Want to maximize your charitable donations and save on taxes? Donating equity compensation like RSUs, stock options, or appreciated shares can help you achieve both. Here's how:
- Donate Long-Term Shares Directly: Skip capital gains taxes and deduct the full market value of shares held for over a year.
- Use Donor-Advised Funds (DAFs): Get an immediate tax deduction, avoid capital gains taxes, and distribute funds to charities over time.
- Create a Charitable Remainder Trust (CRT): Defer capital gains taxes, secure an income stream, and leave a legacy for charities.
- Set Up a Charitable Lead Trust (CLT): Reduce estate or gift taxes while supporting charities with regular payments.
- Time Your RSU and Option Donations: Donate in high-income years to maximize tax savings and charitable impact.
Quick Comparison
| Method | Tax Benefits | Complexity | Best For |
|---|---|---|---|
| Direct Stock Donation | Full market value deduction, no capital gains taxes | Low | Simple, one-time donations |
| Donor-Advised Fund (DAF) | Immediate deduction, flexible giving | Medium | Multi-charity or long-term giving |
| Charitable Remainder Trust | Income stream, deferred taxes | High | Large gifts, income needs, estate planning |
| Charitable Lead Trust | Estate and gift tax reduction | High | Wealth transfer and structured giving |
| Timing RSU/Option Donations | Maximize deductions in high-income years | Medium | Optimizing tax savings with equity awards |
Pro Tip: Always check holding period rules for equity donations (e.g., RSUs must be held for a year post-vesting). Planning ahead ensures you amplify your tax benefits while supporting your favorite causes.
1. Donate Long-Term Shares Directly
Tax Savings Potential
Donating shares you've held for over a year can be a smart move. Why? You can deduct the full market value of the shares on your taxes and skip paying capital gains taxes. This approach allows you to make a bigger impact with your donation without increasing your costs.
"Donating appreciated equity compensation provides more resources to charities without increasing the donor's out-of-pocket expenses."
Next, let’s look at which types of equity compensation are best suited for this strategy.
Applicability to Equity Compensation Types
Not all forms of equity compensation qualify equally for direct donation. Here's a breakdown of how different types measure up:
| Equity Type | Holding Period Requirement | Donation Suitability |
|---|---|---|
| Vested RSUs & RSAs | More than 1 year from vesting | Ideal |
| NSO Exercise Shares | More than 1 year from exercise | Good |
| ISO Exercise Shares | More than 1 year from exercise AND 2 years from grant | Good |
| Vested PSUs & PSAs | More than 1 year from vesting | Ideal |
| ESPP Shares | More than 1 year from purchase AND 2 years from grant | Moderate |
Important: Shares that are unvested, unexercised options (both ISOs and NSOs), or Stock Appreciation Rights (SARs) are not eligible for donation.
Complexity of Implementation
Donating shares directly to a charity requires careful planning to avoid unnecessary complications. Here are some key steps to keep in mind:
- Transfer directly: Always transfer the securities to the charity instead of selling them first.
- Check restrictions: If you're donating restricted stock, get approval from your company’s legal team.
- Follow Rule 144: Be mindful of resale restrictions under Rule 144, if applicable.
- Act early: Complete the transfer before December 31 to qualify for a tax deduction in the current year.
- Review plan documents: Double-check your equity compensation plan for any donation limitations.
Taking these steps ensures the process is smooth and compliant with regulations.
Charitable Impact and Flexibility
Donating shares directly allows charities to benefit in two ways: they can sell the shares immediately to fund their projects or hold onto them for potential long-term growth. Just remember, to secure your tax deduction, the donation must be completed by December 31. This method not only supports your favorite causes but does so in a tax-efficient way, making your contribution go further.
2. Use Donor-Advised Funds for Stock Gifts
Tax Savings Potential
Donor-advised funds (DAFs) provide a smart way to donate appreciated stock while avoiding capital gains taxes. They also allow for a fair market value deduction of up to 30% of your adjusted gross income (AGI). Plus, the assets in a DAF grow tax-free, which can increase the future impact of your donation.
"With a DAF, you receive an immediate charitable deduction for your donation and can then recommend grants to specific charities in future years if you choose." - Elliott Stapleton, senior vice president and managing director of wealth strategy for Ascent Private Capital Management of U.S. Bank
Applicability to Equity Compensation Types
Not all types of equity compensation are treated equally when it comes to DAF donations. Here's how different equity types stack up:
| Equity Type | Holding Period | Tax Benefits | Suitability |
|---|---|---|---|
| Vested RSUs & RSAs | More than 1 year from vesting | FMV deduction up to 30% AGI, eliminate capital gains | Ideal |
| NSO Exercise Shares | More than 1 year from exercise | FMV deduction up to 30% AGI, eliminate capital gains | Good |
| ISO Exercise Shares | More than 1 year from exercise AND 2+ years from grant | FMV deduction up to 30% AGI, eliminate capital gains | Good |
| Vested PSUs & PSAs | More than 1 year from vesting | FMV deduction up to 30% AGI, eliminate capital gains | Ideal |
| ESPP Shares | More than 1 year from purchase AND 2+ years from grant | FMV deduction up to 30% AGI, recognize discount as ordinary income | Moderate |
Complexity of Implementation
Setting up a DAF is simpler than it might seem. Here’s how to get started: Open a DAF account, transfer your eligible equity directly, ensure proper documentation (like Form 8283), and consult with financial advisors for guidance.
