Instead of donating multiple blocks of stock to multiple charities, you make one donation which is used to fund your Giving Account. There is one form to file with your tax return instead of many. Donating stock to a donor-advised fund allows you to take a deduction for the current tax year and then support as many charities as you would like over time, by recommending grants on the timetable that makes the most sense for you.
To be eligible for a charitable deduction for a tax year, donations of stock need to be received by the end of the year. Because different assets take different amounts of time to be transferred, you should initiate your transactions as early as possible.
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How Fidelity Charitable can help. Since , we have been a leader in charitable planning and giving solutions, helping donors like you support their favorite charities in smart ways. Or call us at Facebook Twitter LinkedIn. Here are four reasons you should give stock donation a try: You can give more By donating stock that has appreciated for more than a year, you are actually giving 20 percent more than if you sold the stock and then made a cash donation.
Email: Please enter a valid Email. Sign up. Rather than selling the shares that you acquire under the stock option and then donating the cash, you could also exercise your stock options and direct your broker to donate to charity the shares acquired under the plan. But there are a couple of drawbacks to this approach: 1 If the securities decline in value between the date of exercise and the date of the donation to charity, the per-cent deduction for the gift that I spoke about would be reduced, and 2 the employment benefit from exercising the options is subject to a withholding tax much like a bonus would be , which can be avoided if the shares are sold for cash and the proceeds are donated instead.
Tim Cestnick is president of WaterStreet Family Offices , and author of several tax and personal finance books. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way.
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How to use stock options to help others (and yourself)
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2. How Stock Donations Are Valued For Tax Deductions
Tim Cestnick. Special to The Globe and Mail. Published September 18, Updated September 18, Published September 18, This article was published more than 7 years ago. Text Size. Story continues below advertisement. Your Globe Build your personal news feed Hide info. Because a charity is tax-exempt, its exercise of the ISO or its sale of stock acquired upon exercise of the ISO is sheltered from tax under Section a , since any such income should not be considered unrelated business taxable income "UBTI" under Section Given the favorable income tax treatment accorded a testamentary disposition of an ISO, a bequest of an ISO may be more suitable to noncharitable beneficiaries, depending on the decedent's other assets.
Section c 1 A the term "disposition" does not include a transfer from a decedent to an estate or a transfer by bequest or inheritance. A testamentary transfer to a charity is an enumerated exception, however.
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See note 20 supra. Any deduction based on FMV is subject to the reduction rules of Section e. In such a situation, given that the holder of the option obtains a step-up in basis upon the exercise of the option equal to the FMV of the stock on the date of exercise, any appreciation in value from the date of the grant until the date of the exercise would not reduce the available charitable income tax deduction under Section e 1 A because such appreciation is included as income and therefore increases the basis of the stock.
As in the case of any stock that continues to be held over a period of time, the employee is subject to the risk that the value of the stock acquired upon the exercise of the ISO will decline in value. In situations where, for whatever reason, it is anticipated that the stock acquired pursuant to the exercise of an ISO will substantially decline in value, a sale or contribution of that stock prior to the expiration of the applicable holding period should be considered, despite the consequences resulting from a disqualifying disposition.
The deduction is limited to basis in such a situation because if the stock were sold, it would not produce long-term capital gain. As a result, Section e 1 A would limit the deduction to the basis of the stock contributed, which would likely be equal to the strike price paid upon exercise. The reason is that the basis of the stock acquired upon exercise is stepped up to its FMV as a result of the employee recognizing income at such time.
Thus, even if the Section e 1 A reduction rules apply on the contribution of the stock because any gain realized on the sale would not produce long-term capital gain , the minimum deduction would be based on the basis of the stock. In no event can the charitable deduction exceed the FMV of the stock on the date of the contribution, no matter what the basis. Where basis exceeds the value, it is generally better to sell the stock, recognize the taxable loss, and contribute the sale proceeds to charity. In such a case, the receipt of money or other property upon such sale or disposition is taxed under Section 83 in the same manner as if the option had actually been exercised.
The employee recognizes ordinary income as compensation as a result of the disposition, and Section 83 ceases to apply. The ordinary income is equal to the excess of the money or other property received upon the disposition over the employee's basis in the option which is generally zero. See, e. The IRS has similarly ruled that a transfer of NQSOs to family members does not cause the recognition of taxable income to the employee, even though the gift is complete for gift tax purposes.
If the charity were to exercise the option after to the employee's death, income in respect of a decedent would result upon the charity exercising the option. The IRS has ruled that such income is taxable to the charity, not to the decedent or the estate, as discussed below. Under Section e 1 A , the deduction that is otherwise available for the FMV of contributed property is reduced by any gain that would not have been long-term capital gain if the contributed property had been sold by the taxpayer at its FMV.
