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EP 64 - Gifting Equity Compensation

As the year ends it’s important to consider your Equity Compensation holdings when it comes to the charitable donations you may want to do before the tax year ends. Of course, any time is a good time to make donations to charities, but year-end seems to be opportune because of the tax implications involved. And there are good ways and better ways to make your donations, also based on tax implications. This episode takes a high-level look at the best ways to make your donations and what you should consider in terms of dos and don’ts. 

You will want to hear this episode if you are interested in...

  • The focus on charitable giving using your company stock [0:21]
  • These comments are based on 2021 rules, so keep that in mind [0:48]
  • Deductions for charitable giving of company stock [1:11]
  • The proper steps for donating with “Donor Advised Funds” [5:42]
  • This week’s FLASHBACK: My second BIG Christmas tree purchase [7:08] 

Giving company stock is a great way to benefit your favorite charities

When I speak of donating company stock, I’m talking about stock that is completely under your control, so that means restricted stock, RSUs, and non-qualified stock options. The advice I’m about to provide is based on 2021 rules, so be sure you check the rules of the current tax year with your CPA before making donations. 

For 2021, your charitable deduction of any Equity Compensation holdings you have is based on the fair market value (FMV - the “cost basis”) of the stock when it is donated. That is the same for retail shares as well. You also have to have owned the shares for at least 1 year from the time you exercised your options and took full control. The clock begins ticking when you acquire them, regardless of the form of Equity Compensation.

You are allowed to deduct 30% of your Adjusted Gross Income, but you can carry amounts over that limit for the next 5 years. If you sell stock before donating it, you get a higher deduction for donating cash, but you should confirm that with your CPA. And be sure that you understand, the actual per-share valuation of the deduction is the average of the high and low prices of the company stock on the day you make the donation. 

Rules of thumb for donating company stock wisely

99% of the time, if your stock is up in value from your cost basis, it’s better for you to directly donate the stock to the charity in question. Do not sell it first. If you do, it will result in you paying capital gains taxes on the stock. Conversely, donating the stock directly under those conditions does not require you to pay capital gains tax. But you still get the tax deduction based on the full fair market value. That’s a pretty good deal.

If your shares are down from the cost basis, you should sell them before donating and claim the loss for tax purposes. Then you’re able to donate the cash and benefit from the tax deduction that way. If you know it’s going to be a bad tax year, consider bunching a larger than normal amount of Equity Compensation charitable donations to offset your tax liability.

This week’s FLASHBACK: My 2nd HUGE Christmas tree 

After buying a massive tree that filled our living room (listen to last week’s episode to hear that story), my wife decided that I couldn’t be trusted to pick out a tree on my own. So, she came along and was carrying our son because the snow was too deep for him to walk. I couldn’t carry him because I was busy hunting down the perfect tree. Listen to hear the entire story.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.