Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing

Question: I transferred part of my required minimum distribution directly from my IRA to charity, which should be a tax-free charitable distribution and not included in my adjusted gross income. The problem is that my broker reported the entire RMD on my Form 1099-R as a taxable distribution. Should I get my broker to amend the 1099-R to specify how much of the total distribution was a tax-free charitable transfer so the discrepancy doesn’t raise red flags with the IRS? And how will my tax preparer know that part of the distribution shouldn’t be taxable?

Answer: Even though your broker made the tax-free transfer from your IRA to charity (called a qualified charitable distribution or QCD), your 1099-R form is going to report the total amount of the distribution. “The QCD is invisible in the 1099-R,” says Ed Slott, CPA, an IRA expert and publisher of IRAhelp.com. “The forms are not coded for a QCD, and it looks the same as a distribution. It’s up to you to tell your tax preparer that part of the distribution was a QCD.”

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Slott says brokers don’t specify which portion is a QCD because, even though they made the transfer, they usually don’t want to be responsible for determining whether or not the charity was an eligible 501(c)(3) organization.

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You’ll report the total distribution on line 4a of your Form 1040 when you file your income tax return, then write the taxable amount on line 4b and write “QCD” to explain why part of the distribution isn’t taxable. (If your total distribution was a QCD, you’d write $0 on line 4b and QCD next to it.)

“Filers who aren’t on their toes may make a mistake here and overpay their taxes by failing to reduce the taxable amount of IRA withdrawals by the amount of the charitable gift,” says Mari Adam, a certified financial planner in Boca Raton, Fla., who works with many clients who give their RMDs to charity. It’s important to keep the records of the charitable transfer in case the IRS does ask about the difference. Keep the record from your broker showing that the money was transferred to the charity. And keep the acknowledgment from the charity of the gift, as you would with any other donation.

It’s essential that you tell your tax preparer (or plug into your tax software) the amount of your IRA distribution that was a tax-free QCD. Otherwise, there is no way of knowing that any part of the distribution is tax-free just by looking at your 1099. “The taxpayer needs to be very vigilant,” says Adam.

A QCD permits people age 70½ and older to transfer up to $100,000 directly from their IRA to charity each year tax-free; this money counts toward their required minimum distribution but isn’t included in their adjusted gross income. For more information about qualified charitable distributions, see The Rules for Making a Tax-Free Donation From an IRA. To learn more about how to report the QCD on your tax return, see How to Report an IRA Charitable Distribution on Your Tax Return.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.