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Financial Planning: Gifts



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What is the tax deduction for donations of my company stock?

The tax treatment is the same as it is for donations of any stock to a qualified charity (gifts of stock are covered by another FAQ). After you have held the stock for more than one year, at the time of the donation you get a tax deduction equal to the fair market value of the stock (not to your cost basis). For stock acquired from an option exercise or an ESPP purchase, the holding period begins on the day after exercise/purchase, while for restricted stock it starts on the day after vesting.

Rules

For public companies with an active market in their stock, the fair market value is the average between the high and the low stock prices on the delivery date, unless the stock is still subject to resale and transfer restrictions. For the stock of pre-IPO companies, you need a valuation by appraisal or some other reasonable valuation method (see IRS Revenue Ruling 59-60, which lists valuation factors and explains that no general formula can be used in every private company situation). The delivery date is when the stock is valued and determines the deduction year.

With your tax return, you need to file IRS Form 8283 for your noncash charitable contribution. The instructions for the form explain the rules that apply when you must obtain and include a written appraisal. For example, with nonpublicly traded stock valued at $10,000 or less (see Section B, Part 1) an appraisal is not needed, but the charity needs to explain how it determined the valuation.

If the sale of the appreciated shares would have triggered long-term capital gains, your deduction is up to 30% of your adjusted gross income (20% for family foundations), and you can carry forward amounts over this for five years. The tax treatment of gifting stock to donor-advised funds is similar to that of donating stock to qualified public charities.

When you donate stock, to implement the transfer you need the charity's brokerage account information, with the DTC (Depository Trust Company) number and an account number. Your instructions to your brokerage firm should include this information and any specific lot identification.

Alert: For year-end donations, be sure the stock transfer is completed by December 31 to make it count for the current tax year. For electronic transfers from your brokerage account, the donation is recorded on the day it is received by the charity/foundation (not when you approve the transfer). With increased year-end activity at brokerage firms, you should plan your year-end stock gifts as early as possible and have ongoing communications with your broker to ensure that the transfer takes place. For other ideas on year-end planning, see another FAQ.

Benefits

With a charitable gift of appreciated shares held long-term, the donation you make and the deduction you get are greater than they would be if you were to instead sell the shares and donate the cash proceeds. This is because when you donate shares, you avoid paying the capital gains tax.

Donation Example

You can either (1) donate $100,000 in company stock or (2) sell the stock first and donate the proceeds.

Stock: You donate $100,000 in company stock that you have held for at least one year (10,000 shares trading at $10 per share that you received at $1 per share) to a favorite charity. Your $100,000 tax deduction results in tax savings of $40,000 (assuming a 40% combined federal and state tax rate on your income).

Cash: You sell 10,000 shares, worth $100,000, and donate the cash. On your $90,000 gain ($100,000 minus the cost basis of $10,000) you pay $18,450 in taxes (15% federal capital gains tax plus the 5.5% state tax), resulting in $81,550. This amount will be lower if you trigger the 20% tax rate on capital gains and the 3.8% Medicare surtax. You get a tax deduction for the net amount of cash that you have donated. Your tax savings are $32,620 (40% of $81,550), $7,380 less than the tax savings with a donation of stock.

Donation of stock Donation of cash
Combined federal and state income taxes 40% 40%
Tax rate and amount for selling stock (Not applicable) 20.5% / $18,450 (0.15 x $90,000)
Net amount to donate $100,000 $81,500
Tax savings $40,000 $32,620

Tax Deduction For Short-Term Holdings

For stock that is not held one year, such as shares you may have recently received from an option exercise, ESPP purchase, or restricted stock vesting, the deduction is the cost basis or the current fair market value, whichever is lower. When the sale of the shares would have produced ordinary income or short-term capital gain, the deduction is limited to 50% of your adjusted gross income (30% for family foundations) with five-year carry-forwards. For stocks you hold that have dropped in value, you are better off with selling them first, to generate a capital loss for tax-loss harvesting, and then donating the proceeds.

Additional Reading

For more details on the tax rules of charitable giving, including stock valuation, see IRS Publications 526 and 561. For details on using charitable remainder trusts (CRTs) to donate company stock, see our article series on that topic.

Alert: If the donated shares were acquired from ISOs or an ESPP, additional tax consequences occur if you donate the shares before you have met the required holding periods. (See also the FAQs on donating shares from a Section 423 ESPP after meeting the holding period, and gifting/donating ISO shares after triggering AMT.) Executives and directors will also want to review the Section 16 and Rule 144 requirements before gifting or donating company stock.
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