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“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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Thanks for this article. I started making QCDs earlier this year when I turned 70.5, and I would be interested in seeing exactly how it affects my taxes for 2023. I’ve been able to itemize previously, mainly due to my charitable deductions, so it will be interesting to see if the QCDs shift me to the standard deduction instead. I wrote an article on this with an example of how QCDs might affect someone like me: Looking Forward to Making Qualified Charitable Distributions.
Thanks Chuck. I had no idea this was such a problem. Will definitely have to ask parents about their returns.
For 2022 I did a QCD. My accountant noted it on my 1040 and I STILL got a letter from the IRS questioning my return.
Very helpful info, thank you. I will check with my mother on her taxes. Your suggestion about checks for the IRA is super helpful, the vanguard process my mother currently goes thru is complex. In the meanwhile, I’ve been making charitable contributions of appreciated stock from my brokerage account. that limits me to a minimum of a $50 donation/charity but still helpful. Life is way too complex.
I’ve found that the QCD can be hard to find when using TurboTax.
I also prefer to have all my tax deferred investments in a single traditional IRA. If you are worried now about accidentally converting funds to a Roth, you would be trading that for the possibility later in life of forgetting to include the extra traditional IRA when calculating the RMD.
Senior NY homeowners should consider converting 401(k)s to traditional IRAs. Besides the fact that 401(k)s aren’t eligible for QCDs, there’s a school property tax reduction program called “Enhanced STAR” where distributions from 401(k)s are used in calculating eligibility but not distributions from IRAs. That won’t show up on an income tax form at all. I haven’t figured out the logic of the different treatments of IRAs and 401(k)s, but it appears to be a holdover from the early days of IRAs when contributions weren’t tax deductible.
Unlike other 501(c)(3) charities, a church doesn’t have to disclose what any donations are used for, so I personally wouldn’t donate to one given stories like these: https://www.bbc.com/news/world-europe-58801183
For anyone looking to find a more effective charity aligned with their interests, I recommend searching here: https://www.charitynavigator.org/discover-charities/
New this year for 2023 is a one time max donation of up to $50,000 to fund a charitable gift annuity(CGA) as part of your QCD. The University of Pittsburgh sent information with an annuity through this CGA.. something to look into, it is new and my enrolled agent was not aware of it and just returning from an update course.
Kathleen Rehl wrote about this for HD back in December:
https://humbledollar.com/2023/02/better-than-cake/
The IRS should update Form 1099-R to reflect QCDs so that when a custodian is making a QCD payment for a client, it is coded and reported that way on 1099-R. 2022 was my first year to be eligible to do QCDs. It worked fine doing it online at Vanguard–and with no fee or cost. The only annoying aspect is that the check, made payable to the charity, is sent to me to forward to the charity. I suggest scanning or photocopying the check before sending it on. Unfortunately, it seems like too few donors, charities, and tax preparers know about QCDs. Thanks for your article!
Great topic and article Chuck.
We had several clients who made QCDs. The organizers our software generated included questions addressing QCDs; sadly not all clients completed the organizers. (There should be a reporting requirement for custodians to help taxpayers and the IRS.) The first few years for QCDs, clients received matching notices, which required us to respond with documentation. In succeeding years, while preparing returns, we requested documentation from the custodians regarding payees, amounts and other information, and attached it to the returns. Problem solved. I recommend anyone making QCDs get supporting documentation from the custodian and attach to your return; hopefully your software allows pdf attachments.
Chuck, this is a really helpful article. I think I’ll suggest adding that to our tax questionnaire, as some folks suggested.
Chuck, great article. Thank you.
I’m considering QCDs and this was very helpful in understanding the ins-and-outs, especially the tax reporting trap.
You mention that QCDs can’t be made from employer retirement plans, such as 401(k)s or 403(b)s. However, they can be made from some other type of employer retirement plans, such as “inactive” SEP or SIMPLE plans: Qualified Charitable Distributions (QCDs) | planning your IRA withdrawal | Fidelity
I have funds in a SIMPLE plan from my work years, so that’s what I would use for any QCDs.
There is a tax trap related to QCDs if you have continued to work and have also contributed to a traditional IRA after age 70 & 1/2.
Per the IRS –
Offset of QCDs by amounts contributed after age 70½.
Beginning in tax years after December 31, 2019, the amount of QCDs that you can exclude from income is reduced by the excess of the aggregate amount of IRA contributions you deducted for the taxable year and any prior year that you were age 70½ or older over the amount of such IRA contributions that were used to reduce the excludable amount of QCDs in all earlier years.
Example.