If an NQSO is sold at its FMV, the employee recognizes ordinary income not long-term capital gain equal to the excess of the sale proceeds over the employee's basis in the option, thereby triggering the Section e 1 A reduction rules.
Because the tax liability triggered upon the exercise of the NQSOs by the charity is an obligation imposed by operation of law, the payment of the tax liability by the employee would not be viewed as an additional contribution. See Rev. Clearly, it seems inequitable and contrary to good tax policy for the deduction available for the contribution of NQSOs to be limited to tax basis presumably resulting in no charitable deduction because the basis is likely to be zero and for the donor later to be taxed fully on the subsequent exercise of the options by the charity.
This is a worse result than if ordinary income property such as short-term capital gain property or inventory is contributed, in which case the deduction is limited to tax basis under Section e 1 A , but the donor is not taxed on the sale of the property by the charity. If an employee endorses over his paycheck to a charity or assigns the right to receive wages or compensation to a charity, the employee is generally taxed on such income, but is entitled to a corresponding charitable deduction.
Although an argument could be made that any compensation realized by an employee upon the exercise of an NQSO by a donee charity should similarly result in a corresponding charitable deduction, this does not appear to be the correct result under a technical analysis. When a paycheck, wages, or compensation is assigned to a charity, the gift is considered complete upon the payment of such compensation to the charity at which point the compensation is recognized by the employee and the charitable deduction is taken. In contrast, the transfer of an NQSO to a charity results in a completed gift of such property at the time of the transfer, rather than upon the subsequent exercise of the option when the compensation is actually recognized by the employee.
Under general Section jurisprudence, if property is transferred to charity, the available income tax deduction is based on the FMV of such property when the transfer to charity is complete, rather than being based on the actual income subsequently received by the charity with respect to the contributed property. AJCA no longer applies this approach with respect to contributions of vehicles and patents. In those instances, the amount actually received by the charity from such property serves as the basis for the amount of the charitable deduction available to the donor.
Thus, it would appear that any deduction available to an employee for the contribution of an NQSO to charity would be available only at the time the transfer of the NQSO to the charity is complete, rather than upon the subsequent exercise of the option by the charity. If, however, the donee charity exercises the option in the same taxable year as it receives it, Reg. If an employee makes a contribution of an NQSO, consideration should be given to having the charity legally obligated to pay all required employer tax withholdings upon the exercise of the option by the charity.
Otherwise, the employee will be required to pay such withholdings out of personal funds. In support of its conclusion that a completed gift did not occur, the IRS cited Reg. For a private letter ruling dealing with similar issues in the context of a contribution of NQSOs where the options were subject to a "gift administration agreement" with an intermediary , see Ltr. Such a requirement could not, for example, be imposed on a CRT, because such a trust cannot pay any obligation of a noncharitable beneficiary; payments to or on behalf of a noncharitable beneficiary of the CRT are limited to the annuity or unitrust payouts.
As indicated above, however, if the transfer of the NQSO had been completed, any available charitable deduction appears to be limited to the tax basis of the stock options presumably zero. The IRS's determination regarding this issue was based on Reg. This result is still not as good as the outcome from a contribution of appreciated long-term capital gain property, in which case a charitable deduction based on FMV is available and the donor recognizes no income on the sale of the appreciated property by the donee charity.
In Ltr. This is in contrast to the situation where the charity exercises an NQSO prior to the employee's death, in which case the income recognized upon the exercise of the option is taxed to the employee, not to the charity. Join Today For Free! Skip to Main Content Area. Bankruptcy Court U. Court of Appeals U.
Court of Claims U. District Court U. Supreme Court U. Summary Because of the complex rules governing the taxation of stock options, careful planning is essential when considering a charitable contribution of stock options or of stock acquired through the exercise of stock options.
The Curious Case of the Stock Option – Holt Consulting
Published on Jul ISOs Income tax consequences generally. If a disqualifying disposition occurs as a result of a charitable contribution of stock acquired through exercise of an ISO, the income tax consequences are as follows: The employee is required to recognize ordinary income in the taxable year of the contribution in an amount equal to the excess of the FMV of the stock at the time the ISO is exercised over the strike price.
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If the stock contributed to charity was held for more than one year following the exercise of the option, the available charitable income tax deduction may be based on the FMV of the stock at the time of the contribution, 23 even though a disqualifying disposition occurs. If the stock contributed to charity was held for one year or less following the exercise of the option, the maximum charitable income tax deduction is the FMV of the stock at the time the stock option is exercised, because any subsequent appreciation from the date of exercise through the date of the contribution would be subject to the reduction rules of Section e 1 A.
Conclusion The substantial wealth often associated with employee stock options and the stock acquired upon exercise may prove a useful source of charitable giving, although the tax rules associated with employee stock options are highly complex. Add comment Login or register to post comments. Login or register to post comments.