December is the time for giving, and for preparing any 2014 US tax exposures. Gifting appreciated stock to a recognised charity is a powerful tool for US tax planning. The Centre of Philanthropy has a 501(3)(b) registered fund that is recognised by the US IRS for tax deduction purposes. So US tax payers can potentially obtain a significant tax deduction from donations to Bermuda charities. Several recognised Bermuda Charities are registered under the Centre’s International Charitable Fund Ltd at http://www.centreonphilanthropy.org/pages/icfb.

The gift back to US taxpayers can be more than the cost. A donation of appreciated stock can be based on the current market value of the stock, without having to recognise the capital gains on any appreciation. There is no additional cash outlay, since the appreciated stock is already in their portfolio. And if the portfolio has a high percentage of the particular company’s stock, giving shares will reduce the concentration risk whilst potentially moving the taxpayer into a lower marginal tax bracket. Last year, the top US income tax bracket increased to 39.6 per cent and the capital gain rates increases to 20 per cent for higher income households.

To benefit for US tax purposes, the transfers must be complete by December 31, so start the process now.

Most importantly, charitable contributions of marketable securities, even closely-held stock, are not subject to the US typical gift tax limits. This is a BIG benefit. So, donations to registered charities can result in substantial deductions from income for US tax purposes.

This can be up to a whopping 30 per cent of Adjusted Gross Income or AGI (20 per cent for private foundations) based on current market value for stock owned for more than one year. If the shares were held for less than a year, the deduction is based on the cost or ‘basis’ in the stock up to 50 per cent of AGI (or 30 per cent for private foundations).

An individual who vested in restricted stock or converted stock options from employer compensation schemes in 2014 may find themselves in the highest US tax bracket and could face penalties if the amount of tax was under withheld during the year. Employee compensation and bonuses based on stock are subject to a flat 25 per cent withholding rate for US income tax. And any custodians or employers who take the withholding from stock compensation have little scope for adjusting the withholding rate.

So, the higher the level of stock compensation this year, the higher the chance that the employee will be subject to US tax penalties. This can result in a significant tax bill. The last estimated tax payment is due by January 15 in order to minimise penalties. Charitable stock donations can offset tax liabilities, but the stock transfers must be ‘completed transactions’ by December 31. To register the charitable deduction, IRS Form 8283 is to be filed by April with the final US tax return or by June for US taxpayers not living in the States.

These charitable donations are subject to several guidelines including the type of stock or option and the type of charity receiving the shares. Grants of Restricted Stock Units (RSU) are sometimes used for employee compensation in addition to Incentive Stock Options (ISO) or instead of them.

There are typically restrictions on transfers of RSUs or ISOs prior to the vesting period or exercise date. Details of the compensation plans will need to be reviewed to ensure they allow for transfers to charity. Also, the recipient charity must have either the liquidity to exercise the options or a readily available market in which to sell them.

After a vesting period, restricted stock or options are owned by the employee and can be sold or transferred to charity. To receive a tax deduction based on the current market value, the employee must own them for one-year and have been after two-years from the date of company grant. For non-vested stock options, the ‘completed gift’ occurs at the later of the vesting date or transfer date. It may be advisable to wait until the options are vested prior to donating them to charity. A frequently overlooked fact is that companies can also directly grant options or stock to charities. See www.TheCorporateCounsel.net for a discussion.

In summary, donation of appreciated stock is a powerful tax planning tool. There is a significant deduction to income for US tax purposes, which can limit exposure to the higher US tax brackets. In addition, there is no recognition of the capital gain on the appreciation in the stock when gifted, as long as it has been held for one year. Thereby, the full step-up in basis is realised as a charitable donation for US income tax purposes.

If it were held for less than one year, you realise the market value or cost basis, whichever is less. In any event, this tax offset can provide a valuable tax reduction without a current cash outlay. It is not too late to make a charitable deduction this year, but the transfers must be completed before December 31.

Patrice Horner is a Certified Financial Planner (CFP-US) and holds a Master’s Degree in Finance. She is a Global Financial Consultant located in Bermuda and the Chairperson of the Financial Planning Associations (FPA) Global Committee. The article does not contain specific tax advice and serves as a tool for individuals to explore the benefits based on their particular financial situation. More information is available at www.mystockoptions.com.