoing communications with your broker to ensure that the transfer takes place.

If you have valuable stock in a pre-IPO company, you will want to start the process especially early. Donations and transfers of stock in a private company can take longer than those for stock in public companies and can raise valuation issues.

Donating appreciated stock can be easier through tools like Cocatalyst. Developed with financial advisors, donors, and charities in mind, Cocatalyst has each donor fill out a secure webform and then automatically processes the stock donation with their brokerage firm. Charities of all sizes can use the Cocatalyst system to process their stock donations from donors and receive ACH or check transfers. The company explained to me that the tool is similar to a pass-through donor advised fund (DAF), but focused on directly donating stock, which offers more tax flexibility while retaining the benefits of a DAF.

Alex Chung is the founder of Cocatalyst and a current member of its board. “We wanted to enable every donor to be able to give in a tax effective way without the headache,” he told us in response to our request for comment. “Maximizing donations through stock donations and other tax strategies is important because it helps charities get every last dollar.”

Alex started Cocatalyst because he wanted to streamline his family office's philanthropic giving, but he ultimately decided to make the tool available to all. According to Cocatalyst Research, there are over $21 billion in stock donations per year, and that figure is growing at 62% annually. He pointed out to us that philanthropists such as Jack Dorsey (Twitter) and Phil Knight (Nike) have made large contributions using stock in the past year.

6. Must File Special IRS Form

With your tax return, you need to report the stock donation on IRS Form 8283, used for your noncash charitable contribution. The instructions for the form and IRS Publication 561 explain the rules that apply when you must obtain and include a written appraisal. For example, with private-company stock valued at $10,000 or less, a qualified appraisal is not needed (it is for higher amounts), but the charity needs to explain how it determined the valuation. For a donation of publicly traded stock, you do not need an appraisal.

7. Special Issues With Stock Compensation

For a charitable donation of company stock acquired from equity compensation, the tax treatment and rules are the same as they are for donations of any stock to a qualified charity or donor-advised fund. If the donated shares were acquired from incentive stock options (ISOs) or an employee stock purchase plan (ESPP), be sure you donate the shares after you have met the related special holding periods for ISO and ESPP stock (more than two years from grant and one year from exercise/purchase). Executives and directors will also want to review the Section 16 and Rule 144 requirements before gifting or donating company stock.

More Ideas For Financial Planning With Stock

For other ideas on year-end financial and tax planning for company shares, see the year-end articles and FAQs at myStockOptions. The website’s section on gifts and donations has additional related content, such as on charitable remainder trusts, private foundations, and estate planning.

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REGISTER NOW for our special year-end webinar

REGISTRATION AND DETAILED AGENDA

 

 

Equity Comp Survival Guide For Pandemic Times

The COVID-19 pandemic has affected everyone, including employees with equity compensation.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably declined, leaving you wondering about your equity comp and financial planning.
• You may be considering the best use of your stimulus payment from the IRS.
• If you work for a small business that's seeking a forgivable loan from the Paycheck Protection Program, you need to understand the legal risks in the application and the use of the funds.

Here we present recent articles from the myStockOptions editorial team on these and other timely topics.

See also a full list of new and recently updated content at myStockOptions. Because Tax Season 2020 has been extended to July 15, it includes the fully updated tax-return content in our Tax Center.

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7 Things To Know When You Sell Company Stock To Raise Cash

You may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. One source of these funds can be proceeds from selling shares of your company's stock, whether acquired via the open market or equity compensation (e.g. stock options, RSUs, ESPPs). Before you sell your company shares, review this article's checklist of topics to understand on tax, company, brokerage firm, and SEC rules: 7 Things To Know When You Sell Company Stock To Raise Cash.

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Insider Trading: How To Stay Out Of Trouble

If you do sell company stock quickly to raise cash, be careful. Depending on your access to confidential company information, trading company stock can actually get you into serious legal trouble, including criminal liability for insider trading. A new article at myStockOptions explains what you need to know: Insider Trading: How To Stay Out Of Trouble.

