Easy to Miss

Chuck Staley

“WHERE’S THE QUALIFIED charitable distribution on Mom’s tax return?” Mom had never before executed a qualified charitable distribution, or QCD. Her tax return was 41 pages, and we weren’t sure where to find it.

There was a long pause. “I forgot your mom had made QCDs as I prepared her return,” allowed her tax preparer. “I’ll need to recalculate her taxes.”

A QCD can be a tax-efficient way to donate money for those who are charitably inclined—but only if it’s correctly documented on your tax return. Unfortunately, for busy tax preparers, the QCD seems to be an easy deduction to miss, resulting in a needless overpayment of taxes.

In fact, over the past four years, Mom has had two separate tax preparers miss her QCDs when they prepared her taxes for the first time. In both cases, she explicitly documented the QCDs in writing and provided documentation from the charity, but the QCDs were still missed.

To make matters worse, Mom’s adjusted gross income was right on the cusp of the threshold that determines Medicare’s income-related monthly adjustment amount, otherwise known as IRMAA. A failure to correctly document her QCDs could have resulted not only in an overpayment of income taxes, but also a substantial increase in her Medicare premiums. Getting Mom’s annual QCD right is a big deal: It typically saves her about $3,500 a year in taxes.

A QCD is a direct distribution of money by an IRA custodian—think Fidelity Investments, Charles Schwab and Vanguard Group—to a qualified charity. Anyone over age 70½ is eligible to make a QCD. To do so, you can call your IRA custodian, and it’ll write a check against your IRA that’s payable to the charity. It’s even simpler for Mom. She has a checkbook for her IRA, so she can execute a QCD by simply writing a check to the qualified charity.

Normally, distributions from an IRA are taxed as ordinary income. But a QCD doesn’t count as income on your tax return. In addition, QCDs count toward your annual required minimum distribution. The IRS limits QCDs to no more than $100,000 per person per year. Starting in 2024, that $100,000 maximum will be adjusted for inflation.

Any 501(c)(3) organization can receive QCDs. Churches and most charities are typically classified as 501(c)(3)s. Donor-advised funds, charitable supporting organizations and private foundations aren’t eligible to receive QCDs. QCDs can be made from IRAs, but not from employer retirement plans, such as 401(k)s or 403(b)s, so you’ll need to roll your employer plans into an IRA if you want to execute QCDs.

One of the benefits of 2017’s Tax Cuts and Jobs Act was a near doubling of the standard deduction. But there was a downside: The tax benefit of giving to charity was eliminated for most folks. How so? Most taxpayers now find it’s more beneficial to take the standard deduction, rather than itemize their charitable donations and other deductions.

But for those who are eligible, the QCD comes to the rescue. One of the reasons a QCD is so valuable: You don’t need to choose between taking the larger standard deduction and itemizing. With a QCD, you can take the standard deduction, and then add the tax benefits of donating to charity on top. It’s a win-win.

QCDs are reported on Form 1040. If you had an IRA with a $30,000 distribution, this would go on Line 4a. If $20,000 was donated directly to a qualified charity, only $10,000 would be reported on Line 4b. This is the taxable portion of your IRA distribution after subtracting the QCD. In addition, “QCD” should be typed on Line 4b as the reason Line 4a and Line 4b are different.

A QCD effectively sidesteps income tax on the IRA distribution and reduces the adjusted gross income (AGI) on Form 1040. That’s a big deal. Why? AGI is the starting point for the phasing in and phasing out of various tax deductions and tax credits. Depending on your other income, a lower AGI due to a QCD could reduce the taxable amount of your Social Security and decrease the amount you pay for Medicare premiums.

If a QCD is such a valuable tax benefit, why did Mom’s tax preparers miss it? I think the answer is found in the 1099-R issued each year by the IRA custodian. There’s nothing on a 1099-R to alert a tax preparer that Box 1, the gross distribution from the IRA, includes QCDs. Any QCDs you make throughout the year are buried in the gross distribution in Box 1. This is likely why a QCD is such an easy deduction to overlook.

Result: Folks should proactively let their tax preparer know that the gross distribution on the 1099-R includes QCDs, including telling them the total of their QCDs. They should also provide a written acknowledgment from the charity that it received the distribution.

I’m only 58 and not yet eligible for QCDs. But I don’t want to miss this deduction when I grow up, so I’ve projected the total amount my wife and I plan to give to our church after I turn 70½. I then fenced that amount off in a separate IRA and named it “QCD set aside.” We plan to use this account to make monthly, tax-free QCDs to our church for the rest of our lives.

Naming the account should be a good reminder of its purpose. And creating a separate account should prevent me from accidentally doing Roth conversions on the money. That would be a foolish mistake and cause me to miss the tax-saving benefits of a QCD. A QCD is a valuable tax strategy that’s easy to execute—and one I don’t want to miss.

Chuck Staley and his wife Gina have five children between ages seven and 30. He worked for 35 years as a Department of Defense engineer at Edwards Air Force Base before retiring in January 2022. Chuck now volunteers as a part-time pastor at a small church. He recently started a sole proprietorship, Walk Worthy Solutions, to train federal employees about retirement planning and leadership. Chuck enjoys walking daily with his wife, reading, home improvement projects, and traveling with his family. His previous articles were Passing Them On and Best Time of My Life.

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