IRAs

Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing

Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.

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.”

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.

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.

Most Popular

Dying Careers You May Want to Steer Clear Of
careers

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021

Recommended

11 Best Things to Keep in a Safe Deposit Box
savings

11 Best Things to Keep in a Safe Deposit Box

These valuables and documents, along with some items you hold dear, should be stored securely at your bank.
September 25, 2021
9 Things You’ll Regret Keeping in a Safe Deposit Box
savings

9 Things You’ll Regret Keeping in a Safe Deposit Box

Locking up certain important documents and valuables in a bank vault could turn into a headache for you or your heirs.
September 24, 2021
Tax Changes and Key Amounts for the 2021 Tax Year
tax law

Tax Changes and Key Amounts for the 2021 Tax Year

Americans are facing a long list of tax changes for the 2021 tax year. Smart taxpayers will start planning for them now.
September 23, 2021
How and When to Opt-Out of Monthly Child Tax Credit Payments
Tax Breaks

How and When to Opt-Out of Monthly Child Tax Credit Payments

If you want to stop advance payments of the 2021 child tax credit, you have to opt-out using the IRS's online tool before the monthly deadline.
September 22, 2021