Qualified Charitable Distribution Tax Alert

It’s that time of year when we begin gathering our financial records for our tax preparer. Did you make a Qualified Charitable Distribution (QCD) from your IRA in 2021? If so, don’t assume your accountant will know about it. You must report the amount to your tax preparer and specify that it was a QCD so it is reported properly on your 2021 income tax return.

What is a Qualified Charitable Distribution?

A QCD allows individuals who are 70½ years old or older to donate up to $100,000 (in total) to one or more charities directly from a taxable IRA, including an Inherited IRA. Amounts that qualify as a QCD are not reported as income on your income tax return, nor are they reported as charitable donations on Itemized Deductions Schedule A. The strategy is helpful for the following types of taxpayers:

  • Taxpayers who are not able to itemize their deductions
  • Taxpayers who have deductions that may be limited due to high Adjusted Gross Income (AGI), such as medical expenses
  • Taxpayers whose Medicare Part B premiums are higher than the standard premium due to higher AGI

Taxpayers who do not fall into the above three categories should still consider making QCDs since they do count towards their required minimum distribution (RMD) for the tax year.

Tax Reporting of QCDs

QCDs are reported along with other distributions from an IRA account on IRS Form 1099-R. They are aggregated with other taxable distributions and reported on Lines 1 and 2 on Form 1099-R. Nowhere on Form 1099-R are the amount of QCDs indicated.

Handing the Form 1099-R to your tax preparer without telling them you made QCDs during the tax year may result in your return overstating the amount of taxable distributions you took that year. A simple reconciliation between the amounts reported on Form 1099-R and how much should be reported as taxable on your income tax return looks as follows:

Description                                                         Amount        Form 1040 Line:

Form 1099-R Box 1, Gross Distribution               $25,000                   Line 4a

Less: QCDs made in 2021                                       ($5,000)

Equals Taxable Amount for 2021                           $20,000                   Line 4b

Don’t hesitate to contact your wealth advisor if you have any questions or would like help completing the above reconciliation form to provide to your tax preparer.