Don't Mess With Taxes

These senior citizens celebrate their shared birthday month, if not the required traditional IRA withdrawals the big days may trigger. A QCD can help avoid tax on the mandated distributions. (Photo by Kay Bell)

Most of us still have a real life, old-school, snail mail box. Every November, it is the target for the most mail of the year.

Yep, the holidays are here. My curbside box is jammed with two types of correspondence, catalogs and charity solicitations.

I get a kick out of thumbing through the catalogs. And yes, I even order a few (too many) things.

The donation requests, however, demand more thought. Or, as billionaire Jeff Bezos is learning, "it's really hard" to give away large sums of money in effective ways. Maybe he should chat with his ex-wife, Mackenzie Scott, who seems to have a pretty good handle on philanthropy.

Tax help for charity donors: Obviously, most of us won't ever have to worry about how to give away billions of dollars to our favorite charities. But in giving away any portion of our own wealth, regardless of size, the tax code can help.

There is, of course, the charitable deduction.

Right now, that applies only if you itemize. That's because the $300 for single taxpayers, $600 for jointly filing married couples charity donation deduction found directly on Form 1040 expired at the end of 2021.

There's no guarantee it will resurrected, either retroactive to 2022 charitable gifts or going forward.

ABCs of RMDs and QCDs: Older individuals also have the option to use charitable gifts to satisfy required minimum distributions (RMDs) from their tax-deferred retirement accounts.

For all you younger readers, if you have retirement savings in a traditional IRA, traditional 401(k) plan, or similar nest egg that's growing tax deferred, you must take out a portion of when you, thanks to a recent law change, turn 72. If you began taking RMDs earlier when the trigger age was 70½ you're stuck. That's just the bad luck of your birthday and tax law changes.

But the 70½ age remains in effect if you want to give away some of your RMD-affected savings. You can donate, via a direct transfer known as a qualified charitable distribution (QCD), up to $100,000 to a charity tax-free each year.

It's an easy and tax-smart way to donate a large amount. Currently, donation deductions are limited to 60 percent of your adjusted gross income.

If you're a young septuagenarian not yet facing an RMD, the transfer can reduce the amount that you'll be required to withdraw in the near future when you do turn 72.

And if you are dealing with RMDs, your QCD gift counts toward that annual mandated withdrawal amount and relieves you of the associated tax bill.

If a QCD works for you, here are some tips on the process.

Setting up a QCD: If you want to make a QCD for 2022, contact your individual retirement arrangement (IRA) trustee soon so the trustee will have time to complete the transaction before the end of the year.

This process is critical.

Remember, if you take the money out and then donate it, it will count as an RMD, but you'll also owe tax on the money because you took possession of it, regardless of how briefly.

So get the process started in plenty of time for the traditional IRA funds to go directly to the charity.

Most IRA trustees and charities are equipped to make electronic QCDs. Some, though, will issue a paper check payable to the charity, and that can take a bit more time.

An IRA distribution, such as an electronic payment made directly to the IRA owner, does not count as a QCD. Likewise, a check made payable to the IRA owner is not a QCD.

If you're married and your spouse also is at least age 70½ and has his or her own tax-deferred retirement account, each of you can exclude from your gross income up to $100,000 via QCDs.

Again, since the transferred QCD amounts are not taxable, you don't get a charitable itemized deduction. But no taxes on the nest egg gift is even better.

Report your gift correctly: Even though you don't owe tax on the QCD, you still must report it to the Internal Revenue Service.

A QCD this year will be reported on your 2022 federal income tax return, normally filed during the 2023 tax filing season.

You should receive in early 2023 a Form 1099-R from their IRA trustee that shows any IRA distributions made during calendar year 2022, including both regular distributions and QCDs. The total distribution is in Box 1 on that form. There is no special code for a QCD.

See more tax forms and more about them at Talking Tax Forms.

Like other IRA distributions, QCDs are entered on Line 4 of Form 1040 or Form 1040-SR. If part or all of an IRA distribution is a QCD, enter the total amount of the IRA distribution on Line 4a. This is the amount shown in Box 1 on Form 1099-R.

Then, if the full amount of the distribution is a QCD, enter 0 on Line 4b. If only part of it is a QCD, the remaining taxable portion is normally entered on Line 4b. Either way, be sure to enter "QCD" next to Line 4b.

Deductible or not, get a receipt: QCDs are not deductible as charitable contributions on Schedule A. But, as with deductible contributions, the donor must get a written acknowledgement of their contribution from the charitable organization, before filing their return.

Most charities, especially those taking large QCD gifts, are well aware of IRS rules. They should send your receipt without any prompting. However, if it gets late in filing season and you've yet to get an official, IRS acceptable "thank you," contact your charity for one.

In general, the acknowledgement must state the date and amount of the contribution and indicate whether the donor received anything of value in return. The Acknowledgement section in IRS Publication 526 has details.

You also can read more about IRA distributions and QCDs in IRS Publication 590-B, also available on IRS.gov.

And, as always, you also might find these Don't Mess With Taxes posts of interest:

• 7 tax breaks for older taxpayers
• IRS approves some fake charities. What's a donor to do now?
• Tax-favored retirement savings get big boost from 2023 inflation adjustments

Advertisements