If you’ve been working for your company for a while, then your RSUs could have risen to become an important component of the balance sheet. This growth is a good thing however, it also means that a larger portion of your wealth is tied to a single stock. Before applying advanced charitable strategies, it helps to understand the broader framework, this IRS tax filing and deduction guide provides essential context.
If giving is something you want woven into your financial life and wishes to integrate into your financial plan it can be a great opening. RSUs and DAFs may help you aid causes that are important to you, while also reducing risks and providing an improved tax result, and all without the use of cash for it.
A donor-advised fund, commonly known as a DAF is among the easiest ways to do this.
Why RSUs Create A Unique Charitable Opportunity
In the course of time, those employees who get regular RSU awards may build up a substantial quantity of stock owned by the company. Typically, they’re with a higher value than when they vested the shares. This means that you’re holding shares that have embedded capital gains. If you were to sell the shares, you’d be liable for tax on the gains.
Donating appreciated shares could help you reduce capital gains tax on the amount that is appreciated as long as you follow IRS regulations. Proper handling of these rules is key, this IRS capital gains and deduction guide can help you structure donations correctly.
You can also claim the benefit of a charitable deduction (subject to IRS limitations) determined by what the share’s fair value was at the point you make the gift. In addition, because new RSUs can continue to vest each year, the shares you donate may be replenished in the course of time, which could help fund the ongoing charitable contributions.
How Does A Donor-Advised Fund Works
DAF is a charity account that you manage. You can contribute appreciated shares to the account, get an immediate charitable deduction and then make grants recommendations to non-profit organizations at your own timeline. To ensure compliance and maximize benefits, refer to this IRS charitable contribution and reporting resource for guidance.
How does it work:
- You can donate appreciated RSU shares straight to DAF.
- You are eligible for a charitable deduction in the same year.
- The DAF sells its shares tax-free.
- You decide which charities to support in the future.
Your deduction and your gift aren’t required to be made the same year, this gives you flexibility in both the planning process and impact.
What Is The Reason A DAF Works Well With RSU Compensation
A donor-advised trust fund is a good option when you receive ongoing RSU compensation. If the company’s stocks have appreciated in value, giving shares could assist in reducing concentration, without giving rise to capital gains. It can help you save funds for other purposes while still helping the organizations you are passionate about.
Many find that DAFs are a great option because DAF permits them to “pre-fund” several years of giving within a single year, for instance, when a significant bonus or vesting occurs, you get the deduction upfront, and then you make grants available at your own speed. It makes charitable giving part of your overall financial routine, not an event that you can only revisit periodically or when a charity extends its hand. If you are a person whose compensation includes regular RSU vesting or reinvestment, a DAF could be a straightforward and repeatable method to ensure that generosity and long-term planning are on the same page.
How can you use RSUs to give charitable donations Simple sequence
- Find out which stocks have appreciated the most.
- You might want to transfer those shares directly into DAF.
- You could be eligible to receive a charitable deduction during the year that you make a donation in accordance with IRS regulations.
- The DAF could sell the shares tax-free.
- Recommend grants when you’re prepared.
- Re-evaluate this plan annually as a new RSUs vest.
This could help you convert the accumulation of employer stock into the long-term future, usually with tax benefits and without the need for cash (depending on your individual circumstances).
Questions To Ask Prior To You Make Your Contribution (and why they are important)
These questions can help you decide whether a donation of appreciated RSUs is in line with your objectives:
1. Do You Own More Of Your Employer’s Stocks Than Comfortable?
A concentrated position can increase your risk of being impacted by the fortunes of a specific company. By donating many shares, you can limit the risk of exposure, without creating capital gains.
2. Have Your RSUs Increased In Value Since The Time They Were Issued?
The more shares you have grown, the less tax you’ll pay by giving them away instead of selling them.
3. Do You Plan To Make A Donation Next Year, Or Perhaps In The Near Time?
If giving is a regular part of your routine, then appreciated shares can allow you to contribute to the same causes, while also giving tax benefits, based on the specific circumstances.
4. Are You Experiencing A Year Of High-Income?
A larger deduction can be able to offset the income of big vesting occasions, bonuses, or liquidity occasions.
5. Would You Prefer To Give Shares Rather Than Cash?
Donating stocks can enable you to contribute to charitable causes while also allowing you to save cash to fund other financial goals dependent on your individual situation.
6. Are You Receiving New RSUs Each Year?
The ongoing vesting process can help replenish donations you make over time. This can help you continue giving to charities based on your individual situation.
7. Do You Wish To Have More Flexibility With The Timing Of Your Gift?
A DAF separates tax deductions from the grant itself, therefore you can contribute whenever it is economically efficient, and you can recommend grants to charities if you feel that the time is right.
Before implementing RSU and DAF strategies, make sure you understand the full tax implications. Review our complete IRS tax planning guide for individuals to make informed and tax-efficient decisions.
Integrating Your Values And Financial Life
A DAF can separate tax deduction from grants, which means you can contribute whenever it feels economically efficient, and also recommend grants to charities at the time that feels appropriate. If you’re looking for help making a decision about whether this strategy will work for your overall plan we’re here to help you through the process. Contact us today!
