Advanced Tax Strategies for Donating Equity Awards

Many people who have equity compensation are both concentrated in their company stock and charitably minded. What if you could manage both by donating stock?

Equity compensation can make an excellent gift to charity because of the potential charitable impact and tax benefits available to the donor. If you donate these stock awards directly to charity (rather than selling them first and then donating cash proceeds) you may be able to eliminate capital gains tax you would have paid, resulting in up to 20% more to charity. In addition, you may claim a fair market value deduction for your gift.

Donor-advised funds, which are 501(c)(3) public charities, are an excellent gifting option for donations of company stock awards, as the funds typically alleviate the tax burden on what is often highly appreciated stock.

The most common forms of equity compensation awards are typically restricted stock units (RSUs), restricted stock awards (RSAs), non-qualified stock options (NSOs), and incentive stock options (ISOs). The awards themselves are generally not transferable and therefore cannot be given to charity. However, once these awards are vested and/or exercised—and the underlying stock is held for more than one year—they can make excellent tax-smart charitable gift options.

Not all equity compensation awards are treated the same when it comes to the charitable income tax deduction. As illustrated below, ideal gift options should meet IRS holding period requirements of at least more than one year and have high appreciation above your cost basis. Such gifts enable you to potentially eliminate capital gain tax on the difference between fair market value on the date donated and fair market value when vested or exercised, while also claiming a charitable income tax deduction.

Cheryl is a senior executive of TechCo, a technology company that recently went public. She has accumulated a significant amount of restricted stock from the vesting of RSUs that she has held for more than one year.

Cheryl is eager to plan for her family's future and charitable giving is a big part of her goals. In addition, she has always been charitably minded and will have an unusually high income this year, so a charitable gift could help her to minimize tax exposure.

After speaking with her financial advisor, Cheryl learns about how she can easily fund a donor-advised fund account to receive a current-year tax benefit while making more money available to charity over time.

Cheryl decides to fund a donor-advised fund account with $1 million of company stock, with a cost basis of $50,000. By donating $1 million of TechCo stock directly to charity, as shown in Option 2 below, Cheryl eliminates $190,000 in projected federal capital gains taxes and this money is instead available to grant to charities through her donor-advised fund. She also has an additional $260,300 in tax savings from her claimed income tax deduction.