For example, Cheryl, a senior executive, donated $1 million in company stock with a cost basis of $50,000 to a DAF. By doing so, she saved $190,000 in federal capital gains taxes and gained an additional $260,300 in tax savings through income tax deductions.
Charitable Impact and Flexibility
DAFs allow for highly flexible charitable giving. In fiscal 2022 alone, DAFs facilitated $45.74 billion in grants to charities. They’re especially useful in high-income years, letting you maximize tax benefits while deciding when and where to allocate funds.
You can use a DAF to support multiple charities over time, and the funds can even be invested for potential growth before distribution. This flexibility makes them a great option for managing windfalls, such as equity compensation payouts or strong market returns.
Next, we’ll dive into trust-based strategies to explore even more tax-efficient ways to give.
3. Create a Charitable Remainder Trust
Tax Savings Potential
A Charitable Remainder Trust (CRT) offers a combination of financial and philanthropic advantages. First, you can claim an immediate income tax deduction based on the present value of the future charitable gift. Second, it allows you to defer capital gains taxes on appreciated assets. Third, any investments within the trust grow without being taxed. CRTs require annual distributions ranging from 5% to 50% of the trust's assets and ensure that at least 10% of the initial market value ultimately benefits the charity. This structure creates a beneficial outcome for both you and the charity you support.
Applicability to Equity Compensation Types
CRTs can accommodate various forms of equity compensation, but timing and compliance with holding periods are crucial. Here's how different equity types align with CRT strategies:
| Equity Type | Best Use Case | Tax Consideration |
|---|---|---|
| Appreciated RSUs | Post 1-year holding | Avoids immediate capital gains taxes |
| Company Stock Options | After exercise | Spreads gains over annuity payments |
| Concentrated Stock Positions | Risk diversification | Retains full market value of assets |
Take the example of Caroline, a tech executive whose stock holdings had become overly concentrated due to rapid growth. By using a CRT, she was able to diversify her portfolio, generate a steady income stream, and achieve greater tax efficiency. This approach showcases how CRTs can address both tax concerns and investment risks.
Complexity of Implementation
While the benefits of CRTs are clear, setting one up requires careful planning and professional assistance. The steps typically include:
- Engaging an attorney to draft the trust documents and secure an IRS tax ID.
- Collaborating with financial advisors to manage investments, oversee distributions, and integrate the trust into your overall tax and estate planning strategy.
Since CRTs are irrevocable, it's essential to weigh the pros and cons thoroughly before committing. Partnering with experienced professionals ensures the trust is structured and managed effectively, aligning with both your financial objectives and charitable intentions.
Charity: Part 2 - Donating Appreciated Stock
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4. Set Up a Charitable Lead Trust
A Charitable Lead Trust (CLT) is another strategic option for blending philanthropy with tax planning, offering a way to support charitable causes while managing taxes effectively.
Tax Savings Potential
CLTs provide a stream of income to a charity for a set period, while offering opportunities to reduce estate and gift taxes. There are two main types of CLTs, each with its own tax advantages:
| Trust Type | Tax Benefits | Best For |
|---|---|---|
| Grantor CLT | Immediate income tax deduction; grantor pays trust income taxes | Donors seeking upfront tax deductions |
| Non-Grantor CLT | No immediate deduction; trust claims charitable deductions; lowers gift/estate taxes | Donors focused on estate planning |
To avoid triggering a taxable gift, structure the CLT so that the noncharitable remainder interest is "zeroed out."
How CLTs Work with Equity Compensation
Much like direct donations or donor-advised funds (DAFs), CLTs can optimize tax efficiency while supporting your favorite charities. Here's how different types of equity compensation align with CLT requirements:
| Equity Type | Transferability | Key Considerations |
|---|---|---|
| NSOs | Yes (if plan allows) | Flexible and often used by executives |
| ISOs | No (lifetime transfers prohibited) | Can only transfer shares after exercising |
| RSUs (vested) | Yes | Standard transfer rules apply |
For instance, a donor contributed $1 million in appreciated stock to a 10-year Charitable Lead Annuity Trust (CLAT). With a 5.0% 7520 Rate, the trust paid $129,505 annually to charity. Over the trust's term, the charity received nearly $1.3 million, while approximately $530,000 was passed to the donor's family.