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Market Volatility: A Survival Guide For Equity Comp

When stock markets become a rollercoaster and the economy is in a downturn, you need to hang in there and remember equity comp and company shares are best viewed as a long-term deal. Several articles at myStockOptions provide useful advice on coping with stock-price volatility, down markets, and job termination (whether layoffs or other types). These include:

• Stockbrokers' Secrets: Equity Compensation Strategies For Volatile Markets
• Stomach Volatility In Your Company's Stock Without Losing Your Mind
• Job Loss And Your Stock Grants (Parts 1 and 2)
• Preventing Irrational Decisions About Selling Company Stock Or Exercising Options
• Manage Your Expectations To Avoid The Option Blues
• Reframing Your Stock Option Exercise Strategy In Volatile Markets
• Equity Compensation Strategies For Down And Rising Markets

You can find these articles and extensive related content in the sections Basics: Volatility and Job Events: Termination.

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Donating Your Stimulus Check: 4 Key Tax Rules To Know

If you don't need the extra cash, one possible use of your stimulus payment from the IRS is to donate the money to a worthy cause. For this beneficence, you may get a tax deduction. Before you seek the deduction, learn the IRS rules that apply in an article at the Forbes.com blog of our editor-in-chief Bruce Brumberg.

For guidance on the tax deduction for donations of stock instead of cash, see the related FAQ at myStockOptions.

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How To Avoid Legal Problems With Your Paycheck Protection Program Loan

Potentially forgivable loans to small businesses are available via the Paycheck Protection Program (PPP).

• In an article at Forbes.com, we present advice from former federal prosecutors on avoiding legal problems with PPP loans.
• In a separate Forbes.com article, we share insights from small-business attorneys about how to meet the conditions that make the loan forgivable, and how to use PPP loan funds in a way that avoids abusing the loan program.

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Learning Center Offers CE Credits

Keep up your continuing professional education! In our Learning Center, myStockOptions has six courses and exams offering CE credits for several professional designations:

• 30 continuing-education credits for Certified Equity Professionals (CEPs): 100% of the total requirement
• 15 continuing-education credits for Certified Financial Planners (CFPs): 50% of the total requirement
• 15 continuing-education credits for Certified Private Wealth Advisors (CPWAs) and Certified Investment Management Analysts (CIMAs): 37.5% of the total requirement
• Chartered Financial Analysts (CFAs) and Certified Public Accountants (CPAs) are encouraged to take our courses and exams and include them, if possible, when they self-document their continuing professional education

Each course of study features podcasts, articles, and FAQs from myStockOptions. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.

Year-End Planning: Strategies For Stock Options, Restricted Stock/RSUs, And ESPPs

When the Santa hats and holiday lights are on, you know it's time for year-end financial and tax planning, especially if you have stock compensation, participate in an employee stock purchase plan (ESPP), or hold company shares.

Factors that impact your decisions in year-end planning include:

• your situation, including cash needs that may prompt option exercises and/or stock sales
• whether your decisions should be entirely tax-driven
• what you did earlier in the year with your outstanding stock grant
• whether you will owe additional taxes beyond what was withheld
• your outlook for both your company's stock price and your job
• multi-year projections for your income
• your ability to spread the recognition of income from certain sources over this year and next
• stock options that may expire soon
• grants of stock options and/or restricted stock you expect in the year ahead
• availability of an ESPP and the share purchase dates
• stock trading windows and blackouts and/or ownership guidelines imposed by your company

Tax changes under the Tax Cuts & Jobs Act (tax reform) continue to affect year-end-planning decisions. Meanwhile, the election year ahead in 2020 presents uncertainty about the future of tax laws that affect financial- and tax-planning strategies.

Should Tax Rates Drive Decisions?

Consider the income tax rates and income ranges that fall within each tax bracket for this year and next. With year-end planning, you are looking for ways to shift income between years so that you are paying less in tax, while also considering the outlook for your company's stock.

If you are considering option exercises or stock sales at year-end, you should be aware of the thresholds for higher tax rates and consider keeping your income below them, if possible. In general, financial advisors suggest that investment objectives, expectations for stock-price performance, and personal financial needs—along with tax considerations—should drive your decisions.

7 Strategies

Below are seven strategies suggested from the many ideas in the year-end planning section of myStockOptions.com.

1. You are planning to sell the stock at exercise late this year or early next year. You should calculate whether the ordinary income from a nonqualified stock option exercise will push you into a higher tax bracket and/or trigger the Medicare surtax on your investment gains, and what the taxes will be when the rates and bracket thresholds are adjusted for inflation in 2020. To break up the tax hit from an income spike, you may want to spread the same-day exercise/sale over the end of this year and the beginning of next year. Plus, you'll want to defer exercising into 2020 if you are confident your personal tax rate for the income triggered will be lower.

