A popular tax strategy for individuals over 70 ½ years of age who wish to give money to charity is to make a distribution to the charity directly from their IRA account. The amount of the distribution should not be reported on your tax return, nor should you report the contribution as an itemized charitable deduction on Schedule A.
This type of distribution, known as a Qualified Charitable Distribution (QCD), has several advantages over distributing the funds from your IRA, depositing them into your checking account, and then writing a check to the charity from your bank account. This works well for taxpayers who cannot itemize their deductions due to not meeting the threshold for doing so.
Beware of a Tax Trap
Form 1099-R is issued to you by your IRA custodian with copies sent to the IRS. This Form is used to report the gross distribution and taxable distribution from your IRA account for use in preparing your income tax returns.
Box 1 includes the gross amount distributed, and Box 2a shows the taxable amount. Logic would dictate that Box 1 should include any QCDs made, but Box 2a should not include any QCDs since they are not taxable.
Unfortunately, this is not the case. Both Box 1 and Box 2a should include all QCDs made. Nowhere on Form 1099-R is there a place to even indicate that a QCD has been made.
It is unclear why custodians do not reflect the QCD on this Form, other than not wanting to take responsibility in assuming that you qualify to make the distribution.
Therefore, you must tell your tax preparer that you made a QCD during the year and provide the dollar amount so they can calculate the taxable portion. You should also provide them with the donor acknowledgment letter you received in case you need to provide this documentation to the IRS.
If you prepare your own taxes, you should make sure the tax software you use can handle a QCD (which they all should). Follow the prompts in the software for entering the QCD, which, if done correctly, will show a smaller amount on line 4b (Taxable Amount) then on line 4a (IRA Distributions).
Please let us know if you are unsure of whether this was correctly handled on your tax return. We will be happy to look at it to make sure it is correct or answer any questions you may have on how to report it accurately.