Charitable Contributions with Equity Compensation, Estate Planning and Taxes

Charitable Giving | Estate Planning

 Plancorp team By: Plancorp team

A charitable contribution is the gift of cash or property made to a nonprofit organization. The gift is meant to help an organization accomplish its goals, and the donor receives nothing in return. 

In most years, taxpayers can deduct cash charitable donations to public charities of up to 60% of their adjusted gross incomes — for example, in 2020 and 2021, that amount was 100% because of the CARES Act. 

Before we dive in, we want to make one point clear: Receiving a fair market value (FMV) deduction is only available with long-term securities. The holding period starts when an option is exercised or when restricted stock vests.

Here’s what you need to know about making charitable contributions with equity compensation, estate planning and taxes.

What is a Qualified Charitable Contribution?

In order to deduct a charitable contribution from your taxes,  your charity of choice must be a qualified organization according to Internal Revenue Service (IRS) standards.

Qualified organizations include:

  • A trust, community chest, or foundation created in the United States operated exclusively for charitable, religious, scientific, literary or educational purposes
  • An organization with the goal of preventing cruelty to animals or children
  • Synagogues, mosques, churches or other religious organizations
  • A volunteer, not-for-profit fire company
  • A veterans organization
  • A civil defense organization created under local, state, or federal law
  • Domestic fraternal societies, orders, and associations operating under the lodge system
  • A nonprofit cemetery where the funds are used to care for the cemetery as a whole

What is the Maximum Charitable Contribution?

If you itemize your deductions, you can claim a deduction for charitable contributions. In the past, a deduction was typically limited to 20% to 60% of your adjusted gross income and varied depending on the type of contribution and the type of charity. 

The Coronavirus Aid, Relief and Economic Security (CARES) Act now allows taxpayers to receive an immediate deduction of up to 100% of their adjusted gross income. To do so, the taxpayer must make a qualified cash contribution to a public charity, otherwise the usual limit (20% to 60%) applies.

Eligible individuals can make their elections on their 2021 Form 1040 or Form 1040-SR.

Charitable Contributions with Estate Planning

In addition to the income tax benefits of charitable donations, there can be gift and estate tax benefits as well.  

Here are four other ways to add charitable contributions to your estate plan:

  1. Give long-term, appreciated stock to a charity while you’re alive. You will generally receive a charitable income tax deduction equal to the full fair market value of the stock at the time of the gift and avoid capital gains taxes. When the charity sells your stock, they won’t pay capital gains taxes because charities are tax-exempt.
  2. Use a qualified charitable distribution from your IRA. This will allow you to benefit charity, fulfill your RMD requirement, and exclude that amount from your income. If you are over the age of 70.5, you can donate up to $100,000 per year to charities from your IRA.
  3. Leave a bequest in your will specifically stating how much and how often you’d like to donate to a charity. You can also clarify how you’d like that charity to use your funds.
  4. Name a charity as a/the beneficiary to your retirement account. Be specific about which charity, how much you’d like to donate, how often you’d like to donate and what the funds will be used for.

Charitable Contributions with Equity Compensation

Giving stock as a charitable contribution is another great way to share your wealth. There are a few exceptions that come with this, though. Generally, the equity compensation is non-transferable while still restricted or still in option form; however, once the stock vests andor an option is exercised, then the stock can be gifted.  

Gifting long-term shares (i.e., one year after the shares are not subject to a restriction or one year since an option is exercised) can provide tax benefits since the deduction amount is the full fair market value on date of gift and no gain is recognized. 

As long as the stock is public company stock, charities can use your donation how they choose, including holding the stock or selling.  Since public charities are not subject to tax, they are not motivated to hold versys sell due to tax consequences.

Charitable Contributions Options

As you can see, there are many ways to share the love on a yearly basis. Choose the option that best fits your needs and charity interests, and if you need help, we’re here to guide you.

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Disclosure:

This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Plancorp is a registered investment advisor with the Securities and Exchange Commission ("SEC") and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure and our Form CRS for additional information regarding the qualifications and business practices of Plancorp.

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