Today is #givingtuesday! It’s not just a great time to adjust your belts from the Thanksgiving fallout, but also your wallet to make room for the causes you care the most about.
If you own stock or are compensated in stock options or RSUs - as many tech and startup employees are - you have a great opportunity to stretch your giving and save on taxes.
The crux of the opportunity comes from the fact that donating long-term appreciated stocks results in:
- a standard tax deduction on the value of the stocks, and
- you are not taxed on the appreciation (aka profit or gains) of the stocks.
This is a huge double whammy that leaves you with more money to give to charities or stash away. For a stock to be long-term appreciated, you need to have held it for at least a year and the value must be greater now than when you received or bought it.
Let’s look at an example:
- You receive or buy
10 sharesof $MEGACORP on January 1, 2015 at$100/share. - You decide to hold on to the shares and on January 1, 2016, they are worth
$150/shareand you’ve crossed the one year threshold for long-term capital gains. - Your capital gains are
$50/share * 10 shares = $500. - If you sold these
10 shares, you’d be taxed on the whole of the$500at the long term capital gains rate. However, if you transfer this stock to a charity, you get the tax deduction on the full $1500 (rather than$1500 - $1500 * long-term cap gains rateyou would if you had to sell the stock first and then give to a charity), and you’re not taxed on any of the $500 appreciation of the stock.
The caveat here though is that not all charities accept stock or equities, especially smaller ones. Also, the process is not always very easy and can often include a lot of paperwork and hassle. That’s where Donor Advised Funds (DAF) come in. A DAF is essentially a charity that you can create that can accept your assets until you donate them to other charities. DAFs can often accept not just cash, but equities, real estate, and other assets. But when you make a donation from your DAF to another charity it is given as cash. This makes it a very convenient conversion point for assets you’d like to eventually donate to a charity - even if they don’t accept the type of asset you’re putting into the DAF. Donations to a DAF are also immediately tax-deductible which makes consistent financial and tax planning much simpler and separate from when you actually make the donations to charities. This means you can earmark money for charities not just on a #givingtuesday but regularly throughout the year.
To set up a DAF you’ll need to go through a brokerage like Fidelity Charitable or Vanguard Charitable. However, they do have steep minimum deposits at $5k and $25k, respectively. (Edit: 11/28/2022. There’s a new player in the space, Daffy that has almost no minimum and just a low monthly membership fee rather than taking a management fee. I may be moving my DAF funds there permanently)). Also keep in mind that a DAF consists of several funds just like your 401k might (rather than in the form of the asset you put into it). These funds often have slightly higher fees than standard taxable accounts, however I believe in most cases the fees are worth the tax and other benefits. If a DAF is outside your reach, your favorite charity might still accept direct stock donations. In my case, my employer uses Fidelity for equity compensation so it was very convenient to set up my DAF through Fidelity as well. Transfers are very easy to do and not much different than any other online banking transfer.
I hope that this post gave you some good ideas on how to stretch your dollar to support the causes you care about. As with any financial advice, make sure to contextualize it to your own specific financial and tax situation and do further research. There are plenty of resources on DAFs and tax-efficient giving. Most of the advice in this post only makes sense if you itemize your deductions and it’s prudent for you to hold on to stock long term rather than selling immediately when they’re granted. If you have any other suggestions, thoughts, or questions, reach out to me via email or twitter.
Happy #givingtuesday!
EDIT: Another potential caveat is that while your funds are in the DAF, any gains won’t become tax-deductible versus if they were in a standard taxable account that you donated from. This may or may not be an issue depending on market movement and also the ‘age’ of money in that account