Employees who receive equity compensation often have unique planning opportunities that can help them fund charitable giving in a tax-efficient way.
We find that many of our Executive Services clients are charitably inclined and write checks annually to their favorite causes. For those who donate cash, there may be a more tax-efficient way to be philanthropic. Instead of giving cash to charitable organizations, the donation of appreciated securities may provide additional benefits to both the charity and the donor.
When donating shares that have increased in value to a qualifying charity, the donor can avoid paying capital gains taxes that would otherwise be triggered if the stock was sold for a profit. In fact, the donor can claim a charitable deduction on their federal income tax return (subject to IRS limits, discussed below) equal to the fair market value of the securities at the time of the gift. In addition, the charitable organization would also not be subject to taxes on capital gains when it sells the stock, so it could retain the full value of the assets.
Donating stock that has appreciated in value directly to a charitable organization effectively enables a donor to make a larger contribution than if the shares were sold first, and then paying capital gains taxes on them, before funneling the net proceeds to a charity. At the highest levels, tax rates can be as high as 20% on long-term capital gains, along with a 3.8% Medicare surtax, making for an effective tax rate of 23.8%. (Note that, depending on the jurisdiction, state taxes may apply as well.)
For example, consider a donor who holds shares that were purchased for $20,000 which now have a fair market value of $50,000—meaning that they have appreciated $30,000.
Some qualifications should be noted.
FIRST: To donate appreciated stock to charity based on its full fair market value, the shares must be held for more than one year (i.e., one year plus one day or longer). If stock is held for one year or less, the charitable deduction will be limited to its cost basis.
SECOND: This approach is available only when the taxpayer/donor itemizes deductions on their federal income tax return. The benefit that comes from donating appreciated stock cannot be taken if the taxpayer makes use of the standard deduction.
THIRD: There is a limit on how large a charitable deduction can be claimed in a given year, based on:
- The donor's level of adjusted gross income (AGI) reflected on their federal tax return and
- The type of organization the appreciated stock is being donated to.
If the securities are being given to a public charity, a donor-advised fund, or an operating private foundation, the maximum charitable tax deduction that can be claimed for the year, under current 2023 tax law, is 30% of AGI. If the stock is donated to a private foundation that does not meet the IRS criteria for "operating," the comparable limit is 20% of AGI. However, any potential deduction left unused is not lost—the remainder can be carried forward for up to five years.
In addition to "doing good," donating appreciated stock could improve a donor's financial position as well. This can occur when a donor has a significant concentration of portfolio wealth in a single stock position, due to substantial over-performance or through the accumulation of employer stock through award grants. Donating highly appreciated stock to charity, which avoids recognition of long-term capital gains, can be a tax-efficient means of restoring balance to a portfolio.