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.
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:
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.
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:
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.
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.
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.
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