Steps to Implement a CLT
Setting up a CLT involves several important steps:
- Review your equity plan to identify any transfer restrictions.
- Decide between a CLAT (fixed annual payments) or CLUT (variable payments) structure based on your goals.
- Choose your charitable beneficiaries. A donor-advised fund can provide flexibility for directing distributions.
This approach not only supports your charitable goals but also creates a structured way to manage wealth transfer and tax obligations.
Charitable Giving and Flexibility
One of the key benefits of a CLT is the control it offers over charitable distributions. By naming a donor-advised fund as the lead beneficiary, you can:
- Direct giving throughout the trust's term.
- Oversee how grants are distributed.
- Adjust charitable recipients as your priorities shift.
- Witness the impact of your contributions during your lifetime.
This combination of flexibility, tax efficiency, and philanthropic impact makes CLTs a valuable tool for donors looking to align their giving with long-term financial and family goals.
5. Time Your RSU and Option Donations
When it comes to equity compensation, timing your donations can make a big difference in both tax savings and the impact of your charitable giving. By understanding how and when to donate equity, you can maximize the value of your contributions.
Tax Savings Potential
Donating equity compensation at the right time can unlock significant tax advantages, especially in high-income years. Here’s how:
- Avoid capital gains taxes on appreciated equity.
- Claim charitable deductions of up to 30% of your adjusted gross income (AGI).
- Carry forward unused deductions for up to five years.
"Donating appreciated equity compensation provides more resources to charities without increasing the donor's out-of-pocket expenses", says Elliott Stapleton, senior vice president and managing director of wealth strategy at Ascent Private Capital Management of U.S. Bank.
Knowing the Rules for Different Equity Types
Not all equity compensation is treated the same when it comes to charitable donations. Here’s a quick breakdown:
| Equity Type | Donation Eligibility | Holding Period Requirements | Tax Benefits |
|---|---|---|---|
| Vested RSUs | Eligible after vesting | More than 1 year from vesting | Fair market value (FMV) deduction up to 30% of AGI |
| NSO Stock | Eligible after exercise | More than 1 year from exercise | FMV deduction up to 30% of AGI |
| ISO Stock | Eligible after exercise | More than 1 year from exercise AND 2+ years from grant | FMV deduction up to 30% of AGI |
| Unvested RSUs | Not eligible | N/A | None |
| Unexercised Options | Generally not transferrable | N/A | None |
Understanding these rules can help you determine how your specific equity fits into a donation strategy.
Making It Happen: Steps to Follow
Donating equity compensation isn’t as simple as writing a check, but with the right steps, it’s manageable:
-
Review Plan Documents
Check your equity compensation plan documents to confirm donation eligibility and any restrictions. -
Time Donations Strategically
High-income years are ideal for donations. For instance, a senior executive who donated $1 million in company stock saved $190,000 in capital gains taxes. -
Track Holding Periods
Make sure you meet the IRS’s holding period requirements, including vesting and exercise dates, to qualify for full tax benefits.
Maximize Charitable Impact and Flexibility
Here’s why this strategy matters:
- While nearly 65% of high-income taxpayers donate cash, fewer than 10% donate marketable securities.
- Securities donations can go up to 30% of AGI, compared to 50% for cash donations.
- Donating highly appreciated stock can amplify both your tax savings and the impact on the charities you support.
Tax Savings and Complexity by Method
This section breaks down how different donation methods stack up in terms of tax advantages and the complexity of setting them up. Depending on your strategy, you can maximize tax savings while balancing how much effort is required to implement each approach. Here's a closer look at donating equity compensation.
Direct Stock Donations vs. Complex Structures
If you're looking for simplicity and immediate tax benefits, direct stock donations are a strong choice. By donating appreciated stock held for more than a year, you can:
- Avoid capital gains taxes
- Claim a fair market value (FMV) deduction of up to 30% of your adjusted gross income (AGI)
- Carry forward unused deductions for up to five years
"In essence, you're increasing the charitable impact of your donation, because the charity will receive the full value of the appreciated stock, not the value of the stock less capital gains taxes", - Elliott Stapleton, senior vice president and managing director of wealth strategy for Ascent Private Capital Management of U.S. Bank.
For a clearer picture, the table below compares various donation methods based on their tax advantages, complexity, and the situations where they work best.
