Did you make a Qualified Charitable Distribution (QCD) from your IRA in 2022? If so, keep reading because there’s something you need to know.
Your accountant won’t automatically know about your QCD. You must proactively report the amount to your tax preparer and specify that it was a QCD so it is correctly reported on your 2022 income tax return. You should have an acknowledgment from the charity that received the IRA funds, which you will need to keep on file.
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 or 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 amount due to higher AGI
- Taxpayers who do not fall into the above three categories should still consider making a QCD since they do count toward their required minimum distribution (RMD) for the tax year.
How to Report QCDs on Your Tax Return
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 is the amount of QCDs indicated.
Handing Form 1099-R to your tax preparer without telling them you made QCDs during the tax year may result in your tax return overstating the amount of taxable distributions you took that year.
Here’s a simple example. If a taxpayer withdraws $25,000 from their IRA, of which $5,000 goes directly to charity, it is reported as follows:
|Form 1040 Line:
|Form 1099-R Box 1, Gross Distribution
|Less: QCDs made in 2022
|Equals Taxable Amount for 2022
How to Correct Prior Errors
This explanation may bring up a concern about past years. What should you do if you forgot to tell your tax preparer that you made QCDs in a prior year and paid more income tax than you should have?
The good news is that you can go back and amend your tax return to reflect the correct amount of your QCDs. The IRS allows you to amend the previous three years’ tax returns. To get a refund, you must file the amended return within three years (including extensions) after the date you filed the original return.
If you need help completing the above reconciliation form or have additional questions, don’t hesitate to contact your wealth advisor.
*This article has been updated as of January 2023