Alright, it is that time of year people start thinking about charitable giving. Which is a great thing! I typically write something on this topic every year or two, so this may be a bit repetitive. I’m going to throw in some additional information this time though! As always, have conversations with your CFP® and/or CPA on this topic, especially as the rules are slightly changed this year due to Covid legislation.
First, let’s start with the simplest one of donating stock, directly or indirectly. I’m going to break this into two main categories. First, let’s deal with the assumption this is Apple stock you own in a taxable account and bought it years ago.
- Appreciated Stock – This simply means stock that has gone up in value. You bought your Apple stock for $100 and it is now worth $250 (I’m just making up numbers to keep it simple). In this case, do NOT sell your stock and donate the cash. You will end up paying taxes on the $150 gain and ultimately donate less than if you were to donate the stock directly to the charity. Fortunately, because you have owned the stock for over one full year you will pay long-term capital gains, which should be lower than ordinary income. But, you don’t even want to deal with this because again you WILL donate the appreciated Apple stock DIRECTLY to the charity of your choice, assuming they can receive stock directly. You get a deduction for the donation of the stock and the charity gets to sell the stock without any taxes.
- Depreciated Stock – Alright, you also bought some Apple stock a few years back at $400 a share and it once again is now worth $250. In this case you do want to sell the stock first. Because it is a loss you want to harvest/grab that loss for your taxes. Then you can donate the cash to the charity. No reason to let the charity get credit for the capital loss (not that they can anyways).
How about we talk about Qualified Charitable Distribution (QCD) now? Or, as I like to call it – Charitable RMD (Required Minimum Distributions).
- As a reminder, RMDs are when Uncle Sam says it is time for you to start taking money out of your tax-deferred accounts such as IRAs. Actual amounts are based on your previous end-of-year balance and your age.
- QCD’s allow you to direct/donate your RMDs to the charity of your choice, up to $100,000.
- Now, RMDs are not required to be taken until age 72 (and they’ve been paused for this year too), but you can start doing QCD’s from your IRAs once you hit age 70 ½.
- The basic way it works is you direct your RMD right to the charity. You fulfill your RMD and you are not taxed on the distribution (up to $100,000). No, you do not get a direct tax break, but you have met the RMD and not increased your taxable income.
I am going to quickly mention Donor Advised Funds (DAF). This continues to be an effective tool, especially if you’re looking at a higher than normal tax bill. Short version is you can lump several years’ worth of donations into one year by funding a DAF, get the tax benefit, and then make distributions out of it over time. The only thing I don’t like about these is they tend to be expensive to manage. Hopefully a little more competition in this space will bring down the fees.
Okay, here is the new stuff. I am seeing more and more clients with Equity Compensation. You know, Restricted Stock Units (RSUs), Restricted Stock Awards (RSAs), Non-Qualified Stock Options (NSOs), etc. This could get complex quickly so I will keep it simple.
- Your word of the day, boys and girls is Vested. Your equity compensation needs to be vested, which means you fully own and control it, when considering this avenue.
- I’m going to start with the bad news. If you have NSOs or Incentive Stock Options, odds are incredibly high you cannot donate them to a charity. Why? Well, because they are not vested.
- More bad news – if your RSUs and/or RSAs are also not vested, I would not recommend trying to donate them. This is more of a gray area, but most tax professionals say unvested RSUs and RSAs are not completed gifts for tax purposes. Again, avoid these.
- Now, to the good news. You have fully vested RSUs you’ve owned for over one full year. These you can donate directly. Again, just like appreciated stock you get a deduction for the donation and the charity then sells off the stock (hopefully, but if they hold onto it that’s not your worry).
- You can donate fully vested RSUs and RSAs you have owned less than one full year, but your tax benefit is not as great. It’s basically the same as if you sold the stock and donated the cash.
One last point – when donating stock, including RSUs and RSAs, it is best to donate the positions that have appreciated (gained) the most in value. Why? Well, because let’s say you are going to sell some vested RSUs or Apple stock you own in a taxable account to pay for your kid’s college. Would you rather sell the position and pay taxes on a smaller gain or a larger gain? You want to sell the smaller gain so you pay less in taxes to Uncle Sam. I mean, unless you are cool with tipping Uncle Sam.
That’s it. This week’s article has been long enough and it is now time to focus on turkeys. And stuffing. Remember, stuffing is key. Don’t come at me with that dressing garbage! Happy Thanksgiving!!!