How to Handle Another QCD Mess

NEW BERLIN, Ill. ( TheStreet) -- Many IRA owners looked at tax law a few months ago and assumed the worst about the Qualified Charitable Distribution they made in 2009 (and might have again last year). They acted reasonably -- taking their Required Minimum Distribution, then sending it back to the custodian to take it as a QCD when tax law changed in mid-December.

But it wasn't accepted. They were trapped when the law changed.

Many IRA owners looked at tax law a few months ago, acted reasonably on their Qualified Charitable Distribution and got caught when the law changed in mid-December.

Meanwhile, those who waited were in luck. With the passage of that 2010 Tax Act, the QCD was made retroactively available in 2010 (and 2011) for any IRA owner who is at least age 70.5 years of age and therefore subject to the RMD rules.

The unlucky are basically being set up again. Present law has the QCD once again not available in 2012. So how do they handle it?

First, an explanation: The QCD provision allows an IRA owner as described to direct a distribution from his IRA to a qualified charitable organization, and this distribution does not affect the IRA owner's adjusted gross income. In addition, the distribution can be used to satisfy the IRA owner's RMD for the year, tax free.

The problem
The problem many IRA owners are facing is that the tax act was passed so late in the year. Many IRA owners figured there was no way this provision could be passed in time to be able to take advantage of it in 2010. As it turns out, the late passage of the law actually included an extension of the time an IRA owner had to complete the transaction -- until the end of January.

Many IRA owners assumed the worst. They knew they must complete their minimum distributions before the end of 2010 -- so at some point before the law was passed they went ahead and took the RMD. Having taken the RMD from the account, they could no longer use the QCD (when it became available again) to satisfy the year's RMD.

Quite a few people face this, often causing them to recognize extra, unplanned income on their income tax returns for 2010. Even if you sent the money back to the IRA custodian, it was too late, because the IRS considers the first money you withdraw from your IRA as your RMD for the year -- and RMDs are not eligible for rollover (which is what you'd be doing if you sent it back).

You could still have directed a QCD to a charity directly from your IRA and have it treated as tax free (not included in your AGI, since the tax act passed), but you still would have to include your previously received RMD as income for the year.

A solution (but it's too late now)
One way you could have dealt with this would have been to send a QCD earlier in the year to your charity of choice -- and wait for Congress to act. The risk you would take in that case is if Congress had not acted, you would still have to include the QCD as income, which could have hurt your tax return in general (increasing your AGI and taxable Social Security benefits and reducing some deductions, among other things). But you could still enter the QCD amount as a charitable contribution on your itemized deductions on Schedule A.

As it turns out, taking such an action would have worked in your favor, since the QCD provision was reinstated retroactively for 2010. But hindsight is perfect, as usual.

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