Reporting different types of charitable contributions to the IRS
For those who are charitably inclined, we often encourage a donation of cash and/or securities to charitable organizations to maximize the potential tax benefits of the donation. Doing so, however, requires a little bit of extra work when preparing your tax return. We have summarized required steps below, but you should consult your CPA or tax advisor to ensure accuracy and completeness.
Qualified Charitable Distribution (QCD)
A QCD is a gift of cash and/or securities from a Traditional IRA for those over 70½ years of age. The IRS limits such gifts to $100,000 per individual taxpayer. The benefits of a QCD are 1) the distribution is not taxable, meaning the charitable organization will receive 100% of the value of the donation and no tax is incurred by either party, 2) the distribution is not added to your income, and 3) the distribution will satisfy RMD requirements. If you would like to learn more about QCDs or complete one in 2020, let us know!
If you completed a QCD in 2019, your custodian – Raymond James in our case – will send you a form 1099-R for the distribution, but it does not specifically state that the distribution was a QCD. You must file the 1099-R with your tax return and report the distribution as a QCD yourself. On the IRS Form 1040 (the individual federal tax return), line 4A is used to report your total IRA distributions for the year. The adjacent line 4B is where you report the taxable amount, which should equal your total IRA distributions less the value of your QCD. On that same line 4B, write in the letters “QCD”, which informs the IRS you’re reducing the taxable amount of your IRA distributions by the value of QCDs made that year.
Gift of Securities
A Gift of Securities is exactly what it sounds like…a donation of a position(s) you own, typically in an investment account. A Gift of Securities could be from a Traditional IRA and function as a QCD as discussed above, or it could also be from an after-tax investment account. Making a Gift of Securities on an after-tax basis is not taxable as long as the position(s) is liquidated AFTER the transfer to the charitable organization, meaning the charity will receive 100% of the fair market value of the security and you will avoid the Capital Gains tax. This is why we often recommend gifting highly appreciated securities in an after-tax account – the charity gets the full value of the position and you avoid a potentially high Capital Gains tax. If you complete a Gift of Securities, make sure you keep records of your cost basis and the value of the donation, as you will need that when filing your taxes as discussed below. If you would like to learn more about gifting securities or doing a gift in 2020, let us know!
All charitable contributions are reported on the IRS Form 1040 Schedule A (itemized deductions for individual federal tax return). Noncash contributions are reported on line 12 – enter the fair market value of the gifted securities on this line. Additionally, the IRS Form 8283 (Noncash Charitable Contributions) Section A: Part 1 must be completed (the rest of the form can be left blank) and submitted with your tax return. The IRS provides Instructions for Completing Form 8283 – contact your tax advisor with questions.