2. You are over or near the yearly maximum for Social Security. The Social Security wage base for 2019 is $132,900 ($137,700 in 2020). Social Security tax (6.2%) is owed only up to that income ceiling (Medicare tax is uncapped).

• Yearly income already over that threshold: Exercise nonqualified stock options or stock appreciation rights in December without paying Social Security tax so that you can keep an extra 6.2% of the related income.
• If you wait until January, your yearly wage base restarts at $0, and Social Security tax will again apply up to the new maximum for that year.

3. You expect next year to trigger the additional Medicare tax. The Medicare tax rate (normally 1.45%) is 2.35% for single filers with yearly compensation income of more than $200,000 (more than $250,000 for married joint filers). In addition, a 3.8% Medicare surtax applies to investment income, such as dividends and stock sale gains, for people in that same income range.

Example: Your multi-year projections of income show that you will trigger this surtax next year. You have company stock or other investments that you intend to sell soon, you may want to avoid the additional 3.8% tax by selling this year instead of next year.

4. Your restricted stock or restricted stock units (RSUs) vested this year. Unlike stock options, which trigger taxes when you choose to exercise them, restricted stock and RSUs usually give you no control over the timing of your taxes because you are taxed when the shares vest. The two exceptions to this are rare: opting to be taxed at grant instead by making a Section 83(b) election, which is unavailable for RSUs, or having RSUs with deferral features.

At vesting, you own the stock outright and have taxable W-2 income. Therefore, you can try to plan the timing and shifting of other income around this restricted stock/RSU income, as suggested in #1 above. See also the considerations in #6 about whether to continue holding the stock after vesting, which are similar to the question of whether to hold NQSOs exercised this year.

5. You exercised incentive stock options (ISOs) this year, you still hold the stock, and the stock price dropped substantially. While the changes in the AMT calculation under the TCJA make it much less likely you'll trigger the AMT, it is still important to calculate whether you should sell the stock this year (i.e. a disqualifying disposition) to eliminate any alternative minimum tax on the spread at exercise. Not doing this "escape hatch" analysis near the end of the year, especially if your company's stock price fell after an exercise earlier in the year, is a big mistake that many people with ISOs make. Should you decide to sell the stock, to avoid problems with the wash sale rule do not repurchase company shares within 30 days after the sale.

6. The stock price rose (or fell) after your exercise of nonqualified stock options (NQSOs) or your restricted stock/RSU vesting this year. The tax treatment is fixed at the time you exercise options or stock appreciation rights, and at the vesting of RSUs or restricted stock (assuming no Section 83(b) election for restricted stock). This is the tax rule for your federal and state income tax, regardless of the future stock price and whether you hold or sell the stock. You may have planned to sell the stock at price targets after holding it long enough to receive long-term capital gains treatment, but the stock price fell significantly. Therefore, you may want to consider selling the stock to receive a short-term capital loss, perhaps to net the loss against any capital gain, to diversify, or at least to cover any additional taxes that you will owe with your tax return for the spread at exercise or the value at vesting.

Alert: When you sell company stock at a loss to net against gains, be careful about the wash sale rule if you intend to buy the same stock again soon (see our related Forbes.com blog commentary: Year-End Stock Sales To Harvest Capital Losses: Beware Wash Sales). You should wait at least 30 days before repurchasing. However, you can sell appreciated stock for a gain and soon repurchase it without wash sale problems.

Alternatively, your stock price may have substantially increased, hitting your targets earlier than you expected. You may want to sell before the one-year mark because you are concerned that your stock has peaked or that tax rates will rise, or because you are worried about overconcentration in company stock. However, you may not want to pay short-term capital gains rates (i.e. the same rates as those for ordinary income). Check whether you have capital-loss carry-forwards from last year or short-term losses from this year that you can net against these gains. This is a good time to use up these losses against your short-term gains, which can also be created from sales of ESPP shares.

7. You want to donate stock or cash. The end of the year is also a time when many people consider making gifts and donations of company stock. This can be made directly with company stock to a charity or through a foundation or donor-advised fund.

The increase in the standard deduction under tax reform can make donations worth more when you’re trying to still itemize deductions. Look at your prior year’s Form 1040 tax return on Schedule A to see if you are able to itemize or could if you bunch together donations this year to get over the standard deduction amount ($12,200 for individuals and $24,400 for joint filers in 2019). As we have explained before in this blog, once you understand the tax rules, stock donations are often a better approach for appreciated shares held more than one year than first selling them and then donating the cash.

