Planned Giving Tax Information

Tax Law Changes

• Tax-Free Charitable IRA Rollover Extended for 2008 & 2009
• Job and Growth Tax Relief Reconciliation Act of 2003
• Economic Growth and Tax Relief Reconciliation Act of 2001

Tax Identification Number

Harvard University’s Tax ID number is 04-2103580

Tax-Free Charitable IRA Rollover Extended for 2008 & 2009

Some resources that may be helpful in relation to financial, estate, and charitable planning.

The tax-free charitable IRA rollover was extended until December 31, 2009 as part of The Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008.  This legislation enables you to make a gift from your IRA to Harvard in both 2008 and 2009, and exclude the transferred amount from your taxable income.

• You must be 70 ½ or older
• The transfer must go directly from your IRA to Harvard
• Your gift cannot exceed $100,000 per year
• Your gift counts toward your required minimum distribution
• The transferred amount is not included in your taxable income. (There is no income tax deduction for the transfer.)

Please note that transfers to charitable remainder trusts, gift annuities, donor advised funds and private foundations do not qualify.

The 2008 IRS Form 1040 is currently available in print and on-line at http://www.irs.gov/. Specific information on how to report your gift from your IRA can be found on page 23 (Exception #3) of the Form 1040 instructions.

To briefly summarize these instructions, your IRA custodian or trustee will report all distributions from the IRA to both you, as the IRA owner, and to the IRS. You must then report the total IRA distribution on line 15a and the portion of the distribution that is taxable (the portion not distributed directly to charity) on line 15b. You should enter “QCD”, for qualified charitable distribution, next to line 15b.

For example, let us assume that in 2008 John Harvard was required to withdraw $10,000 from his IRA as his minimum distribution. If he decided to direct the IRA trustee to distribute $7,000 to Harvard as a gift and the balance of $3,000 to himself, he would report $10,000 on line 15a (total distribution) and $3,000 on line 15b (total distribution of $10,000 – charitable gift to Harvard of $7,000 = $3,000 in taxable distributions). Please note, charitable IRA gifts (QCDs)are not reported on Schedule A where itemized charitable gifts are reported, as such amounts have already been excluded from income.

See sample instruction letters below to initiate your gift:

• Sample Request from Plan Owner to IRA Administrator (PDF)
• Sample Letter from Donor Informing Harvard of IRA Transfer (PDF)

Job and Growth Tax Relief Reconciliation Act of 2003

On May 23, 2003, Congress passed the Job and Growth Tax Relief Reconciliation Act of 2003 (the "Bill"). It was signed into law on May 28, 2003.

The Bill will:

• Temporarily accelerate the rate reductions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "2001 Act");
• Temporarily lower the top long-term capital gain rate to 15% and lower the rate on most dividends to 15%; and
• Increase and extend the "bonus depreciation" for new depreciable business property enacted by the Job Creation and Worker Assistance Act of 2002 (the "2002 Act") and increase the amount of depreciable business property that small businesses may currently deduct.

These rate reductions are the most significant reductions in income tax rates (especially on investment income) since 1986, and will create many planning opportunities. The following is a brief summary of the tax provisions of the Bill most likely to be relevant to our clients.

Individual Income Tax Rate Reductions

• The current 38.6%, 35%, 30% and 27% income tax rates will be reduced as of January 1, 2003 to 35%, 33%, 28%, and 25% respectively. This represents a drop in rates of 9.3%, 5.7%, 6.7% and 7.4% respectively.
• The amount of income exempt from the alternative minimum tax will be raised by $7,500 (for single individuals and married individuals filing separately) or $15,000 (for married couples filing jointly) for 2003 and 2004.
• Under the terms of the 2001 Act, none of these provisions will apply for taxable years beginning after December 31, 2010.

Capital Gain and Dividend Rate Reductions

• Once enacted, the Bill will reduce the top rates imposed on long-term capital gain from 20% to 15%. There is no rate reduction for short-term capital gain, which will continue to be taxed at ordinary income tax rates. These rate reductions will be effective for taxable years ending on or after May 6, 2003 and beginning on or before December 31, 2008. For the current year, the lower rates will apply only to long-term capital gain realized after May 6, 2003.
• Under the Bill, "qualified dividend income" received by individuals will be taxed at the reduced long-term capital gain rates described above. Like the reduction in long-term capital gain rates, the reduction in the rate at which a dividend is taxed will not apply after December 31, 2008.
• The reduction in the tax rate on dividends from 38.6% to 15% (a 61.1% reduction) will create many planning opportunities for pulling dividends out of companies (from operations or through leveraged recapitalizations).
  • Qualified dividend income is defined as dividend income (whether paid out of current or accumulated earnings and profits) received from domestic corporations and qualified foreign corporations. A foreign corporation is a qualified foreign corporation if it is (i) incorporated in a possession of the U.S., or (ii) eligible for the benefits of a comprehensive income tax treaty with the U.S. Dividends on stock of a foreign corporation "readily tradable on an established securities market in the U.S." will be treated as qualified dividend income. Dividends from foreign personal holding companies, foreign investment companies, and passive foreign investment companies will not be qualified dividend income.
  • Qualified dividend income does not include any dividend received on a share of stock (i) held for less than 60 days during the 120 day period beginning 60 days before the stock becomes ex-dividend or (ii) to the extent the taxpayer has hedged his position in the stock.
  • Qualified dividend income will only be included in "investment income" (for purposes of the limitation on deductibility of investment interest) to the extent an election is made to subject such dividend income to ordinary income tax rates. If a taxpayer makes this election, the dividends will no longer be qualified dividend income.
  • If a shareholder receives qualified dividend income from "extraordinary dividends" on his shares (basically, a dividend or dividends representing over 10% (5% in the case of preferred shares) of the shareholder's basis in the shares) any loss on the sale of the shares will be treated as long-term capital loss. This prevents a taxpayer from taking dividend income into account at 15% and then selling at a short-term capital loss to offset other ordinary income (at rates of up to 35%).
  • Capital gain dividends paid by a regulated investment company ("RIC") are taxed at the reduced long-term capital gain rates, and are not considered qualified dividend income. In addition, unless dividends received by a RIC constitute 95% or more of a RIC's gross income, only the portion of the dividend designated by the RIC as being paid out of qualified dividends received by the RIC will be considered qualified dividend income at the shareholder level. Similar pass-through rules apply to dividends paid by a real estate investment trust ("REIT"). A transition rule provides that only dividends received by the RIC or REIT after December 31, 2002 are eligible for pass-through treatment.