Donation Methods Comparison
| Method | Tax Benefits | Implementation Complexity | Best Use Cases |
|---|---|---|---|
| Direct Stock Donation | High – Immediate deduction at FMV | Low – Simple transfer process | Single large donations, immediate impact |
| Donor-Advised Fund | High – Immediate deduction with flexibility | Medium – Some paperwork required | Multiple charities, future giving plans |
| Charitable Remainder Trust | Very High – Income stream plus deduction | High – Significant legal setup | Large estates, ongoing income needs |
| Charitable Lead Trust | Very High – Estate tax benefits | High – Complex trust structure | Wealth transfer planning |
This comparison can help you identify the best approach based on your donation size and long-term financial planning needs.
Equity Type Considerations
The type of equity compensation you're working with also plays a role in determining the most tax-efficient strategy:
RSUs and RSAs
Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) offer strong tax advantages when held for over a year. You can avoid capital gains taxes while claiming a deduction for the full market value of the stock.
Stock Options
For Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs), timing is critical. To take advantage of tax benefits, you'll need to meet the required holding periods after exercising the options. However, unexercised options cannot be donated, so plan accordingly.
Advanced Planning Considerations
For those exploring more sophisticated strategies, donor-advised funds (DAFs) and charitable trusts provide additional options. Here's what to keep in mind:
- Donor-Advised Funds (DAFs): With nearly $230 billion in assets, DAFs allow for flexible giving, making them a popular choice for donors who want to support multiple charities over time.
- Charitable Trusts: While trusts offer significant tax benefits, they come with higher setup costs and legal requirements.
- Direct Donations: These require minimal paperwork, making them an easy option for straightforward giving.
As the complexity of the method increases, so do the potential tax benefits. Direct donations and donor-advised funds are practical for most donors seeking simplicity. However, charitable trusts are ideal for those with larger estates or who want to create an ongoing income stream while addressing estate planning goals.
Conclusion
Making tax-efficient equity donations requires careful planning, but the rewards can be substantial. With U.S. families and individuals contributing over $1 billion to charitable causes daily, understanding how to maximize these contributions is more important than ever.
The best approach depends on the type of equity you own and your financial objectives. For example, donating appreciated assets held for more than a year offers a double advantage: you avoid capital gains taxes and can claim a fair market value deduction of up to 30% of your adjusted gross income.
Timing and structuring your charitable giving thoughtfully can amplify its impact. With a complex tax landscape and a $13.99 million exemption set for 2025, platforms like Mezzi’s AI-powered tools simplify the process, helping you optimize both your tax benefits and the effect of your donations. These strategies are key to crafting a well-rounded approach to philanthropy and tax planning.
Additionally, any unused charitable deductions can be carried forward for up to five years. By combining these strategies with modern financial tools, you can align your giving with both your personal values and tax-saving goals, ensuring your contributions make a meaningful difference.
FAQs
What are the benefits of donating equity compensation through a Donor-Advised Fund (DAF)?
Donating equity compensation through a Donor-Advised Fund (DAF) comes with several key advantages:
- Immediate Tax Benefits: When you donate appreciated equity, you can deduct the full fair market value of the stock - up to 30% of your adjusted gross income (AGI).
- No Capital Gains Taxes: Donating the stock directly means you skip the capital gains taxes you'd owe if you sold it first.
- Giving on Your Timeline: A DAF lets you take the tax deduction right away while giving you the flexibility to decide later how and when to support your favorite charities.
On top of that, contributions made to a DAF can be invested to grow tax-free, potentially increasing the funds available for charitable donations over time. This combination of tax efficiency and strategic giving makes DAFs a smart choice for maximizing your charitable efforts.
How can a Charitable Remainder Trust (CRT) help reduce taxes when donating appreciated assets?
A Charitable Remainder Trust (CRT) offers a smart way to combine tax benefits with philanthropic goals. When you transfer appreciated assets, like stocks or real estate, into a CRT, the trust can sell those assets without triggering capital gains taxes. This means the entire proceeds can be reinvested, giving them more room to grow.
In exchange, you receive a steady income stream from the trust, either for a specific number of years or for the rest of your life. After the trust term ends, whatever remains is donated to the charity of your choice. This approach not only lowers your current tax liability but also provides you with income and helps you contribute to causes that matter to you.
How can I time my RSU and stock option donations to maximize tax benefits?
Timing your donations of Restricted Stock Units (RSUs) and stock options can make a big difference in managing taxes effectively. Here are two important factors to keep in mind:
- Vesting and holding periods: When RSUs vest, they’re treated as ordinary income for tax purposes. If you hold onto the shares for at least one year after vesting before donating, you can claim a charitable deduction based on the fair market value at the time of the donation. Plus, you’ll sidestep capital gains taxes on any increase in value since the shares vested.
- Income and tax brackets: Consider donating in years when your income is lower to keep yourself in a lower tax bracket. This is especially relevant for stock options, as the timing of when you exercise and sell them can have a big impact on your taxable income.
Thoughtful planning around donation timing can help you minimize taxes while amplifying the impact of your charitable contributions.