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 and charities, plan year-end stock gifts early and have ongoing communications with your broker to ensure the transfer takes place. Donations of private and pre-IPO company stock can take even longer with more documents to complete.

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myStockOptions 2020 Advisor Conference: Save The Date!

The 2020 myStockOptions conference, Financial Planning for Public Company Executives & Key Employees, will be held on June 15 and 16 at the Hilton San Francisco Airport Bayfront. The conference is for financial advisors working with executives, directors, and highly compensated employees at public and private companies, as well as others interested in those topics. The event will start on the afternoon of June 15 with an advisor boot camp on equity comp. A full day of conference sessions with expert speakers will follow on June 16.

Our conference is recommended in The 20 Best Conferences For Financial Advisors To Choose From In 2020 by financial-planning thought leader Michael Kitces! Please contact us ([email protected]) to be notified when registration starts at the early-bird discount rate.

Give Smart: Year-End Donations Of Stock Instead Of Cash Make Even More Sense After Tax Reform

Whatever holidays you celebrate, this is the season of giving. If you're charitably inclined and hold meaningful amounts of appreciated stock, such as shares acquired from a stock option exercise, restricted stock/RSU vesting, or ESPP purchase, donating stock instead of cash can be a smart tax-planning move. Given the changes in the rules for itemized deductions under the Tax Cuts & Jobs Act (TCJA), stock donations can reduce your taxes by giving you total deductions that exceed your new increased standard deduction amount.

Tax Rules For Stock Donations

After you have held stock for more than one year and its price has risen, at the time of the donation you get a tax deduction equal to the fair market value of the stock (not its cost basis). 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. The Tax Cuts & Jobs Act increased the income limit for charitable contributions of cash to public charities (from 50% to 60%), but not for charitable contributions of stock. Shares gifted to donor-advised funds receive the same tax treatment.

After Tax Reform: Using Company Stock To Bunch Donations

The advice from many experts is to bunch donations so that your itemized deductions go beyond the TCJA standard deduction amounts in 2018 of $12,000 for individuals and $24,000 for joint filers (adjusted annually for inflation). If you do not routinely exceed the standard deduction, you can get over it by bunching donations of stock to charities or a donor-advised fund.

Benefits Of Stock Donations

With a charitable gift of appreciated securities held long-term, the donation you make and the deduction you get are greater than they would be if you were to sell the shares and donate the cash proceeds instead. That is because when you donate shares, you avoid paying the capital gains tax.

Donation Example

Suppose you can either (1) donate $50,000 in stock held more than one year or (2) sell the stock first and donate the proceeds. The stock has a cost basis of $10,000. You have a 40% combined federal and state tax rate on your income and a combined 20% tax rate on capital gains.

Example factors	Stock donation	Cash donation
Combined federal and state income taxes	40%	40%
Tax rate and amount for selling stock	Not applicable	20% / $8,000 (0.2 x $40,000)
Net amount to donate	$50,000	$42,000
Tax savings	$20,000	$16,800

Be Careful With Year-End Timing

To obtain a deduction for the current tax year, the stock transfer must be completed by December 31. For electronic transfers from your brokerage account, the donation is recorded on the day it is received (not when you approve the transfer). Plan your year-end stock gifts as early as possible and have ongoing communications with your broker to ensure that the transfer takes place.

If you have valuable stock in a pre-IPO company, you will want to start the process especially early. Donations and transfers of stock in a private company can take longer than those for stock in public companies and can raise valuation issues.

Special Issues With Stock Compensation

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 or donor-advised fund. If the donated shares were acquired from incentive stock options (ISOs) or an employee stock purchase plan (ESPP), be sure you donate the shares after you have met the related special holding periods for ISO and ESPP stock (more than two years from grant and one year from exercise/purchase). Executives and directors will also want to review the Section 16 and Rule 144 requirements before gifting or donating company stock.

More Ideas For Financial Planning With Stock

For other ideas on year-end financial and tax planning, see our year-end articles and FAQs at myStockOptions.com. Our section on estate planning has additional content related to gifts and donations, such as charitable remainder trusts.

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.

Ho, Ho...How? A Guide To Making Year-End Donations Of Company Stock To Charities

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.

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, 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.

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.