Making Charitable Donations of Stock
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.
This article provided by: Bruce Brumburg, Forbes contributor https://www.forbes.com/sites/brucebrumberg/2018/11/26/making-charitable-donations-of-stock-instead-of-cash-after-tax-reform/#61638374cb3a
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