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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). When you have held the stock for more than one year, at the time of the donation you get a tax deduction for the fair market value of the stock (not for your cost basis). For stock acquired from an option exercise, the holding period begins on the day after exercise, 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

The "costs" of a charitable gift of appreciated shares that are held long-term is less than that of contributing the same amount in cash.

Example: You donate $100,000 of company stock held at least one year (say, 1,000 shares trading at $100 per share that you received at $1 per share) to a favorite charity. You have a $100,000 tax deduction, which results in $40,000 of tax savings (assuming a 40% combined federal and state tax rate). If instead you sold the 1,000 shares to donate the cash, on your $90,000 gain ($100,000 minus $10,000 cost basis) you would pay $18,450 in taxes (15% federal capital gains tax and the 5.5% state tax), resulting in $81,550. You would get a tax deduction for this net amount. Your tax savings here would be less, at $32,620.

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 and then donating the proceeds.

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 these are ISO or ESPP shares, additional tax consequences occur if you donate 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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