Qualified charitable distributions (QCD) are easy to miss. Clients often assume that the custodian accounts for QCDs but they do not. Responsibility for proper reporting is the taxpayers. Typically, the 1009-R comes out reporting the gross distribution, the client doesn’t even think about it and doesn’t tell the preparer about the donations. The preparer then reports the full gross amount and the client pays tax on too much income.
Sometimes the client informs the preparer that they made a donation but fails to tell them the donation was made from the IRA. The preparer then puts it on Schedule A. This results in an improper treatment of the donation or can be completely forgotten because the client doesn’t even itemize and uses the standard deduction.
The last scenario occurs when the taxpayer makes donations early in the year and forgets about them. This is common with small donations and when many donations are made throughout the year. Each IRA owner over 70 ½ can donate up to $100,000 per year. Most people won’t forget a $100,000 donation but many will forget a $100 gift.
The amount of taxes clients will pay in their lifetimes typically dwarfs their financial planning or investment fees. It takes some effort on our part but minimizing tax costs in sensible ways can make a huge difference for clients.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].