Reporting RMDs and QCDs the Right Way on Tax Forms

Nobody wants to be audited by the IRS. One of the best ways to avoid this is to report everything properly on your tax forms. In his latest column, Julian Block offers some important reminders and reporting requirements for retirees who utilize IRA withdrawals to make tax-deductible donations.

Apr 29th 2021
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pre-tax retirement

In a previous column, I highlighted new rules that allow nonitemizers to take 2020 deductions of as much as $300 for contributions to charities. Something else that I discussed in more detail was tax breaks for retirees who use IRA withdrawals to make deductible donations.

To recap, long-standing rules require individuals who place money in traditional IRAs and other kinds of tax-deferred retirement plans to make annual withdrawals after they attain age 72. These yearly subtractions are known as RMDs, short for required minimum distributions.

On the plus side, the law allows seniors to use some of their RMDs to make to make deductible contributions. These donations are known as QCDs, short for qualified charitable distributions.

In response to the coronavirus, Congress approved and then-president Trump signed the CARES Act, short for the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act. The CARES Act allows seniors to skip RMDS for 2020. But seniors who opt not to receive RMDs still are able to make QCDs for 2020.

What follows are more reminders about RMDs and QCDs.

The IRS deep-sixes tax breaks for donors who are unaware of or ignore paperwork requirements. It warns seniors that they have to properly substantiate their QCDs.

For instance, many seniors have found out the expensive way that the IRS imposes receipt-in-hand rules.

Before donors file their 1040s, they’re supposed to be in possession of written statements from the charities.

The IRS’s preternatural fondness for boilerplate. It requires charities’ statements to mention that they received the QCDs and they didn’t provide any goods or services to the donors in consideration of those QCDs.

Put more plainly, the IRS puts charities on notice that it’s verboten for them to provide benefits. Modest meals at Le Greasy Spoon or the right to receive them are a no-no. Not even a cruller and coffee.

Reminders for accountants who prepare returns for seniors who use some of their RMDs to make QCDs. Ask them whether they’ve provided all of the 1099-R forms that they received from outfits like Vanguard and Fidelity. They might receive more than one 1099, because they use more than one custodian for their retirement accounts.

Accountants and other preparers also should ask about QCDs. While the 1099s report RMDs, they don’t disclose whether there were QCDs.

Reporting RMDs and QCDs the right way on lines 4a (IRA distributions) and 4b (Taxable amount) on page one of the 1040 form. Donors who forget or misunderstand the reporting rules needlessly overpay their taxes.s

Filers use line 4a to report the full amounts of RMDs, including any QCDs. Those amounts are the same as the amounts that IRA custodians list on 1099-R forms when they send them to clients and to the IRS.

What should filers who receive RMDs and make QCDs keep in mind when they review their 1099-Rs? What the forms disclose and don’t disclose.

1099-Rs show how much was distributed from IRAs and should be entered on line 4a. What do 1099-Rs fail to mention? Filers are supposed to report some withdrawals as RMDs that are taxable. They’re supposed to treat other withdrawals as QCDs that aren’t taxable.

What does the IRS tell filers to do after they enter numbers on line 4a? Subtract any QCDs and enter the remaining amount of RMDs on line 4b.

Suppose Patti’s 1099-R shows she received RMDs of $20,000. Her QCDs are $5,000. Her entries are $20,000 on line 4a and $15,000 on line 4b.

Maxene’s 1099-R shows RMDs of $15,000. QCDs are $15,000. Entries are $15,000 on line 4a and zero on line 4b.

LaVerne didn’t receive any RMDs; she exercised her option not to receive any. QCDs are $10,000. Entries are $10,000 on line 4a and zero on line 4b.

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