If you receive equity awards as part of your compensation, you’re probably familiar with the exciting financial windfall that can happen when those shares vest. Over the holidays, a member of my family shared that her annual vesting was coming up. She always looks forward to getting the email from her employer saying that her shares had vested because she knows it means a big day for her portfolio.
But in the spirit of the holidays, this relative told me she wished there was something more she could do with her company shares. Knowing that I work with a charity, she asked if there was any way to incorporate her new wealth in her charitable giving for the year.
Fortunately, there’s a strategy you can use year-round that can potentially minimize your taxes from a high-income year, reduce overconcentration of company stock in your portfolio, and, best of all, give back to the causes that matter most to you.
Many employers offer equity compensation to their employees—and the majority of those awards are typically granted in the first three months of the calendar year. If you’re experiencing a vesting event now, you might be wondering what to do with the new assets in your portfolio—and how they could affect your tax bill.
The most common types of awards—restricted stock units (RSUs), restricted stock awards (RSAs), and nonqualified stock options (NSOs)—each have a different impact on your income taxes. When RSUs or RSAs vest and are delivered, you will most likely recognize ordinary income for the fair market value of the stock at that time and be taxed accordingly. Alternatively, upon the exercise of an NSO, ordinary income is recognized on the difference between the exercise price and the fair market value at exercise. The vesting of restricted stock or the exercise of an option can have a significant impact on the amount of ordinary income you recognize.
In addition to considering the tax impacts of a higher income year attributable to stock awards, you might also be concerned about the concentration of one company’s shares in your portfolio and want to protect against tax exposure. That’s where strategic charitable giving comes in.
Compared with donating cash, or selling the securities and contributing the after-tax proceeds, donors who give long-term appreciated assets like shares of their company can take advantage of three main benefits. Their gift qualifies them to take a tax deduction for the full fair market value of the stock, potentially eliminates capital gains taxes assessed on any appreciation, and enables donors to give more to the charities they care about.
While simply donating your options directly may seem like the right idea, most company plans restrict donations of these awards because of their inherently disadvantaged tax treatment. You may be required to pay any income tax upon exercise of the options, even though you no longer own the asset—not an ideal outcome. In addition, your unvested RSUs and RSAs may not be completed gifts for tax purposes, so you may not be able to donate the underlying unvested shares.
It’s important to note the strategy of donating appreciated stock works best for long-term assets that you have held for a year or longer, so donating the stock immediately upon vesting or exercise might not be the best approach. Since the underlying stock will not have met the one-year holding period requirement to qualify for long-term capital gains treatment, it would not carry the same tax advantages.
Instead, examine your portfolio: You might have additional shares of company stock or other appreciated assets that you have held for greater than one year. Data shows that nearly 60% of employees hold shares long term from prior vesting events, and that number increases to more than 70% for executives.1
It’s these shares—previously acquired company stock or other appreciated assets—that may very well be the prime assets for high-impact charitable giving.
Because the shares vesting this year might not be the most tax-advantageous assets to donate, you don’t need to take advantage of this strategy right away for the shares vesting this year.
Instead, you can choose the right time to make a charitable contribution of other highly appreciated assets in your portfolio. If made any time this year, the gift will still offset the impact of the vesting shares and help you rebalance your portfolio to address concentration concerns.
Once you select the right assets and timing, consider a donor-advised fund to carry out your strategic charitable plan. Whether you want to give long-term appreciated public stock or a complex asset, combining a non-cash donation with a donor-advised fund vehicle helps you streamline your giving—enabling you to support multiple charities from a single tax-advantaged charitable gift and providing you the opportunity to potentially grow the donation, tax-free.
If you are an executive or key employee at a company, you may be subject to closed trading periods or other insider trading policies. While employees are prohibited from buying or selling during a closed window, it may still be possible to gift stock to charity with certain guidelines in place. In addition, many executives are now interested in including a charitable giving element to their 10b5-1 trading plans. Work with your financial advisor and chosen charity, such as one sponsoring a donor-advised fund, to make the most of your giving strategy.
No matter your approach, charitable giving can be a meaningful way to optimize your equity compensation awards for good. Your company has designed an annual wealth accumulation event for you as part of your total compensation plan—don’t miss your chance to make more of a difference with it!
1Source: Fidelity Employee Share Ownership Analysis, restricted shares vesting 2018 to January 2021, as of January 2022.
Head of Fundraising
Karla Valas leads fundraising for Fidelity Charitable, the nation’s largest grantmaker. The expertise from her team of Charitable Planning Consultants helps advisors have more sophisticated financial planning conversations that incorporate charitable strategies, such as donor-advised funds. Ms. Valas has expertise in complex assets and previously led a team of attorneys who facilitate thousands of charitable donations of appreciated private company stock and other nonpublic assets annually. She a B.A. from Mount Holyoke College, a J.D. from New England Law and an LL.M. in Taxation from Boston University School of Law. Ms. Valas is admitted to the bar in New York State and the Commonwealth of Massachusetts.
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