By Beverly DeVeny, Ed Slott and Company, LLC
Did you do a Qualified Charitable Distribution (QCD) last year? Make sure the tax preparer knows about it.
The IRA custodian is not required to report a QCD transaction on Form 1099-R. Instead, it will show up as a regular distribution to the IRA owner. A regular distribution is normally a taxable event. A tax preparer, especially at this time of year, will simply look at the 1099-R and include the entire amount in the IRA owner’s income where it will become taxable.
A QCD transaction is supposed to be a non-taxable transaction. The IRA owner needs to advise their tax preparer that they did a QCD last year and the amount of the QCD. There should be an acknowledgement from the charity of the receipt of the IRA funds. Once the tax preparer knows you did a QCD they then need to report it on the tax return.
On Form 1040, the entire amount on the 1099-R is put on line 15a. On line 15b, any taxable amounts distributed will be filled in. The discrepancy between line 15a and line 15b, which should be the QCD amount (and possibly an additional amount attributable to a rollover or a distribution of after-tax funds), is explained by including the notation QCD on line 15b. This process removes the QCD amount from the individual’s taxable income. The final step in the process is for the individual to review their return and make sure that their QCD is not included in their income.
If the QCD has been missed and the return has already been filed, individuals can amend their returns back three years for a tax refund. You don’t have to look very hard to find out if the QCD was reported or not; you only have to look at lines 15a and b on the 1040.
Tax preparers are not mind readers. Sometimes they need, and generally appreciate, a little help from us in preparing our tax returns. Don’t assume they know you did a QCD. An advisor who recently attended one of our workshops went back to his office and called his CPA to tell him about his own QCD transaction. He discovered that it would have been totally overlooked if he had not made that call!
Tax preparers; maybe you could give your clients a little nudge in this area also. When you see that a client is over 70 ½ and has an IRA distribution, ask them if they did a Qualified Charitable Distribution. That simple question could avoid a lot of problems and could help build your business and retain clients.