Retirement Weekly

Can get a tax break on charitable contributions from my IRA?

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Dear Dan,

Due to a K-1, we extended the filing of our tax return. I just got it back from my CPA and it didn’t have any adjustment for charitable donations from my IRA.

I’m 75 and retired last year so I thought I was eligible, but he insists no because I made IRA contributions. Is that right? Why would a contribution have anything to do with charity? ?


Dear Pete,

Qualified charitable distributions (QCD) are a great way to donate for those eligible. However, your CPA is correct, if you made deductible contributions to your IRA in recent years.

Starting with tax year 2020, persons over age 70 ? and anyone with earned income regardless of age became eligible to make contributions to an IRA. For years, this was not the case purportedly because 70 ? was the age required minimum distributions (RMD) began and it was odd to allow contributions into an account from which one was required to remove money.?

However, the newly permitted contributions presented a situation in which a worker over age 70 ? could get more tax benefits than Congress wanted to allow so a restricting provision was added. If you have made deductible contributions to your IRA since turning 70?, those contributions will cause donations that otherwise would have been qualified charitable distributions (QCD) to be taxable until all of those post 70? contributions have come out of the account.

For example, if you made a total of $20,000 of deductible IRA contributions to your IRA since 2020, the first $20,000 you donate to charity are not considered QCD and will be taxable. Once $20,000 has been donated, additional donations could then be QCD and therefore not taxable, assuming no more deductible contributions are made to the IRA. Additional deductible contributions limit future QCD eligibility.

There are other reasons why a QCD might show up as taxable. Probably the most common is simple miscommunication with the tax preparer. The custodian of the IRA will issue a 1099-R for the gross amount distributed from the IRA. Unless the preparer is notified by the taxpayer that a donation was made from the IRA, there is nothing on a 1099-R that would lead the preparer to record the transaction properly as a QCD. This error can be corrected with an amended return and is another reason to make sure you get copies of the acknowledgment letters charities are supposed to send after receiving a donation of $250 or more and share those with your preparer.

Another way donations from an IRA can be taxable occurs when the funds are not paid directly to the charity. If you receive a check from the IRA made payable to you, rather than the charity, the distribution is not treated as a QCD even if you write a check to the charity for the same amount distributed. Doing that puts the donation on Schedule A where you will only get a tax benefit to the extent your total itemized deductions exceed your standard deduction.

A less common cause of failing to get QCD treatment is donating to an ineligible charity. Only direct donations to qualified charities result in the tax benefit. Not all nonprofit organizations qualify. For instance, private foundations and donor advised funds are not eligible.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.?

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.