Let me tell you about Judy O’Brien*.
Judy is a 71-year-old retired executive and a long-time client of ours. Like many retirees, she gives generously to her church every year.
After we discussed the tax benefits of making a direct gift from her IRA, she decided to make a $10,000 qualified charitable distribution (QCD) in 2024, sending the money directly from her IRA to her church. Additionally, she withdrew $20,000 from her IRA throughout the year to meet her personal income needs.
That’s a total of $30,000 in IRA withdrawals — but here’s the issue: Her tax return showed the full $30,000 as taxable income.
Sound familiar?
If you made a charitable gift directly from your IRA in 2024, there’s a good chance it wasn’t reported correctly on your tax return, which could mean you’re paying more in taxes than necessary.
As we’ve reviewed our clients' 2024 tax returns this spring, we’ve seen this mistake repeatedly. And it’s not because your CPA or tax software made an error. It’s because the IRS reporting system makes it hard to get this right.
Let’s walk through what’s happening.
A qualified charitable distribution (QCD) is a special type of gift that allows individuals aged 70½ or older to donate up to $100,000 per year directly from their IRA to a qualified charity. The benefits are significant:
However, to enjoy the tax advantage, the gift must be sent directly from the IRA custodian to the charity.
All IRA withdrawals, including QCDs, are reported to the IRS on Form 1099-R. This form is issued by your IRA custodian (such as Fidelity, Schwab, Vanguard, etc.).
Unfortunately, there is no standard way for custodians to report a QCD on the 1099-R. What they report in Box 1 is the total amount distributed from your IRA, which includes both personal withdrawals and charitable gifts.
But what about Box 2a, the “taxable amount”?
That’s where most custodians tend to avoid detailed calculations. Instead of determining what part of your distribution is taxable (and what was a QCD), they simply check Box 2b, which says: “Taxable amount not determined.”
Because custodians typically report the full amount of IRA withdrawals without specifying the QCD portion, your tax return may incorrectly include charitable gifts as taxable income.
This is what happened to Judy.
Her 1099-R showed $30,000 distributed from her IRA. Her CPA assumed it was all taxable and entered the full $30,000 on her return, without realizing that $10,000 had been directed to her church as a tax-free QCD.
Judy forgot to inform her CPA about the gift because it had been processed more than 10 months before she began working on her taxes. It was an innocent mistake, but it meant she was taxed on money she actually gave away.
Pull out your 2024 tax return and review Lines 4a and 4b of your Form 1040:
If you made a QCD and these two amounts are the same, your gift was not properly excluded from your income, and you might be eligible for a refund.
If Lines 4a and 4b are different and there is a notation “QCD,” then your charitable distribution was noted correctly.
If you find that your QCD was reported as taxable income, talk to your CPA about filing an amended return using Form 1040-X. Doing so can correct the mistake and help you get the tax benefits you’re entitled to.
Looking ahead, be proactive:
Fortunately, the IRS is taking steps to address this issue.
For the 2025 tax year, IRA custodians will be required to use a new Code Y in Box 7 of Form 1099-R to report qualified charitable distributions. This change provides custodians with a standardized way to identify QCDs and should help prevent the common "everything taxable" reporting mistake seen in 2024.
Of course, implementation depends on custodians updating their systems accordingly, so it’s still wise to double-check your tax return next year.
A QCD is a direct transfer of up to $100,000 per year from an IRA to a qualified charity, available to individuals age 70½ and older. It can count toward your RMD and is excluded from taxable income.
A QCD isn’t tax-deductible because it’s excluded from taxable income, providing a different type of tax benefit.
You must manually ensure that Line 4a of Form 1040 shows the total IRA distribution, and Line 4b deducts the QCD amount. Write "QCD" next to Line 4b.
Until 2025, most custodians lacked a standardized method for reporting QCDs. They usually marked Box 2b “Taxable amount not determined,” leaving it to you or your CPA to report correctly.
You might need to file Form 1040-X to amend your return. Consult your tax advisor to correct the mistake.
Yes. Starting in 2025, custodians will use Code Y in Box 7 of Form 1099-R to identify QCDs, which is expected to reduce errors.
If you generously contributed from your IRA in 2024, first of all, thank you. Your donations make a difference.
And second, please double-check your return carefully. If you notice a reporting error like this, consult your CPA about filing an amended return (Form 1040-X). Moving forward, ensure your tax preparer knows you made a QCD because your IRA custodian probably won’t alert them.
If you made a QCD in 2024, don’t miss out on your tax savings. Our advisors can help verify your return and plan more effectively for 2025. Contact us today to review your IRA strategy.
Giving should feel good, not cost you extra in taxes.
Sources: IRS Publication 590-B; IRS Form 1099-R Instructions; IRS Form 1040-X Instructions
*Name was changed to protect identity.
Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
CRN202807-9009933
Shane Tenny, CFP®, is Managing Partner of Spaugh Dameron Tenny, where he helps high-net-worth individuals and families navigate complex financial decisions with clarity, structure, and confidence. Since joining the firm in 2000, Shane has worked with clients through major financial transitions, including career changes, liquidity events, retirement, and multigenerational planning. His approach combines comprehensive financial planning with a focus on behavioral finance, including advanced studies in Behavioral Economics through the University of Chicago Booth School of Business. Shane is the author of Your Next Million, former host of the Prosperous Doc® Podcast, and a nationally recognized financial advisor, speaker, and educator.
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