Growth Incentives for Businesses

• Once enacted, the Bill will extend and increase the special depreciation allowance created by the 2002 Act. For most new depreciable business property acquired after September 10, 2001 and before September 11, 2004 the 2002 Act provides a depreciation deduction of 30% of the cost of the property in the year the property is placed in service. This first year bonus depreciation will be increased to 50% for property that is acquired after May 5, 2003 and before January 1, 2005 and that is placed in service before January 1, 2005. In addition, the Bill provides that the "placed in service" date for property eligible for 30% bonus depreciation under the 2002 Act will be extended to January 1, 2005. See Tax &Benefits Department Memorandum 2002-3 for more detail on these provisions.
• Under present law, certain businesses with a sufficiently small amount of annual investment may elect to deduct each year up to $25,000 of the cost of depreciable business property. The $25,000 amount is phased out if more than $200,000 of depreciable business property is placed in service during the taxable year. Once enacted, the Bill will increase the deductible amount to $100,000 and the phase-out amount to $400,000 for property placed in service in taxable years beginning in 2003, 2004 and 2005. The Bill also provides that "off-the-shelf computer software" placed in service through January 1, 2005 will be eligible for 50% bonus depreciation.

This tax alert was provided by counsel of Ropes and Gray.

Economic Growth and Tax Relief Reconciliation Act of 2001

The following is a summary of some of the major provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”). The Act contains a “sunset” provision under which none of the provisions of the Act will apply for taxable years beginning in 2011, unless re-enacted by a future Congress before then.

Key Points to Keep in Mind

It is impossible to predict how these tax changes may affect giving to charities. A reasonable assumption, however, is that supporting Harvard and other charities outweighs tax considerations in most, if not all, gift decisions. Tax and income considerations largely play a role in determining how best to fund a gift.

There still are tax incentives to give to charity. With the changes in these incentives, some individuals may choose to give in different ways. It could be argued that these tax changes would eventually favor more lifetime giving. Gifts of highly appreciated property will continue to be an attractive option.

Remember, the estate tax repeal and other provisions of this Act must be re-authorized by Congress before 2011 to extend beyond then.

Individual Income Tax Rate Reductions

The Act contains a new 10 percent rate for a portion of taxable income that is currently taxed at 15 percent. This rate became effective in tax year 2001.

The current income tax rates will be decreased over six years. The new rates are summarized as follows:

Retirement Savings Provisions

It still is not possible to give retirement plan assets to charity during one’s lifetime without paying income taxes. However, charitable bequests funded with these assets remain attractive.

Beginning in 2002, the annual limit for employee contributions to a 401(k) or 403(b) plan is increased from $10,500 to $11,000, and then further increased by $1,000 per year until $15,000 is reached in 2006.

The annual IRA contribution limit is increased from $2,000 to $3,000 for 2002-2004; $4,000 for 2005-2007; and $5,000 beginning in 2008.

Both the 401(k)/403(b) and IRA contribution limits are further increased for taxpayers who have attained age 50. The 401(k)/403(b) elective deferral limits are further increased by $1,000 per year beginning in 2002 until $5,000 is reached in 2006. These additional contributions may be made regardless of any other limit applicable to these plans. The IRA limit is further increased by $500 for the years 2002-2005, and then $1,000 in 2006 and thereafter.

Beginning in 2006, employees will be able to deem certain 401(k) and 403(b) contributions as after-tax “Roth” contributions, avoiding tax on the investment buildup.

Estate, Gift, and Generation-Skipping Transfer Tax Provisions

The estate and gift tax rates and unified credit exemption amounts are modified as follows. (The unified credit is the amount an individual can transfer to heirs free of estate tax.)

Gift taxes are not repealed so that gifts to individuals during your lifetime above a total of $1 million will be subject to tax.

As part of this Act, after the estate tax is repealed in 2010, the law pertaining to stepped-up basis is also repealed. Currently, for appreciated property inherited through an individual’s will, the cost basis in the property is “stepped up” to the then fair market value. Thus, generally no capital gains tax is owed on the sale of that property. With the repeal, in general, there will not be a full “step up” so capital gains tax may be owed on the sale of appreciated property. (Appreciated property passing to a surviving spouse will be stepped up as much as $4.3 million; appreciated property passing to children will be stepped up by as much as $1.3 million.)