Jim became age 70½ in 2020 and deducted $5,000 for contributions he made in 2021 and 2022 but makes no contribution for 2023. Jim makes no qualified charitable distributions for 2021 and makes qualified charitable distributions of $6,000 for 2022 and $6,500 for 2023.
He determines he has no excludable qualified charitable distribution for 2022 as figured on his 2022 QCD Worksheet. His 2022 qualified charitable distribution is reduced by the aggregate amount of $10,000 of the contributions he deducted in 2021 and 2022, which reduces his excludable qualified charitable distribution to a negative amount of $4,000.
Jim decides to make a qualified charitable distribution of $6,500 for 2023. Jim completes his 2023 QCD worksheet by entering the amount of the remainder of the aggregate amount of the contributions he deducted in 2021 and 2022 ($4,000) on line 1. This amount is figured on his 2022 QCD worksheet and is entered on line 1 of his 2023 QCD worksheet. Jim figures his excludable qualified charitable distribution of $2,500 on his 2023 QCD worksheet ($6,500 – $4,000 = $2,500).
The above referenced worksheet can be found in IRS Pub 590-B.
Good article. I also generally recommend never filing a paper 1040 but if you are claiming a QCD and filing a paper 1040 I would expect you will receive a compliance letter from the IRS computer.
William, can you please explain what an IRS “compliance letter” is, and why a paper return, but not an electronic one, would receive it?
Thanks
Sure.
When you file a 1040 return and properly claim a QCD those letters appear on your return to the left of the taxable amount on the IRA line. If you file your return on paper you are depending on a IRS employee to properly input the reduced or zero amount of the taxable distribution IRA distribution. According to the IRS , the error rate for paper returns is 21%, compared with less than 1% among e-filed returns. (Dec 1, 2022)
When you electronically file the QCD exclusion reported on your 1040 return the QCD exclusion is properly input into the IRS records.
QCDs are not reported to the IRS by third parties. When you have your custodian send the QCD directly to the charity the 1099-R they issue to you is the same as if the distribution had been sent to you. The gross and taxable distribution amount are both reported on the the 1099-R as a taxable distribution. The IRS only knows about the QCD from your 1040 filing.
The IRS computer compliance letter can occur as the result of a mismatch of the 1099-R taxable amount and an error on imputing a paper return with a QCD. Yes, this would be a error by the IRS, not you, but you the taxpayer now has to deal with the IRS about the issue of unreported income.
I have seen properly prepared paper returns that were not correctly input by the IRS that resulted in correspondence headaches. Thus, I always recommend electronically filing your 1040 even for the most basic return.
Best, Bill
Bill, thanks very much for the background and explanation.
I do my own return and wish I could file electronically. But there always seem to be some notes or explanations I add that can’t be input electronically—only manually.
“Any 503(c)(3) organization…”
501(c)(3)
Thanks for the correction!
Good catch! I made the fix.
Good article! My tax preparer missed the QCD until I asked where it was reported. Now it’s a line item on her annual questionnaire.
I may suggest our tax preparer add that question to his annual questionnaire as well. Great tip.
Chuck, thanks for a very clear and well-written article on a confusing aspect of the tax code. I’ve done volunteer tax preparation under the IRS’ VITA program for 5 years. I don’t think I’ve ever seen a QCD. Many of the clients clearly had the resources. It’s possible we it was missed due to the 1099R issue you explained. We will need to be more aware of this.
Good info on the mechanics of QCDs. I like the idea of an account earmarked strictly for QCDs as well. Anything to share on how you determined how much to put in that account?
When I calculated how much to put in my QCD set-aside account, I wasn’t too worried about precision. My wife and I are going to leave my church as the beneficiary of the account anyway.
An easy way to come up with a number is use something like https://ficalc.app/. For your Withdrawal Strategy on the tool, select “constant dollar amount” and put in your desired QCD (the amount you want to give to charity in the year you turn 70.5 years old) and click the box to adjust for inflation. You can adjust the account allocation to anything you’re comfortable with. FIcalc will use historical data to calculate a success rate. Then keep adjusting the initial portfolio value to cover your joint lifetime at a level you feel comfortable with. Once you have that initial portfolio value, discount it from 70.5 years old to your age today.
That was roughly my initial amount in my QCD set-aside account. There are probably a million ways to estimate the amount (all of them are estimates that won’t match reality), but that’s one way to do it.
Thanks for the heads up on this one. 2023 is my first use of QCDs. I had assumed the QCD would be reported as non taxable portion of RMD on the 1099. You saved me a few bucks I suspect.
Because of your info I checked TurboTax and found they have a pop up asking about QCDs when you enter a 1099 👍
I have been doing QCDs for years and TurboTax handles them flawlessly. Ours are from Vanguard and there is mention of QCDs on their 1099 form. So you have to track these yourself.