How Technology Professionals Can Reduce Taxes Through Donor Advised Funds
As a technology professional, you may receive grants of restricted stock units that vest on an annual basis. Depending on the size of the grants, this compensation strategy has the potential to provide significant income to you and your family. The additional income may help you and your family improve your lifestyle, allow you to plan for significant financial planning events (purchasing a home, saving for college, saving for retirement) and overall improve your wealth. One downside of this additional income, however, is materially higher taxes. Depending on your current financial situation, folks who are charitably inclined can take advantage of a Donor Advised Fund to effectively lower taxes and support charities of their choosing, both immediately and in the future.
Introduction to Donor Advised Funds
Donor Advised Funds (DAFs) are charitable accounts that can be set-up at your custodian, similar to a brokerage account. As an account owner, you can make contributions of cash or stock to this account and control when and how funds are distributed to an eligible 501(c)3 organization of your choice at any time in the future.
DAFs are a powerful tool for technology professionals because contributions of appreciated stock can be made with immediate tax benefits. Donors can contribute shares of appreciated stock and receive a charitable deduction up to 30% of their AGI based on the fair market value of the stock at the time of contribution while completely avoiding ever paying capital gains tax on the gains.
For technology employees who have stable cash flows and are already planning on making charitable contributions, the DAF offers significant value by avoiding selling stock to contribute cash to organizations directly, which can trigger capital gains and reduce the total amount contributed to the organization.
Example
If an AMZN employee has 50 shares of stock that they received in October of 2014, these shares could have a cost basis of $303.64/share. With a current share price at $1,743.81, to sell 100 shares they would end up with a taxable gain of $56,826. For someone in the 20% long term capital gains tax rate, this would result in a tax liability of $11,765, reducing your proceeds from the sale to $75,425 from $87,190.
For someone who was charitably inclined and already planned on making a gift of that size, contributing those 50 shares directly to their Donor Advised Fund would result in eliminating any tax bill on this transaction, maximizing the amount that would ultimately go to charity ($87,190). This higher amount is also used to calculate the client’s charitable deduction for the year.
Other Advantages of Donor Advised Funds
Besides the tax advantages of Donor Advised Funds, they are a great philanthropy tool because of their flexibility and convenience. Many of our clients who do all of their charitable giving through a DAF appreciate the convenience of only having to collect one letter to document their contributions come tax time rather than something from every organization they gave to.
Not subject to the strict rules earmarked for Private Foundations, owners can elect to not make any charitable grants from the account if they do not want to. Funds within the account can be invested according to the owners wishes, helping the initial contribution grow to fund charitable grants in the future.
For these reasons, DAFs can be used in high earning years to thoroughly reduce a large tax bill and fund their charitable account, which can then be invested to grow and cover charitable obligations years down the road.
Interested in seeing if a Donor Advised Fund would be a good fit for your family and your financial and charitable goals? Schedule a meeting with one of our advisors to learn more today.