By: AnnaMarie Mock, CFP®
Donating appreciated stock and equity compensation is a powerful way for savvy investors, pharmaceutical executives, and high-income earners to reduce tax liability while supporting meaningful causes. By leveraging appreciated assets like stocks or restricted stock units (RSUs), donors can avoid capital gains taxes, diversify their portfolios, and preserve liquidity for other financial needs. In this guide, we'll explore the benefits of stock donations, tax implications, and how tools like Donor Advised Funds (DAFs) can streamline the process, making supporting the charities you care about easier while maximizing financial efficiency.
Tax Strategies for Savvy Investors and Pharmaceutical Executives
Savvy investors and pharmaceutical executives always look for ways to reduce their tax liability and increase charitable donations.
Benefits of Donating Appreciated Stock and Equity Compensation
Today, we will talk about the benefits and some helpful tips on donating appreciated stock and equity compensation.
Why Donate Appreciated Assets?
By leveraging appreciated assets like stock, the donor can:
Support the causes that they care most about
Reduce their tax liability
In the year of the contribution, the donor can deduct the fair market value up to certain limits on their tax return.
This is hugely impactful because it avoids triggering capital gains. It reduces taxable income and removes future appreciation from their net worth and estate. It also allows the donor to reduce concentration to one particular stock.
Diversification and Risk Reduction Through Donations
This ultimately leads to the diversification of the portfolio and a reduction in risk over the long run. Donors can also preserve liquidity for other financial needs because they're not using the cash they have on hand—they use stock they currently have in their portfolio.
This impacts the organization as the asset grows, providing ongoing support and long-term sustainability.
What Kind of Stock is Eligible for Donation?
So, what kind of stock is available and eligible to donate?
Public Stock Donations
The first kind is just public stock that the donor has in their name.
Equity Compensation: Restricted Stock Units (RSUs)
Equity compensation gets a little nuanced. For example, restricted stock units must be held one year from the vesting date. If the year isn't up, it makes sense to sell out of the RSU and donate the cash.
Non-Qualified and Incentive Stock Options
The stock must be held for one year from the exercise for non-qualified stock options. Incentive stock options must be held for one year from exercise and two years from the grant.
Be mindful of any AMT (Alternative Minimum Tax) triggered by these donations.
How to Donate Stock to Charity
So, how do you donate the stock?
Donating to a 501(c)(3) Charity
The stock must go to a 501(c)(3) charity. In the year of the donation, the donor can deduct up to 30% of their AGI on their tax return. Consult an accountant for personalized advice on this to understand your unique circumstances.
Using a Donor-Advised Fund (DAF) for Simplicity
A straightforward tool is a Donor Advised Fund (DAF) account. This helps facilitate the donation process and simplifies it for you. You can deduct up to 50% of your AGI in the year of the contribution.
This is a powerful tool during high-income years, allowing assets to grow within the DAF for future charitable donations on an annual basis.
Why Donate Low-Cost Basis Stock?
It's also vital to consider donating low-cost basis stock directly to the charity or through a DAF.
Example of Tax Savings on Low-Cost Basis Stock Donations
Let's look at an example. If you have a stock that vested at $80 versus a stock that vested at $20, and they're both now worth $100:
Donating the stock vested at $80 saves around $20 in capital gains.
Donating the stock vested at $20 saves $80 in capital gains.
If you're in the highest capital gains rate of 20%, that's $16 per share—a significant savings in the current year and a powerful benefit as the stock grows.
Conclusion: Empowering Donors Through Stock Donations
To sum up, donating appreciated stock empowers donors by allowing them to support causes they care about and reduce their tax liability.
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AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.