There are some rules you must follow when using a QCD
Dear Dan,
I had a required minimum distribution of $73,657 for 2023. To satisfy that, I wrote $30,000 of checks to a bunch of charities from the checkbook specifically attached to my IRA for this purpose and disbursed $43,657 to my personal checking account just before Christmas. I used to have to fill out a form for each donation, but the checks seemed an easier way to go. I received a 1099-R for $43,657. All good, until I gave the form to my CPA. He says, the $30k doesn’t count because I wrote checks and will owe half the shortfall in penalties. That’s $15,000! That can’t be right, right?
— Kerry
Dear Kerry,
Right. That’s not correct but it’s not entirely wrong either. There is likely a $30,000 shortfall but the act of writing the check is not the problem and the penalty will be less than $15,000.
These special checks for qualified charitable distributions, or QCD, can be much more convenient than filing a form. They are especially attractive to people who like to benefit many charities like yourself, or those who tend to make spontaneous gifts during the year. However, there is some tracking needed if the goal is to take only the required minimum distribution (RMD) from the IRA as you are doing. Using QCDs this way is smart tax planning.
The complication is the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. Under the law, the issuing firm need only report the gross amount paid out of the IRA on the 1099-R.
So, in your case, if you had submitted distribution forms in 2023 like you did in past years, you would have received a 1099-R with a gross distribution of $73,657. Your CPA would have put the gross distribution from the 1099-R on line 4a, the taxable portion of $43,657 on Line 4b, and included a notation “QCD.”
When you submitted a distribution form to have them send charities money in past years, the company holding the IRA counted those funds as distributed when the funds left the account. When you write a check to a charity, they have no idea you wrote the check. As a result, they will not include those sums in the gross distribution until a check is cashed by the charity.
My guess is that with you writing these checks so late in the year, the checks did not get cashed by Dec. 31, 2023. If that’s true, your accountant is correct that you have a $30,000 shortfall. When those checks cash in 2024, they will count as distributions toward your 2024 RMD.
To avoid this problem in the future, you should write the checks earlier in the year and keep tabs on which ones get cashed before year-end. If you can’t get a charity to cash their check, you will need to take a distribution for yourself or another charity by Dec. 31 of the year in question.
Now, about the penalty. The penalty is handled via Form 5329. The Secure Act 2.0 reduced the penalty from the long standing 50% you mentioned to a still significant 25%. However, if corrected in a timely manner the penalty can be reduced further to 10%. You can also ask for a complete waiver of the penalty due to the circumstances when filing Form 5329.
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.
Originally published on MarketWatch. Read the original article here.