By Kelly Metzler, CFP®

Equity compensation, such as Restricted Stock Units (RSUs), Restricted Stock Awards (RSAs), and stock options, is a valuable incentive for executives. It often makes up a key part of your total compensation package. Effective planning is important in order to manage the tax implications as well as the potential concentration risk that can arise from equity awards.

For executives that are charitably inclined, donating company stock offers a strategic tax-planning opportunity, while simultaneously reducing your company stock exposure.

Tax Benefits of Donating Stock to Charity

Donating appreciated stock can be a more tax-efficient approach to charitable giving than donating cash. This strategy has a twofold tax benefit. First, when you donate stock that has been held for at least one year, you can claim an income tax deduction equal to the stock’s current fair market value (FMV).

Second, you also avoid paying capital gains tax on the appreciation of that stock. Ultimately, the charities you support will receive higher donations when compared to selling the securities, paying capital gains taxes, and then donating the after-tax proceeds. 

Managing Concentrated Stock Positions

Without proper planning, equity compensation can lead to an overconcentration of company stock in your investment portfolio. Owning too much of any single stock increases the overall risk of your investment portfolio. Donating company stock can be a strategic way to diversify your investment holdings while also fulfilling your charitable goals and recognizing a tax benefit.

Donating RSUs and RSAs

Once Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs) have vested and the stock has been held for at least one year, they can be ideal gifts for charity. You can deduct the full fair market value (FMV) of the stock you donate from your taxable income. And you’ll avoid capital gains tax on the difference between the FMV at vesting and the FMV on the gifting date.

For vested shares that have been held for less than one year, there is no tax advantage versus just selling the stock and donating the after-tax proceeds. When donating short-term shares, the income tax deduction is limited to the lesser of your cost basis in the donated assets (i.e., the market value of the stock when it vested) or the FMV. In this case, you may be better off donating other appreciated stock in your portfolio.

Unvested RSUs and RSAs are not transferrable and therefore cannot be donated to charity.

Donating Exercised Stock Options to Charity

Non-qualified Stocks Options (NSOs) that have been exercised and the stock has been held for more than one year are another good candidate for donating to charity. You can deduct the FMV of the stock you donate as long as it’s held for at least one year after exercise. You’ll also eliminate capital gain recognition on the difference between the FMV at exercise and FMV on the date donated.

While stock received from the exercise of Incentive Stock Options (ISOs) can be donated to charity, the tax benefits may be less than donating other equity award types. If the shares are held for greater than one year after exercise and two years after the grant date, you’ll still get an income tax deduction and avoid capital gain recognition. However, there are potential Alternative Minimum Tax (AMT) implications to consider.

As a financial advisor, I have helped executives identify the best securities for charitable giving and incorporate charitable goals into their overall financial plan.

Donating Appreciated Stock to a Donor-Advised Fund

While many charities have the capability to receive appreciated stock as direct donations, a donor-advised fund (DAF) can help facilitate and streamline the donation of stock, including equity compensation.

A DAF is a charitable giving account sponsored by a public charity. Here’s how it works: You donate your vested or exercised awards held over one year to the DAF. You get a tax deduction when the contribution to the DAF account is made.

You then recommend grants to 501(c)(3) charities of your choice at any time. Your grants can either be made in the same year as your DAF contribution, or in future years.

Utilizing a DAF can be a good strategy to offset an unusually high income tax year by pre-funding the DAF with multiple years of charitable contributions. You would contribute to the DAF and claim the tax deduction in the high tax year, but would be able to spread the grants to charities over time.

Conclusion

Donating company stock earned through certain equity compensation awards is a way for executives to fulfill their charitable goals in a tax-efficient manner. However, there are essential financial and tax implications to take into account with our comprehensive planning for executives. When executed thoughtfully and strategically, stock donations can be a valuable means of philanthropic giving. If you’re ready to incorporate your charitable objectives into your overall financial strategy, schedule a call.