Reporting a tax-free transfer from your IRA to charity

By Kimberly Lankford
Posted on January 19, 2018

Question: I have to take a $20,000 required minimum distribution from my Vanguard IRA this year. I’d like to give $5,000 tax-free to a charity and withdraw the remaining $15,000 for myself.

A Vanguard rep said it would send me a check for $15,000 payable to me as well as a $5,000 check made payable to the charity that I could forward. The rep said that at the end of the year it would report the entire $20,000 on my Form 1099-R as a gross distribution. How can I benefit from the tax-free transfer then?

Answer: The tax reporting rules for qualified charitable distributions can be tricky. (With a QCD, you can give up to $100,000 tax-free from your IRA to charity each year after you turn 70½; the gift counts as your required minimum distribution but isn’t included in your adjusted gross income.)

Regardless of where the distribution is sent, the full amount is reported on IRS Form 1099-R with the name, address and Social Security number of the IRA owner using Code 7 “normal distribution,” as if the distribution had been paid directly to the owner, according to Vanguard. But you’ll claim the tax-free benefits of a QCD when you file your federal income tax return.

Report the full $20,000 distribution on line 15a of Form 1040 as a gross distribution. On line 15b, write $15,000 for the taxable amount and add “QCD” next to that line to explain why part of the distribution is tax-free. Be sure to keep records from the charity in your tax files showing that the tax-free transfer was made to the charity.

Make a copy of the check before you forward it to the charity, and keep an acknowledgement of the gift from the charity in your tax files. (IRA administrators don’t always make it clear who made the donation when transferring money from an IRA to charity, so before you make the donation, give the charity a heads-up about how much money it will be receiving from your IRA, and tell them that the receipt should be sent to you.)

Ask your IRA administrator for its procedure for making the tax-free transfer to charity; the specifics can vary.

If you work with a tax preparer, let him or her know about the qualified charitable distribution, so you don’t end up paying taxes on the amount, since the Form 1099-R reporting the distribution does not specify that it was a tax-free transfer to charity.