Did you make a Qualified Charitable Donation (QCD) last year?

Melissa Kolcz |

Did you make a Qualified Charitable Distribution (QCD) last year? If the answer is yet, please make sure your tax preparer knows about it!

Charles Schwab, your account 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 wonderful benefit of a QCD transaction is that it is supposed to be a non-taxable transaction. The IRA owner should advise their tax preparer that they made a QCD last year and provide 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 made 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 4a. On line 4b, any taxable amounts distributed will be filled in. The discrepancy between line 4a and line 4b, 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 4b. 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 4a and b on the 1040.

Please remember, tax preparers are not mind readers. Sometimes they need, and generally appreciate, a little help in preparing our tax returns. Don’t assume they know you did a QCD. As always, please reach out to us if you have any questions or concerns!