Donate options to worthy causes

By Loretta W. Prencipe, InfoWorld |  Career

As the end of the year approaches, high-tech employees consider their options -- their stock options -- and their (often) good fortunes. For many of the dot-com newly wealthy, donating stock options to charities is their first major philanthropic venture and a significant tax benefit.

HIGH-TECH EMPLOYEES reviewing their option vesting schedule and the IRS Schedule C might do well to consider stock option donations, says Randy Carver, a financial planner at Raymond James Financial Services, in Mentor, Ohio. Some foundations and charities now practice "venture philanthropy" -- soliciting donations of stock options and awaiting an event such as an IPO that will turn the options into cash.

1. Pick a reason to donate options

"There are two basic reasons why someone will donate stock options to a charity: either it's philanthropic or it's to avoid capital gains," James says. Whatever the reason, James advises that you work with an accountant or financial planner to ensure that you meet IRS guidelines. Donating to an organization not recognized as a charity by the IRS might affect the amount of the tax deduction the donor can take, he says.

2. Understand option differences

"Donating options to charity differs significantly from donating cash," James says. "With cash, the day you write the check is the gift date for tax purposes. With options, it's the date the options are reregistered in the charity's name that matters for tax purposes." James says to allow time for the reregistration.

3. Make a gift outright

To make a gift, you must own the options outright. "The options have to be vested. You cannot donate unvested options or a promise on vested options," James says. Check your stock option agreement plan for the vesting schedule.

4. Understand the tax implications

Donating stock options to a recognized charity in most cases allows the giver to take a tax deduction against adjusted gross income, James says. "The deduction is for the fair market value of the stock, not the option price, which is often much lower."

The other benefit of donating options rather than shares is to avoid a taxable event. In most cases, James says, "Donate options. Don't exercise them and then give the proceeds. That will result in a capital gains liability."

5. Consider a donor-advised fund

The DAF is relatively easy and quick to set up, James says. "You fund a DAF with options and decide which charities receive assets," James says. Although all the DAF assets may not be distributed in a single year, the donor takes an immediate tax break. But remember, James says, DAF assets cannot be returned to you.

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