IRS Issues Additional Guidance on QCD's
January 17, 2011
The IRS has issued additional guidance on QCD's on January 12, 2011. This guidance will allow IRA custodians to prepare their tax reporting forms for 2010 and 2011 and allow IRA accountholders to prepare their federal income tax forms for 2010 and 2011. This relief can be found at http://irs.gov/retirement/article/0,,id=234258.00.html.
The IRS has ruled that it will not be granting any special rollover relief to individuals who had taken their RMD's for 2010 prior to extension of the QCD's laws.IRA accountholders who had received their 2010 RMDs will not be able to re-contribute those distributions and then have them redistributed to a charity as the QCDs rules require.
The IRS does not discuss whether or not it had the authority to issue this special relief. It simply explains that any distributions, including any RMDs, which the IRA accountholder actually receives cannot qualify as QCDs. This rule also applies to amounts deemed paid to or on account of the IRA accountholder. Therefore, if an IRA accountholder had income tax withheld with respect to his or her RMD distribution, such amount is also ineligible to be rolled over.
Form 1099-R Reporting by the IRA Custodian.
The IRA custodian is to use the standard procedures to prepare its Form 1099-Rs for 2010 and 2011. There is no special reporting for a QCD or RMD made in January of 2011 for 2010.
If the distribution occurs in 2010, it will he reported on the 2010 Form 1099-R.
If the distribution occurs in 2011, including any 2010 QCDs made on or before January 31,2011, is reported on the 2011 Form 1099-R.
Special Calculation For the 2011 RMD.
Although the IRS was unwilling to give the major relief of creating a special rollover rule for those who had already taken their 2010 RMD prior to the law change, it has created a special rule which provides some limited relief. Somewhat surprisingly, the RMD calculation formula for 2011 is modified by the special QCD rule. The balance as of January 31, 2010, is reduced by the full amount of the 2010 QCD/RMD made in January of 2011. The IRS does not offer any explanation for making this special rule. The general RMD as set forth in the governing regulation does not provide for this special rule. Under the RMD calculation rule as set forth in the regulation, an IRA accountholder who attains age 70½ in 2010 who elects to take his or her 2010 RMD from January 1 to April 1,2011, is not able to decrease the December 31, 2010 balance by the amount taken in 2011. This special rule now allows such an adjustment to be made. This special rule is restricted to the 2011 calculation.
IRA Accountholder Reporting on 2010 Tax Return For QCDs Made in 2010
The standard rules for an IRA accountholder to complete his or her tax return to properly reflect a 2010 QCD made in 2010 still apply. The IRA custodian prepares the Form 1099-R to show that the distribution is fully taxable. The individual has the task of completing his or her tax return to show the distribution is nontaxable since it was a QCD. If the distribution is a QCD,line 15a is to be completed with the total distribution, enter 0 on line 15b. There is no requirement in this situation to write QCD next to line 15b although it is a good idea to do so even if not required. The individual is to attach a note of explanation if there is more than one reason why the IRA distribution to be reported on lines 15a and 15b is not taxable (i.e.not includable in income). For example, the person has a QCD and also a rollover or a qualified HSA funding distribution: Line 25b:$3,000 QCD, $1,000 rollover and a HFD of $6,150.
IRA Accountholder Reporting on 2010 Tax Return For 2010 QCD Made In January of 2011.
The individual must report on his or her Form 1040 as follows. Line 15a is to be completed with the full amount of his or her QCD as made in January of 2011 for 2010. This is so even if such QCD exceeds $100,000. Then the individual is to leave line 15b blank (i.e. do not include any amount), but he or she is to write QCD next to line 15b.These IRS instructions will be set forth in the 2010 IRS Publication 590, Individual Retirement Arrangements (IRAs).Certain individuals will need to prepare their 2010 Form 8606 in a special manner. If an individual has basis with respect to his or her traditional IRAs, and received a distribution on 2010, other than the January 2011 QCD for 2010, the individual will need to adjust the amount to be reported on Form 806, line 6, by any 2010 QCD made in January of 2011.
CWF Summary/Planning For 2012
The IRS has chosen not give any special relief to individuals who took their RMDs prior to the law change. This is unfortunate, but the IRS is not the blame when Congress left the law change until the last moment as it did. The deadline for 2011 QCDs is December 31,2011. It is certainly possible that a new tax law applying for2012 and subsequent years will not be enacted by December 31,2012 and again it will be unclear if QCD's will apply for 2012. If 2010 RMD checks would have had the payee of the check be the charity rather than the individual, such distributions would have qualified as a QCDs since all of the QCD requirements would have been met. Even if there were no special QCD rules, it is permissible for an IRA custodian to issue an individual's RMD check directly to a third party as long as the IRA custodian reports on the Form 1099-R that the distribution was made to the individual. If this situation presents itself again in 2012, IRA custodians and IRA accountholders may wish to adopt the approach of having the payee of the check be the charity rather than the IRA accountholder.
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