taxes

How to Report a Tax-Free Transfer From Your IRA to Charity

The tax filing rules for qualified charitable distributions can be tricky. You must specify how much of your required minimum distribution is taxable and why part of the distribution is tax-free.

Question: I have to take a $20,000 required minimum distribution from my Vanguard IRA this year. I'd like to give $5,000 tax-free to a charity and withdraw the remaining $15,000 for myself. A Vanguard rep said it would send me a check for $15,000 payable to me as well as a $5,000 check made payable to the charity that I could forward. The rep said that at the end of the year it would report the entire $20,000 on my Form 1099-R as a gross distribution. How can I benefit from the tax-free transfer then?

Answer: The tax reporting rules for qualified charitable distributions can be tricky. (With a QCD, you can give up to $100,000 tax-free from your IRA to charity each year after you turn 70½; the gift counts as your required minimum distribution but isn't included in your adjusted gross income.) Regardless of where the distribution is sent, the full amount is reported on IRS Form 1099-R with the name, address and Social Security number of the IRA owner using Code 7 "normal distribution," as if the distribution had been paid directly to the owner, according to Vanguard. But you'll claim the tax-free benefits of a QCD when you file your federal income tax return.

Report the full $20,000 distribution on line 15a of Form 1040 as a gross distribution. On line 15b, write $15,000 for the taxable amount and add "QCD" next to that line to explain why part of the distribution is tax-free. Be sure to keep records from the charity in your tax files showing that the tax-free transfer was made to the charity. Make a copy of the check before you forward it to the charity, and keep an acknowledgement of the gift from the charity in your tax files. (IRA administrators don't always make it clear who made the donation when transferring money from an IRA to charity, so before you make the donation, give the charity a heads-up about how much money it will be receiving from your IRA and that the receipt should be sent to you.)

Ask your IRA administrator for its procedure for making the tax-free transfer to charity; the specifics can vary. If you work with a tax preparer, let him or her know about the qualified charitable distribution so you don't end up paying taxes on the amount, because the Form 1099-R reporting the distribution does not specify that it was a tax-free transfer to charity.

For more information about the procedure for making a tax-free transfer to charity, see How to Ensure Your IRA Donation to Charity Is Tax-Free. Also see the IRS's IRA FAQs – Distributions factsheet. For more information about the benefits of making a qualified charitable distribution, see The Advantages of a Tax-Free Transfer From an IRA to Charity.

Most Popular

Tax Wrinkles for Work-at-Home Employees During COVID-19
taxes

Tax Wrinkles for Work-at-Home Employees During COVID-19

Are your home office expenses deductible? How does going out of state to work for a while affect your tax picture? There are some interesting wrinkles…
November 9, 2020
Retirement: It All Starts with a Budget
personal finance

Retirement: It All Starts with a Budget

When you’re meeting with your financial planner, do you talk about your budget? If not, you should.
November 10, 2020
Will Joe Biden Raise YOUR Taxes?
taxes

Will Joe Biden Raise YOUR Taxes?

During the campaign, Joe Biden promised that he would raise taxes for some people. Will you be one of them?
November 10, 2020

Recommended

Your Guide to Roth Conversions
Tax Breaks

Your Guide to Roth Conversions

Like marriage, converting a traditional IRA to a Roth is not a step that should be taken lightly.
November 24, 2020
10 States with the Highest Gas Taxes
taxes

10 States with the Highest Gas Taxes

COVID-19 has made us appreciate driving our cars more, but filling up the tank will cost you more in these state.
November 23, 2020
It's ITIN Renewal Time!
tax filing

It's ITIN Renewal Time!

Beat the rush and avoid refund delays by renewing your ITIN before the end of the year if it's about to expire.
November 23, 2020
10 States With the Lowest Gas Taxes
taxes

10 States With the Lowest Gas Taxes

Saving money is a marathon not a sprint. And even low gas taxes can help keep money in your pocket.
November 21, 2020