Qualified Charitable Deduction or RMD of IRA with basis
I have a client with an IRA, that has about 25% of the amount being after tax contributions. The way I understand it is that if he makes the Qualified Charitable Deduction (QCD), and gives this RMD directly to charity, it is counted as being all pre-tax money being taken out, and the after-tax amounts stay in the IRA, and thus make the percentage with basis increase.
So, if his RMD is $10,000 and he makes the QCD for the year, this entire $10,000 counts towards his RMD, and is also counted as all pre-tax money coming out of the IRA and going to the charity. His after tax basis still in the IRA remains the same for the year. I assume this would be accounted for on form 8606 in the year it occurs?
Is this thinking correct?
JA
Permalink Submitted by Alan Spross on Thu, 2011-11-03 21:45
JA,
You are correct that none of the basis transfers as a QCD until the pre tax IRA dollars are exhausted. Therefore, a QCD will increase the basis % of what remains in the TIRA. But in your example there is no need to file an 8606 because the amount of basis is not changing.
The QCD should always be made first if the taxpayer wants to cover the full RMD and eliminate any taxes due. But the QCD can be more or less than the RMD amount. If less, then the difference will be taxable. In your example, if client wanted to limit the QCD to 5,000, there would be no basis applied to the 5,000, but basis would be applied to the 5,000 of RMD not covered by the QCD, and an 8606 would be needed to address the non QCD portion of the RMD.
Permalink Submitted by Jon Aldrich on Thu, 2011-11-03 21:58
Alan:
Thanks for the reply. That confirms what I was thinking.
JA